UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ________________
Commission File Number: 001-13779
W. P. CAREY & CO. LLC
(Exact name of registrant as specified in its charter)
DELAWARE 13-3912578
(State of incorporation) (I.R.S. Employer Identification No.)
50 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10020
(Address of principal executive offices) (Zip Code)
Registrant's telephone numbers, including area code:
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 [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Registrant has 37,844,395 Listed Shares, no par value, outstanding at
November 2, 2005.
W. P. CAREY & CO. LLC
INDEX
PAGE NO.
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PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements*
Consolidated Balance Sheets as of September 30, 2005 and
December 31, 2004 3
Consolidated Statements of Income for the three and nine
months ended September 30, 2005 and 2004 4
Consolidated Statements of Comprehensive Income for the
three and nine months ended September 30, 2005 and 2004 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2005 and 2004 6-7
Notes to Consolidated Financial Statements 8-17
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-30
Item 3. - Quantitative and Qualitative Disclosures About Market
Risk 31
Item 4. - Controls and Procedures 32
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings 33
Item 6. - Exhibits 33
Signatures 34
* 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,
SEPTEMBER 30, 2004
2005 (NOTE)
------------- ------------
ASSETS:
Real estate, net $ 460,258 $ 485,505
Net investment in direct financing leases 135,397 190,644
Equity investments 127,731 110,379
Assets held for sale 37,414 12,802
Cash and cash equivalents 12,376 16,715
Due from affiliates 59,697 63,471
Goodwill 63,607 63,607
Intangible assets, net 43,151 50,501
Other assets, net 27,843 19,915
--------- ----------
Total assets $ 967,474 $1,013,539
========= ==========
LIABILITIES, MINORITY INTEREST AND MEMBERS' EQUITY:
Liabilities:
Mortgage notes payable $ 172,575 $ 190,698
Credit facility 78,000 102,000
Accrued interest 1,711 1,389
Dividends payable 16,941 16,626
Accounts payable and accrued expenses 21,766 19,838
Prepaid rental income and security deposits 5,633 4,881
Due to affiliates 1,567 2,033
Accrued income taxes -- 3,909
Deferred income taxes, net 39,825 38,359
Other liabilities 14,621 11,748
--------- ----------
Total liabilities 352,639 391,481
--------- ----------
Minority interest 1,271 1,407
--------- ----------
Commitments and contingencies (Note 7)
Members' equity:
Listed shares, no par value; 37,739,156 and 37,523,462 shares
issued and outstanding at September 30, 2005 and
December 31, 2004 741,728 734,658
Dividends in excess of accumulated earnings (125,741) (112,441)
Unearned compensation (5,764) (5,366)
Accumulated other comprehensive income 3,341 3,800
--------- ----------
Total members' equity 613,564 620,651
--------- ----------
Total liabilities, minority interest and members' equity $ 967,474 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
REVENUES:
Asset management income $ 15,736 $ 16,053 $ 46,063 $ 45,748
Structuring fees 4,898 23,315 25,422 43,408
Rental income 13,640 11,552 40,576 32,927
Interest income from direct financing
leases 3,870 3,882 11,573 11,515
Incentive and subordinated disposition
fees from CIP merger -- 42,095 -- 42,095
Other operating income 2,026 850 3,053 5,301
----------- ----------- ----------- -----------
40,170 97,747 126,687 180,994
----------- ----------- ----------- -----------
OPERATING EXPENSES:
General and administrative (11,503) (14,563) (39,532) (39,684)
Depreciation (2,945) (2,462) (8,762) (7,218)
Amortization (2,203) (4,485) (6,609) (7,870)
Property expenses (2,549) (843) (5,844) (4,080)
Impairment charges and loan losses -- 1,000 -- (1,800)
----------- ----------- ----------- -----------
(19,200) (21,353) (60,747) (60,652)
----------- ----------- ----------- -----------
OTHER INCOME AND EXPENSES:
Other interest income 871 828 2,537 2,221
Income from equity investments 1,379 1,254 3,944 3,885
Minority interest in income (572) (1,175) (1,971) (1,340)
(Loss) gain on foreign currency
transactions and other gains, net (62) 163 (725) 569
Loss from other business operations -- (1,767) -- (1,336)
Interest expense (4,330) (3,665) (12,838) (10,632)
----------- ----------- ----------- -----------
(2,714) (4,362) (9,053) (6,633)
----------- ----------- ----------- -----------
Income from continuing operations before
income taxes 18,256 72,032 56,887 113,709
Provision for income taxes (4,583) (32,610) (15,535) (44,746)
----------- ----------- ----------- -----------
Income from continuing operations 13,673 39,422 41,352 68,963
----------- ----------- ----------- -----------
DISCONTINUED OPERATIONS:
Income from operations of discontinued
properties 655 4,220 2,466 6,352
Gain on sale of real estate -- 12 9,119 12
Impairment charge on properties held for
sale -- (8,500) (15,821) (13,600)
----------- ----------- ----------- -----------
Income (loss) from discontinued operations 655 (4,268) (4,236) (7,236)
----------- ----------- ----------- -----------
NET INCOME $ 14,328 $ 35,154 $ 37,116 $ 61,727
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE:
Income from continuing operations $ .36 $ 1.05 $ 1.10 $ 1.84
Income (loss) from discontinued operations .02 (.11) (.11) (.19)
----------- ----------- ----------- -----------
Net income $ .38 $ .94 $ .99 $ 1.65
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE:
Income from continuing operations $ .35 $ 1.01 $ 1.06 $ 1.78
Income (loss) from discontinued operations .02 (.11) (.11) (.19)
----------- ----------- ----------- -----------
Net income $ .37 $ .90 $ .95 $ 1.59
=========== =========== =========== ===========
DIVIDENDS DECLARED PER SHARE: $ .448 $ .440 $ 1.338 $ 1.314
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 37,727,008 37,472,823 37,663,712 37,398,280
=========== =========== =========== ===========
Diluted 38,948,980 38,929,696 39,100,233 38,757,457
=========== =========== =========== ===========
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2005 2004 2005 2004
------- -------- ------- -------
NET INCOME: $14,328 $35,154 $37,116 $61,727
Other comprehensive income:
Change in unrealized appreciation
(depreciation) on marketable securities 403 (1,090) 517 (823)
Foreign currency translation adjustment (130) 129 (976) (883)
------- ------- ------- -------
273 (961) (459) (1,706)
------- ------- ------- -------
COMPREHENSIVE INCOME $14,601 $34,193 $36,657 $60,021
======= ======= ======= =======
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)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2005 2004
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 37,116 $ 61,727
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 4,236 7,236
Depreciation and amortization of intangible assets and deferred financing
costs 15,805 15,656
Unrealized loss (gain) on foreign currency transactions and warrants 764 (144)
Minority interest in income 1,971 1,340
Straight-line rent adjustments 2,149 944
Distribution received in excess of accumulated earnings and
equity income in excess of distributions 547 (457)
Gain on sale of investments (96) --
Realized loss (gain) on foreign currency transactions 59 (425)
Management income received in shares of affiliates (22,905) (15,243)
Costs paid by issuance of shares 147 124
Amortization of unearned compensation 3,041 2,947
Impairment charges and loan losses -- 1,800
Tax charge - share incentive plans 465 2,906
Deferred income taxes 1,466 8,933
(Decrease) increase in accrued taxes payable (3,909) 20,901
Increase in structuring fees receivable (5,170) (14,780)
Deferred acquisition fees received 8,961 5,978
Net change in other operating assets and liabilities (2,131) 1,559
-------- ---------
Net cash provided by continuing operations 42,516 101,002
Net cash provided by discontinued operations 3,334 6,958
-------- ---------
Net cash provided by operating activities 45,850 107,960
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Distributions received from equity investments in excess of equity income 4,103 5,852
Purchases of real estate and equity investments -- (115,522)
Proceeds from sale of property and investments 32,591 4,430
Release of funds from escrow in connection with the sale of a property -- 7,185
Capital expenditures (1,295) (1,498)
Purchase of investment (465) --
Payment of deferred acquisition fees to affiliate (524) (524)
-------- ---------
Net cash provided by (used in) investing activities 34,410 (100,077)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from credit facility 60,000 135,000
Proceeds from mortgage note substitution 104 --
Scheduled payments of mortgage principal (6,933) (6,882)
Prepayments of mortgage principal and credit facility (88,893) (86,962)
Payment of financing costs (1,322) (1,262)
Distributions to minority interests (355) (1,101)
Dividends paid (50,101) (48,614)
Proceeds from issuance of shares 3,529 3,662
Retirement of shares -- (2,543)
-------- ---------
Net cash used in financing activities (83,971) (8,702)
-------- ---------
Effect of exchange rate changes on cash (628) (386)
-------- ---------
Net decrease in cash and cash equivalents (4,339) (1,205)
Cash and cash equivalents, beginning of period 16,715 24,359
-------- ---------
Cash and cash equivalents, end of period $ 12,376 $ 23,154
======== =========
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)
Non-cash 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.
B. In connection with the acquisition of properties in July 2004, the
Company assumed mortgage notes payable with a fair value of $27,756
(cost - $27,003).
C. In August 2005, the Company satisfied a maturing obligation of $9,621
by substituting a new mortgage of $9,725 and received net proceeds of
$104.
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. BUSINESS
W. P. Carey & Co. LLC (the "Company") is a global investment firm that
specializes in sale-leaseback and build-to-suit transactions. The Company owns a
portfolio of net-leased real estate assets and also provides investment
management services 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").
The Company's primary business segments include:
MANAGEMENT SERVICES - The Company provides services to the CPA(R) REITs in
connection with structuring and negotiating investment and debt placement
transactions (structuring fees) and provides 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. As funds available to the CPA(R) REITs are
invested in properties, the asset base for which the Company earns revenue
increases. The Company may elect to receive fees in cash or restricted shares of
the CPA(R) REITs. The Company may also earn incentive and disposition fees in
connection with providing liquidity alternatives to CPA(R) REIT shareholders.
REAL ESTATE OPERATIONS - The Company invests in commercial and industrial
properties that are then leased to companies domestically and internationally.
NOTE 2. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements of 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
Certain prior period amounts have been reclassified to conform to current period
financial statement presentation. The financial statements included in this Form
10-Q have been adjusted to reflect asset management income and structuring fees
as separate components of revenue and the disposition (or planned disposition)
of certain properties as discontinued operations for all periods presented (see
Note 9). As a result, certain prior period amounts have been reclassified to
conform to current period financial statement presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2005, the SEC deferred the effective date of Statement of Financial
Accounting Standards ("SFAS") No. 123 (Revised 2004), "Share-Based Payment"
("SFAS 123(R)") for a six-month period. The Company is now required to adopt the
provisions of SFAS No. 123(R) beginning with its first quarter of fiscal 2006.
FAS 123(R) 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.
SFAS No. 123(R) allows two different methods of transition. Note 10 to the
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 SFAS No. 123(R), 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 123(R) and methods that may be used to calculate future
stock-based compensation expense.
8
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
In June 2005, the Financial Accounting Standards Board ratified the Emerging
Issues Task Force ("EITF") Consensus on Issue No. 04-5, "Determining Whether a
General Partner, or the General Partners as a Group, Controls a Limited
Partnership or Similar Entity When the Limited Partners Have Certain Rights."
The EITF agreed on a framework for evaluating when a general partner controls,
and should consolidate, a limited partnership or a similar entity. The EITF is
effective after June 29, 2005, for all newly formed limited partnerships and for
any pre-existing limited partnerships that modify their partnership agreements
after that date. General partners of all other limited partnerships must apply
the consensus no later than the first reporting period in fiscal years beginning
after December 15, 2005. The adoption of EITF 04-5 is not expected to have a
material impact on the Company's financial position or results of operations.
NOTE 3. TRANSACTIONS WITH RELATED PARTIES:
Through one of its wholly-owned subsidiaries, the Company earns fees as the
advisor ("Advisor") to 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 structuring and management fees is based
on each CPA(R) REIT meeting specific performance criterion and is earned only if
the criterion are achieved. Generally, the Company earns a base asset management
fee of 1/2 of 1% per annum of average invested assets, as defined in the
advisory agreements, for each CPA(R) REIT and, based upon specific performance
criteria for each REIT, may be entitled to receive performance fees, calculated
on the same basis as the asset management fee, and is reimbursed for certain
costs, primarily the cost of personnel. Effective in 2005, the advisory
agreements were amended to allow the Company to elect to receive restricted
stock for any fee due from each CPA(R) REIT. For the three-month periods ended
September 30, 2005 and 2004, total asset-based fees and reimbursements earned
were $15,736 and $16,053, respectively. For the nine-month periods ended
September 30, 2005 and 2004, total asset-based fees and reimbursements earned
were $46,063 and $45,748, 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 structuring
fees based on the cost of the properties acquired. For the three-month periods
ended September 30, 2005 and 2004, the Company earned structuring fees and
reimbursement allowances of $4,898 and $23,315, respectively. For the nine-month
periods ended September 30, 2005 and 2004, the Company earned structuring fees
and reimbursement allowances of $25,422 and $43,408, 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, which will only be recognized as the relevant
conditions are met.
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 $1,861 and $1,063,
respectively, for the three-month period ended September 30, 2005 and of $8,577
and $2,569, respectively, for the nine-month period ended September 30, 2005.
CPA(R):16-Global did not incur such fees during the three and nine-month periods
ended September 30, 2004. Since the inception of CPA(R):16-Global, the Company
has not recognized $16,112 and $3,388 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.
2004 MERGER BETWEEN CIP(R) AND CPA(R):15
In September 2004, CPA(R):15 acquired CIP(R)'s business in a stock-for-stock
merger that was approved by the shareholders of both funds. Prior to the merger
between CIP(R) and CPA(R):15, the Company acquired interests in 17 properties
from CIP(R) with a fair value of $142,161 for approximately $115,158 in cash and
the assumption of approximately $27,003 in limited recourse mortgage notes
payable. The purchase price of the properties was based on a third party
valuation of each of CIP(R)'s properties. The results of operations for the
three and nine-month periods ended September 30, 2004 include the properties
that the Company acquired from CIP(R) for the month of September 2004.
In connection with providing a liquidity event for CIP(R) shareholders, CIP(R)
paid the Company incentive fees of $23,681 and disposition fees of $22,679.
Disposition fees relating to the interests in the properties acquired by the
Company of $4,265 were not earned and have been applied, for financial reporting
purposes, as a reduction in the cost basis of such interests. The Company also
recognized transaction fees of $11,493 in connection with the merger. The
transaction fees are included in the 2004 transaction fee amounts described
above for both the three and nine-month periods ended September 30, 2004.
9
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
NOTE 4. REAL ESTATE
The Company's real estate portfolio consists of land and buildings leased to
others as well as land and buildings used in operations as follows:
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------ -----------------
REAL ESTATE:
Cost $520,878 $546,402
Accumulated depreciation (60,620) (60,897)
-------- --------
$460,258 $485,505
======== ========
NOTE 5. 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 September 30, 2005, the Company's ownership in the CPA(R) REITs is as
follows:
SHARES % OF OUTSTANDING SHARES
--------- -----------------------
CPA(R):12 1,700,396 5.25%
CPA(R):14 3,017,565 4.31%
CPA(R):15 2,951,734 2.30%
CPA(R):16-Global 276,618 .49%
The Company also owns non-controlling 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:
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------ -----------------
Assets (primarily real estate) $ 2,683,157 $ 5,189,736
Liabilities (primarily mortgage notes payable) (1,327,561) (2,372,468)
------------ -----------
Partners' capital and shareholders' equity $ 1,355,596 $ 2,817,268
============ ===========
Company's share of equity investees' net assets $ 127,731 $ 110,379
============ ===========
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2005 2004
-------- ---------
Revenues (primarily rental income and interest income
from direct financing leases) $ 338,398 $ 246,455
Expenses (primarily depreciation and property expenses) (147,049) (101,269)
Other interest income 10,015 5,195
Income from equity investments 36,615 27,479
Minority interest in income (14,228) (8,996)
(Loss) gain on sales of real estate, derivatives and
foreign currency transactions, net (3,560) 1,566
Interest expense (127,357) (88,637)
--------- ---------
Income from continuing operations 92,834 81,793
Income (loss) from discontinued operations 384 (2,031)
10
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
Gain on sale of real estate 494 1,754
Impairment charge on properties held for sale (4,255) (150)
------- -------
Net income $89,457 $81,366
======= =======
Company's share of net income from equity investments $ 3,944 $ 3,885
======= =======
NOTE 6. 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 21 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:
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------ -----------------
AMORTIZED INTANGIBLE ASSETS:
Management contracts $ 59,815 $ 59,815
Less: accumulated amortization (37,526) (34,089)
-------- --------
22,289 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 (5,434) (1,521)
-------- --------
16,887 20,800
-------- --------
UNAMORTIZED GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS:
Trade name 3,975 3,975
Goodwill 63,607 63,607
-------- --------
$106,758 $114,108
======== ========
Below-market rent $ (2,009) $ (2,009)
Less: accumulated amortization 159 45
-------- --------
$ (1,850) $ (1,964)
======== ========
Net amortization of intangibles was $2,412 and $4,516 for the three-month
periods ended September 30, 2005 and 2004, respectively, and $7,236 and $7,892
for the nine-month periods ended September 30, 2005 and 2004, respectively.
Based on the intangibles recorded through September 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 7. COMMITMENTS AND CONTINGENCIES:
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
11
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
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 $9,600, 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 $875;
CPA(R):12 paid in excess of $2,455; CPA(R):14 paid in excess of $4,990; and
CPA(R):15 paid in excess of $1,240. 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.
12
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
NOTE 8. IMPAIRMENT CHARGES AND LOAN LOSSES:
2005 - IMPAIRMENT CHARGES ON DISCONTINUED OPERATIONS
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 then a third
appraisal is obtained. In connection with this transaction, in the quarter ended
March 31, 2005, the Company recognized a non-cash 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 non-cash
impairment charge of $5,819 in the quarter ended June 30, 2005 for a total
impairment charge on these properties during the nine months ended September 30,
2005 of $14,691. 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 nine months ended
September 30, 2005 of $1,130. Discussions with respect to disposing of this
property are ongoing between the parties. The Company had previously recorded an
impairment charge of $7,500 during the quarter ended September 30, 2004 related
to this property.
These properties are classified as held for sale in the accompanying financial
statements (see Note 9).
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 nine-month period
ended September 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 and based on the
Company's assessment of the recoverability of the note, it wrote off the entire
$2,250 as a loan loss. During the quarter ended September 30, 2004, the Company
received a $1,000 settlement payment from the former lessee and determined that
the remaining amounts were not recoverable.
The Company recognized impairment charges of $1,000 and $1,400, respectively, on
other properties during the three and nine-month periods ended September 30,
2004. Of this total, $550 relates to impairment charges for properties held for
use for the nine-month period ended September 30, 2004.
NOTE 9. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS:
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 nine months ended September 30, 2005 (see Note 8 for
details).
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 nine months ended September 30, 2005 (see Note 8 for details).
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
13
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
approximately $1,000. Non-cash impairment 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. In October 2005, the sale of
the property to a third party closed for $1,050. The Company expects to record a
gain on the sale of approximately $243 based on the property's current carrying
amount.
Assets held for sale include a property located in Cincinnati, Ohio that is
subject to a contract for sale for approximately $10,100. Non-cash impairment
charges totaling $12,700 were previously recorded in prior years to write down
the property's value to its estimated fair value.
2005 DISCONTINUED OPERATIONS
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 recorded in a prior year to write down the
property value to the estimated net sales proceeds.
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 sale 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2005 2004 2005 2004
------ ------- -------- --------
REVENUES:
Rental income $ 2 $ 344 $ 70 $ 1,267
Interest income from direct financing leases 698 1,452 3,024 4,403
Revenues of other business operations 1,786 1,714 5,387 5,395
Other income (9) 2,712 36 2,761
------ ------- -------- --------
2,477 6,222 8,517 13,826
------ ------- -------- --------
EXPENSES:
Depreciation -- (338) (274) (1,134)
Property expenses (224) (198) (1,096) (1,559)
Operating expenses of other business operations (1,598) (1,466) (4,681) (4,781)
------ ------- -------- --------
(1,822) (2,002) (6,051) (7,474)
------ ------- -------- --------
Income before impairment charge and gain on sale 655 4,220 2,466 6,352
Gain on sale of real estate -- 12 9,119 12
Impairment charge on properties held for sale -- (8,500) (15,821) (13,600)
------ ------- -------- --------
Income (loss) from discontinued operations $ 655 $(4,268) $ (4,236) $ (7,236)
====== ======= ======== ========
Depreciation is not recorded on properties held for sale. The effect of
suspending depreciation was $198 and $127 for the three months ended September
30, 2005 and 2004, respectively and $536 and $255 for the nine months ended
September 30, 2005 and 2004, respectively.
NOTE 10. STOCK OPTIONS AND RESTRICTED STOCK:
The Company has elected to adopt the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" and SFAS No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of SAFS
123." If stock-based compensation cost had been recognized based upon fair value
at the date of grant for options and restricted stock awarded under
14
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
the Company's share incentive plans and amortized to expense over their
respective vesting periods in accordance with the provisions of SFAS No. 123 and
SFAS No. 148, pro forma net income would have been as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2005 2004 2005 2004
------- ------- ------- -------
Net income as reported $14,328 $35,154 $37,116 $61,727
Add: Stock based compensation included in net
income as reported, net of related tax effects 788 486 2,068 1,805
Less: Stock based compensation determined under
fair value based methods for all awards, net
of related tax effects (879) (620) (2,411) (2,277)
------- ------- ------- -------
Pro forma net income $14,237 $35,020 $36,773 $61,255
======= ======= ======= =======
EARNINGS PER COMMON SHARE AS REPORTED
Basic $ .38 $ .94 $ .99 $ 1.65
Diluted $ .37 $ .90 $ .95 $ 1.59
PRO FORMA EARNINGS PER COMMON SHARE
Basic $ .38 $ .93 $ .98 $ 1.64
Diluted $ .37 $ .90 $ .94 $ 1.58
For the nine-month periods ended September 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 3,262 4,398
Forfeitures (347) (134)
Compensation expense (amortization of unearned
compensation) (2,517) (2,947)
------- -------
End of period $ 5,764 $ 6,180
======= =======
For the nine-month periods ended September 30, 2005 and 2004, restricted shares
of $161 and $221, 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
increased by $281 for the three-month period ended September 30, 2005 as a
result of an increase in fair value. For the nine-month period ended September
30, 2005, $525 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 $644 has been amortized into compensation expense for the
three-month periods ended September 30, 2005 and 2004, respectively, and $338
and $1,757 for the nine-month periods ended September 30, 2005 and 2004,
respectively.
NOTE 11. EARNINGS (LOSS) PER SHARE:
Basic and diluted earnings (loss) per common share for the Company for the three
and nine-month periods ended September 30, 2005 and 2004 were calculated as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Income from continuing operations $ 13,673 $ 39,422 $ 41,352 $ 68,963
Income (loss) from discontinued operations 655 (4,268) (4,236) (7,236)
----------- ----------- ----------- -----------
Net income $ 14,328 $ 35,154 $ 37,116 $ 61,727
=========== =========== =========== ===========
Weighted average shares outstanding - basic 37,727,008 37,472,823 37,663,712 37,398,280
Effect of dilutive securities: Stock options 1,221,972 1,456,873 1,436,521 1,359,177
----------- ----------- ----------- -----------
Weighted average shares outstanding - diluted 38,948,980 38,929,696 39,100,233 38,757,457
=========== =========== =========== ===========
Basic earnings per share:
Income from continuing operations $ .36 $ 1.05 $ 1.10 $ 1.84
15
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
Income (loss) from discontinued operations .02 (.11) (.11) (.19)
---- ----- ----- -----
Net income $.38 $ .94 $ .99 $1.65
==== ===== ===== =====
Diluted earnings per share:
Income from continuing operations $.35 $1.01 $1.06 $1.78
Income (loss) from discontinued operations .02 (.11) (.11) (.19)
---- ----- ----- -----
Net income $.37 $ .90 $ .95 $1.59
==== ===== ===== =====
The diluted weighted average shares outstanding for the nine months ended
September 30, 2004 has been restated to conform to the current year
presentation. This change resulted in a decrease in the diluted shares of 4,288
and had no impact on the Company's diluted earnings per share for the nine
months ended September 30, 2004.
NOTE 12. SEGMENT REPORTING:
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.
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.
A summary of comparative results of these business segments is as follows:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2005 2004 2005 2004
-------- -------- -------- --------
MANAGEMENT SERVICES
Revenues $ 20,634 $ 81,463 $ 71,485 $131,251
Operating expenses (11,541) (17,326) (39,574) (44,150)
Interest expense -- -- -- (35)
Other, net (2) 1,179 183 2,463 2,134
Provision for income taxes (4,721) (31,743) (15,247) (43,157)
-------- -------- -------- --------
Income from continuing operations $ 5,551 $ 32,577 $ 19,127 $ 46,043
======== ======== ======== ========
REAL ESTATE (3)
Revenues $ 19,536 $ 16,284 $ 55,202 $ 49,743
Operating expenses (7,659) (4,027) (21,173) (16,502)
Interest expense (4,330) (3,665) (12,838) (10,597)
Other, net (2) 437 887 1,322 3,201
Provision for income taxes 138 (867) (288) (1,589)
-------- -------- -------- --------
Income from continuing operations $ 8,122 $ 8,612 $ 22,225 $ 24,256
======== ======== ======== ========
OTHER (1)
Loss from other business operations $ -- $ (1,767) $ -- $ (1,336)
TOTAL COMPANY
Revenues $ 40,170 $ 97,747 $126,687 $180,994
Operating expenses (19,200) (21,353) (60,747) (60,652)
Interest expense (4,330) (3,665) (12,838) (10,632)
Other, net (2) 1,616 (697) 3,785 3,999
Provision for income taxes (4,583) (32,610) (15,535) (44,746)
-------- -------- -------- --------
Income from continuing operations $ 13,673 $ 39,422 $ 41,352 $ 68,963
======== ======== ======== ========
16
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
TOTAL ASSETS TOTAL LONG-LIVED ASSETS
-------------------------------------- --------------------------------------
AS OF AS OF AS OF AS OF
SEPTEMBER 30, 2005 DECEMBER 31, 2004 SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------ ----------------- ------------------ -----------------
Management Services $252,731 $ 237,889 $ 95,883 $ 83,018
Real Estate 714,743 766,184 666,678 740,895
Other -- 9,466 -- 9,140
-------- ---------- -------- --------
Total Company $967,474 $1,013,539 $762,561 $833,053
======== ========== ======== ========
(1) Primarily consists of the Company's other business operations, which
includes the Los Angeles United School District (the "District")
build-to-suit development project (see Note 13).
(2) Includes other interest income, minority interest, income from equity
investments, loss from other business operations 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 $1,978
and $1,896 for the three months ended September 30, 2005 and 2004,
respectively, lease revenues of $6,120 and $5,669 for the nine months ended
September 30, 2005 and 2004, respectively, income from equity investments
of $191 and $124 for the three months ended September 30, 2005 and 2004,
respectively and income from equity investments of $608 and $431 for the
nine months ended September 30, 2005 and 2004, respectively. These
investments also accounted for long-lived assets as of September 30, 2005
and December 31, 2004 of $67,369 and $76,332, respectively.
NOTE 13. SUBSEQUENT EVENT:
In October 2005, a wholly-owned indirect subsidiary of the Company reached a
settlement agreement with the District and certain other parties in connection
with a build-to-suit development management agreement to develop and construct a
new high school. Under the terms of the settlement agreement, the subsidiary
will not be entitled to any further payments under the development management
agreement and will discharge all parties to the settlement agreement from any
further obligations arising from the development management agreement. In
return, the subsidiary has been released from any liabilities and obligations to
the District and the other parties to the settlement agreement. The Company
expects to recognize non-cash pre-tax income of approximately $2,700 in the
quarter ending December 31, 2005 as a result of entering into the settlement
agreement. Approximately $2,000 of this income represents the deferral of a
portion of gain on sale of land to the District in 2002.
17
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 September 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 global investment firm that specializes in sale-leaseback and
build-to-suit transactions. We own a portfolio of net-leased real estate assets
and also provide investment management services 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").
Our primary business segments include:
MANAGEMENT SERVICES - We provide services to the CPA(R) REITs in connection with
structuring and negotiating investment and debt placement transactions
(structuring fees) and provide 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. 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. We may also earn incentive and
disposition fees in connection with providing liquidity alternatives to CPA(R)
REIT shareholders.
REAL ESTATE OPERATIONS - We invest in commercial and industrial properties that
are then leased to companies domestically and internationally. We currently have
investments in the United States and Europe.
CURRENT DEVELOPMENTS AND TRENDS
CURRENT DEVELOPMENTS INCLUDE:
INVESTMENT ACTIVITY - During the quarter ended September 30, 2005, we structured
$152,831 in investments on behalf of the CPA(R) REITs. Approximately 64% of
these investments were made on behalf of CPA(R):16 - Global, with the majority
of the remainder made on behalf of CPA(R):15. Additionally, 82% of investments
structured were for international transactions. The mix between REITs is
consistent with our 2005 second quarter results while the percentage of
international investments completed represents an increase from 63% in the
second quarter of 2005.
IMPAIRMENT CHARGES - There were no impairment charges recorded in the quarter
ended September 30, 2005.
Non-cash impairment charges totaling $15,821 have been recorded during the nine
months ended September 30, 2005 related to properties held for sale in Berea,
KY; Amberley Village, OH and Livonia, MI (see Note 8 in the accompanying
financial statements).
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)
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
Third quarter 2005 impairment charge -- --
------- ------
Total 2005 impairment charges (year to date) $14,691 $1,130
======= ======
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 September 30, 2005, we completed
investments totaling approximately $97,642 on CPA(R):16 - Global's behalf. While
we currently anticipate that CPA(R):16-Global's second offering may commence
before the end of 2005, the offering may be delayed or suspended based upon a
number of factors, which may include among others obtaining regulatory
approvals, negotiation of satisfactory agreements with selected dealers, and
our analysis of market conditions and other factors affecting the offering.
DEBT REFINANCING - In August 2005, we refinanced approximately $9,700 of
mortgage financing that was scheduled to mature in 2006 and had a fixed interest
rate of 7% with new 10 year financing at a fixed interest rate of 4.87%.
Additionally, in October 2005 we took advantage of low long-term interest rates
by placing fixed rate financing of approximately $45,900 on several properties
at a weighted average rate of 5.13% for an average term of 9.2 years. Net
proceeds from these financings were used to pay down short-term variable rate
debt outstanding on our credit line. We anticipate adding a further $10,750 of
similar long-term debt financing in the near future.
DIVIDEND - In September 2005, our board of directors approved and increased the
third quarter dividend to $.448 per share payable in October 2005 to
shareholders of record as of September 30, 2005.
CURRENT TRENDS INCLUDE:
We continue to see increased competition for net leased properties as capital
continues to flow into real estate, in general, and net leased real estate, in
particular. We believe that the low long-term treasury rate by historical
standards has created greater investor demand for yield-based investments, such
as net leased real estate, thus creating increased capital flows and a more
competitive investment environment.
We believe that several factors may provide us with continued investment
opportunities both domestically and internationally including increased merger
and acquisition activity, which may provide additional sale-leaseback
opportunities as a source of funding, a continued desire of corporations to
divest themselves of real estate holdings and increasing opportunities for sale-
leaseback transactions in the international market, which continues to make up
a large portion of our investment opportunities.
For the nine-month period ended September 30, 2005, international investments
accounted for 55% of total investments. We currently expect international
commercial real estate to comprise a significant portion of the investments we
make on behalf of the CPA(R) REITs although the percentage of international
investments in any given period may vary substantially. Financing terms for
international transactions are generally more favorable as they provide for
lower interest rates and greater flexibility to finance the underlying property.
These benefits are partially offset by shorter financing maturities.
Increases in long term interest rates would likely cause the value of the owned
and managed assets to decrease, which would create lower revenues from managed
assets and lower investment performance for the managed funds. Increases in
interest rates may also have an impact on the credit quality of certain tenants.
To the extent that the Consumer Price Index ("CPI") increases, additional rental
income streams may be generated for leases with CPI adjustment triggers. In
addition, we constantly evaluate our debt exposure and to the extent that
opportunities exist to refinance and lock in lower interest rates over a longer
term, we may be able to reduce our exposure to short term interest rate
fluctuation.
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. 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 adverse impact on our management income from affiliates.
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)
For the nine months ended September 30, 2005, distributions paid of $50,101 were
substantially funded by cash flows generated from operations and equity
investments of $49,953. Existing cash and cash equivalent reserves were used to
fund the difference. 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 rather than cash.
HOW MANAGEMENT EVALUATES RESULTS OF OPERATIONS
Management evaluates our results of operations with a primary focus on
increasing and enhancing the value, quality and amount of 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 investments 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
non-cash 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 non-cash 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 nine months ended September 30, 2005 and 2004 is as
follows:
2005 2004
------- -------
Rental income $40,576 $32,927
Interest income from direct financing leases 11,573 11,515
------- -------
$52,149 $44,442
======= =======
For the nine months ended September 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) $3,559 $3,277
Dr Pepper Bottling Company of Texas 3,279 3,245
Detroit Diesel Corporation 3,238 3,118
Quebecor Printing, Inc. (c) 2,303 1,990
Orbital Sciences Corporation (c) 2,267 1,991
Titan Corporation (b) 2,174 240
America West Holdings Corp. 2,128 2,128
AutoZone, Inc. 1,738 1,724
Sybron Dental Specialties Inc. 1,328 1,328
Unisource Worldwide, Inc. 1,276 1,279
BE Aerospace, Inc. 1,185 1,185
Eagle Hardware & Garden, Inc., a wholly-owned
subsidiary of Lowe's Companies Inc. (c) 1,158 980
Lucent Technologies, Inc. (b) 1,139 144
Sprint Spectrum, L.P. 1,068 1,068
CSS Industries, Inc. 1,039 1,229
AT&T Corporation 945 945
EnviroWorks, Inc. (b) 940 120
Swat-Fame, Inc. (c) 928 784
United States Postal Service 925 925
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)
BellSouth Telecommunications, Inc. 918 918
Omnicom Group Inc. (b) 855 93
Anthony's Manufacturing Company, Inc. 789 764
Brodart, Co. 788 960
United Space Alliance, LLC 782 778
Other (a) (b) (d) 15,400 13,229
------- -------
$52,149 $44,442
======= =======
(a) Revenue amounts are subject to fluctuations in foreign currency exchange
rates.
(b) Includes the CIP(R) real estate interests acquired in September 2004.
(c) Increase is due to rent increase in 2005.
(d) Lease revenue applicable to minority interests in the consolidated amounts
above total $1,273 and $1,179 for the nine months ended September 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
nine months ended September 30, 2005 and 2004, our share of net lease revenues
in the following lease obligations is as follows:
2005 2004
------ ------
Carrefour France, SA (a) $2,577 $2,523
Federal Express Corporation 2,018 1,996
Checkfree Holdings Corporation Inc 1,685 1,635
Sicor, Inc. (b) 1,254 126
Information Resources, Inc. 1,233 1,233
Hologic, Inc. 852 852
Childtime Childcare, Inc 354 354
Titan Corporation (c) -- 36
------ ------
$9,973 $8,755
====== ======
(a) Revenue amounts are subject to fluctuations in foreign currency exchange
rates.
(b) Includes the CIP(R) real estate interest acquired in September 2004.
(c) We acquired the remaining interest in this property in connection with the
September 2004 acquisition of CIP(R)real estate interests.
RESULTS OF OPERATIONS
We evaluate our results from operations by our two major business segments -
real estate operations and management services operations. A summary of
comparative results of these business segments is as follows:
REAL ESTATE OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- ---------------------------------------
2005 2004 CHANGE 2005 2004 CHANGE
------- ------- ------- -------- -------- -------
REVENUES:
Lease revenues $17,510 $15,434 $ 2,076 $ 52,149 $ 44,442 $ 7,707
Other operating income 2,026 850 1,176 3,053 5,301 (2,248)
------- ------- ------- -------- -------- -------
19,536 16,284 3,252 55,202 49,743 5,459
------- ------- ------- -------- -------- -------
OPERATING EXPENSES:
General and administrative expenses (1,313) (1,676) 363 (3,947) (3,601) (346)
Depreciation and amortization (3,797) (2,508) (1,289) (11,382) (7,021) (4,361)
Property expenses (2,549) (843) (1,706) (5,844) (4,080) (1,764)
Impairment charges and loan losses -- 1,000 (1,000) -- (1,800) 1,800
------- ------- ------- -------- -------- -------
(7,659) (4,027) (3,632) (21,173) (16,502) (4,671)
------- ------- ------- -------- -------- -------
OTHER INCOME AND EXPENSES:
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)
Other interest income (121) 71 (192) 128 184 (56)
Income from equity investments 775 851 (76) 2,380 2,766 (386)
Minority interest in (income) loss (155) (198) 43 (461) (318) (143)
(Loss) gain on foreign currency
transactions (62) 163 (225) (725) 569 (1,294)
Interest expense (4,330) (3,665) (665) (12,838) (10,597) (2,241)
------- ------- ------- -------- -------- -------
(3,893) (2,778) (1,115) (11,516) (7,396) (4,120)
------- ------- ------- -------- -------- -------
Income from continuing
operations before income taxes 7,984 9,479 (1,495) 22,513 25,845 (3,332)
Provision for income taxes 138 (867) 1,005 (288) (1,589) 1,301
------- ------- ------- -------- -------- -------
Income from continuing operations 8,122 8,612 (490) 22,225 24,256 (2,031)
------- ------- ------- -------- -------- -------
Income (loss) from discontinued
operations 655 (4,268) 4,923 (4,236) (7,236) 3,000
------- ------- ------- -------- -------- -------
Net income $ 8,777 $ 4,344 $ 4,433 $ 17,989 $ 17,020 $ 969
======= ======= ======= ======== ======== =======
LEASE REVENUES
For the comparable quarters ended September 30, 2005 and 2004, lease revenues
(rental income and interest income from direct financing leases) increased by
$2,076 primarily due to $1,705 in revenue from properties acquired from CIP(R)
in September 2004 and $831 in rent increases and rent from new tenants at
existing properties. These increases were partially offset by a reduction in
rent of $276 due to a lease expiration and a reduction in interest income from
direct financing leases for financial reporting purposes as a result of reducing
estimated residual values on several leases. Our net leases generally have rent
increases based on formulas indexed to increases in the CPI or other indices for
the jurisdiction in which the property is located, sales overrides or other
periodic increases, which are designed to increase lease revenues in the future.
For the comparable nine-month periods ended September 30, 2005 and 2004, lease
revenues increased $7,707 primarily due to the same factors as described above.
Revenues of $7,118 from the CIP(R) acquisition and $1,740 from rent increases
and rent from new tenants at existing properties were partially offset by a
lease expiration of $813 and the negative impact on income from direct financing
lease reductions to estimated residual values on several leases.
Leases with combined annual rent of approximately $6,500 are scheduled to expire
in the next twelve months. Several of these leases, totaling approximately
$3,020, have been renewed early and on similar financial terms as their original
leases.
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-month periods
ended September 30, 2005 and 2004, other operating income increased by $1,176.
The increase is mainly attributable to the receipt of $848 in the third quarter
of 2005 from a former lessee that filed for bankruptcy in 2001.
For the nine-month periods ended September 30, 2005 and 2004, the decrease in
other operating income of $2,248 is primarily due to the receipt of $3,779 in
bankruptcy claim distributions from former lessees in 2004 partially offset by
the receipt of $848 in 2005 from a former tenant that filed for bankruptcy in
2001.
GENERAL AND ADMINISTRATIVE EXPENSES
For the comparable quarters ended September 30, 2005 and 2004, general and
administrative expenses decreased $363 primarily due to a reduction in
professional fees. Professional fees in 2004 included legal services rendered in
connection with the Los Angeles United School District (the "District")
arbitration (see Subsequent Event below).
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)
For the comparable nine-month periods ended September 30, 2005 and 2004, general
and administrative expenses increased $346 primarily due to an increase of $144
in investor related services, including printing and proxy solicitation costs as
well as an increase of $131 in our share of rental expenses under an
office-sharing agreement.
DEPRECIATION AND AMORTIZATION
For the comparable three and nine-month periods ended September 30, 2005 and
2004, depreciation and amortization expense increased by $1,289 and $4,361,
respectively. The increase is primarily a result of depreciation and
amortization expense recognized on the properties acquired from CIP(R) in
September 2004.
PROPERTY EXPENSES
For the comparable three and nine-month periods ended September 30, 2005 and
2004, property expenses increased $1,706 and $1,764, respectively, primarily
due to increases in property related expenses such as legal and professional
fees and real estate taxes at specific properties and increases in reimbursable
tenant costs. Actual recoveries of reimbursable tenant costs are recorded as
both revenue and expense and therefore have no impact on net income.
IMPAIRMENT CHARGES AND LOAN LOSSES
We did not incur any impairment charges or loan losses with respect to
continuing operations for the three and nine-month periods ended September 30,
2005. For the quarter ended September 30, 2004, we recorded an adjustment of
$1,000 related to collection of a previously written-off note receivable.
Impairment charges and loan losses recorded in the nine-month period ended
September 30, 2004 relate primarily to the write-off of a $2,250 note receivable
and an impairment charge of $550 to write down a property's carrying value to
its estimated fair value, partially offset by the adjustment described above.
INTEREST EXPENSE
For the comparable quarters ended September 30, 2005 and 2004, interest expense
increased $665, primarily due to an increase of $715 related to higher average
outstanding borrowings and higher variable interest rates related to our credit
facility and $287 related to debt balances outstanding on the properties
acquired from CIP(R). These increases were partially offset by lower interest
payments resulting from paying off mortgage balances and scheduled principal
payments. Although we reduced our outstanding credit facility balance by $24,000
as of September 30, 2005, average outstanding borrowings under this facility
were greater in the quarter ended September 30, 2005 versus the comparable prior
year period.
For the comparable nine-month periods ended September 30, 2005 and 2004,
interest expense increased $2,241, 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 $2,316. Debt balances
on the properties acquired from CIP(R) contributed $1,372 of the increase. As
described above, these increases were partially offset by lower interest
payments resulting from paying off mortgage balances and scheduled principal
payments.
INCOME FROM CONTINUING OPERATIONS
For the comparable quarters ended September 30, 2005 and 2004, income from
continuing operations decreased $490. Income 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 depreciation
and amortization as well as property expenses, mainly due to the CIP(R)
acquisition.
For the comparable nine-month periods ended September 30, 2005 and 2004, income
from continuing operations decreased $2,031. Increases in lease revenues, due
primarily to the properties acquired from CIP(R) in 2004, were offset by
increases in operating expenses and interest expense primarily related to the
properties acquired from CIP(R). In addition, other operating income was lower
by $2,248
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)
primarily as a result of the receipt of bankruptcy claim distributions from
former lessees in 2004 and foreign currency fluctuations resulted in lower
income of $1,294. These variances are described above.
PROVISION FOR INCOME TAXES
For the comparable three and nine-month periods ended September 30, 2005 and
2004, provision for income taxes decreased $1,005 and $1,301, respectively,
primarily due to the ability in certain states to file tax returns for operating
subsidiaries rather than filing consolidated returns and changes in estimates
for tax expense as a result of refunds received from prior year tax returns. The
ability to file tax returns for operating subsidiaries rather than consolidated
returns was deemed more tax efficient.
DISCONTINUED OPERATIONS
For the quarter ended September 30, 2005, we earned income from discontinued
operations of $655. In 2004, we incurred a loss from discontinued operations
primarily due to recognizing non-cash charges totaling $8,500, the majority of
which related to a property in Livonia, Michigan.
For the nine-month period ended September 30, 2005, we incurred a loss from
discontinued operations of $4,236 primarily due to the recognition of non-cash
impairment charges totaling $15,821 on the Berea, Kentucky; Amberley Village,
Ohio and Livonia, Michigan properties, which was partially offset by a $9,151
gain on sale from three facilities in Dubuque, Iowa; Portsmouth, New Hampshire
and Rochester, New York. In 2004, we incurred a loss from discontinued
operations primarily due to the recognition of non-cash impairment charges in
connection with properties at Livonia, Michigan and Toledo, Ohio.
MANAGEMENT SERVICES OPERATIONS
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2005 2004 CHANGE 2005 2004 CHANGE
-------- -------- -------- -------- -------- --------
REVENUES:
Asset management income $ 15,736 $ 16,053 $ (317) $ 46,063 $ 45,748 $ 315
Structuring fees 4,898 23,315 (18,417) 25,422 43,408 (17,986)
Incentive and subordinated
disposition fees from CIP merger -- 42,095 (42,095) -- 42,095 (42,095)
-------- -------- -------- -------- -------- --------
20,634 81,463 (60,829) 71,485 131,251 (59,766)
-------- -------- -------- -------- -------- --------
OPERATING EXPENSES:
General and administrative (10,190) (12,887) 2,697 (35,585) (36,084) 499
Depreciation and amortization (1,351) (4,439) 3,088 (3,989) (8,066) 4,077
-------- -------- -------- -------- -------- --------
(11,541) (17,326) 5,785 (39,574) (44,150) 4,576
-------- -------- -------- -------- -------- --------
OTHER INCOME AND EXPENSES:
Other interest income 992 757 235 2,409 2,037 372
Income from equity investments 604 403 201 1,564 1,119 445
Minority interest in income (417) (977) 560 (1,510) (1,022) (488)
Interest expense -- -- -- -- (35) 35
-------- -------- -------- -------- -------- --------
1,179 183 996 2,463 2,099 364
-------- -------- -------- -------- -------- --------
Income from continuing operations
before income taxes 10,272 64,320 (54,048) 34,374 89,200 (54,826)
Provision for income taxes (4,721) (31,743) 27,022 (15,247) (43,157) 27,910
-------- -------- -------- -------- -------- --------
Income from continuing operations $ 5,551 $ 32,577 $(27,026) $ 19,127 $ 46,043 $(26,916)
======== ======== ======== ======== ======== ========
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)
ASSET MANAGEMENT INCOME
Asset management income for the three and nine-month periods ended September 30,
2005 remained relatively consistent compared to the prior year comparable
periods. Asset management and performance fees increased by $1,515 and $4,989
for the three and nine-month periods ended September 30, 2005, respectively.
These increases reflect additional investments by the CPA REITs, including
investment by CPA(R):16-Global of proceeds from its public offering, which was
partially offset by the sale of CIP(R) of $142,161 of properties to us prior to
its merger in September 2004 with CPA(R):15. These increases were offset by a
reduction in marketing reimbursement costs resulting from CPA(R):16-Global's
termination of its initial public offering in March 2005.
A portion of the CPA(R) REIT asset management income 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 September 30, 2005, resulting in $1,063 and $2,569 in
performance fees not being recognized by us for the three and nine-month periods
ended September 30, 2005, respectively. Since the inception of CPA(R):16-Global,
we have not recognized $3,388 of performance fees. 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 September 30, 2005, the cumulative
distribution return for CPA(R):16-Global was 5.25% and its current distribution
rate was 6.0%. Based on management's current assessment, CPA(R):16-Global is
expected to meet the cumulative performance criterion during late 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, and in the
performance of properties that CPA(R):16-Global invests in 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.
Based on assets under management of the CPA(R) REITs as of September 30, 2005,
annualized asset management income under the advisory agreements is expected to
approximate $53,925. The asset management income 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.
STRUCTURING FEES
For the comparable quarters ended September 30, 2005 and 2004, structuring fees
decreased $18,417 primarily due to structuring fees of $11,493 earned in 2004 in
connection with the CIP(R) and CPA(R):15 merger as well as a reduction in
investment volume. Structuring fees include fees from structuring investments
and financing on behalf of the CPA(R) REITs. We structured $152,831 of
investments for the quarter ended September 30, 2005 as compared with $335,662
in the comparable prior year quarter. Approximately 64% of acquisitions
structured in the quarter ended September 30, 2005 related to CPA(R):16-Global
as compared to 60% 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.
For the comparable nine-month periods ended September 30, 2005 and 2004,
structuring fees decreased $17,986 primarily due to the same factors as
described above. Structuring fees earned in 2004 in connection with the CIP(R)
merger totaled $11,493. The decrease was also partially attributable 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 nine months ended September 30, 2005, we
structured $779,450 of investments as compared to $839,300 in the comparable
prior year period. For the nine months ended September 30, 2005, 66% of the
total investment volume related to CPA(R):16-Global as compared to 41% in the
comparable prior year period.
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 experiencing increased competition for international transactions as
well. For the three months ended September 30, 2005, international investments
accounted for $124,633 of the total investment volume, as compared to $200,949
for the comparable prior year quarter. For the nine
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)
months ended September 30, 2005, international investments accounted for
$426,092 of the total investment volume, as compared to $245,423 for the
comparable prior year period.
As discussed above, a portion of the CPA(R) REIT structuring 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 September 30, 2005, resulting in $1,861 and $8,577 in
structuring fees not being recognized by us for the three and nine-month periods
ended September 30, 2005. Since the inception of CPA(R):16-Global, we have not
recognized $16,112 of structuring fees. We will only be able to recognize the
fees if the performance criterion is met. The current performance and
anticipated future achievement of the performance criterion is discussed further
above. As we currently expect that CPA(R):16-Global will represent a significant
portion of our total 2005 investment volume relative to the other CPA(R) REITs
and its performance criterion are not expected to be met during 2005,
structuring fees revenue for 2005 will likely moderate or decrease based on a
similar investment volume.
INCENTIVE AND SUBORDINATED DISPOSITION FEES
In September 2004, CPA(R):15 acquired CIP(R)'s business in a stock-for-stock
merger that was approved by the shareholders of both funds. In connection with
providing a liquidity event for CIP(R) shareholders, we earned incentive fees of
$23,681 and subordinated disposition fees of $18,414 from CIP(R), in addition to
the structuring fees mentioned above. Incentive and disposition fees are
generally earned in connection with events which provide liquidity or
alternatives to CPA(R) REIT shareholders.
GENERAL AND ADMINISTRATIVE EXPENSES
For the comparable quarters ended September 30, 2005 and 2004, general and
administrative expenses decreased $2,697 primarily due to a reduction in
personnel costs of $3,216, which was partially offset by increased professional
fees of $461. A significant portion of personnel costs is directly related to
CPA(R) REIT investment volume, which decreased by $182,831 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. The
increase in professional fees is primarily related to ongoing securities law
compliance, including increased costs of compliance with the Sarbanes-Oxley Act.
For the comparable nine-month periods ended September 30, 2005 and 2004, general
and administrative expenses decreased $499 primarily due to a reduction in
personnel costs of $4,565, as described above, which was partially offset by
increases in professional fees of $2,857, office expenses of $587 and business
development expenses of $565. CPA(R) REIT investment volume decreased by
$59,850 over the comparable prior period. The increase in professional fees is
primarily due to legal costs associated with the ongoing securities law
compliance, including the Sarbanes-Oxley Act and the ongoing SEC investigation.
The increase in office expenses is mainly attributable to an increase in our
share of rental expenses under an office-sharing agreement and the increased
business development expenses are primarily due to increased advertising.
DEPRECIATION AND AMORTIZATION
For the comparable three and nine-month periods ended September 30, 2005 and
2004, depreciation and amortization expense decreased by $3,088 and $4,077,
respectively. These decreases are primarily due to the accelerated amortization
in 2004 of certain intangible assets related to a management contract with
CIP(R), which was terminated as a result of CIP(R)'s merger with CPA(R):15.
PROVISION FOR INCOME TAXES
For the comparable three and nine-month periods ended September 30, 2005 and
2004, the provision for income taxes decreased by $27,022 and $27,910,
respectively. These decreases are primarily due to the fees earned in the third
quarter of 2004 in connection with the merger between CIP(R) and CPA(R):15 as
described above.
INCOME FROM CONTINUING OPERATIONS
For the comparable three and nine-month periods ended September 30, 2005 and
2004, income from continuing operations decreased by $27,026 and $26,916,
respectively, primarily due to the impact of fees earned in the third quarter of
2004 in connection with the
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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)
merger between CIP(R) and CPA(R):15 as described above. The net of tax impact of
these fees approximated $27,000 for both the three and nine-month periods ended
September 30, 2004.
OTHER
Other represents our development management agreement with the District as
described below in Subsequent Event and in Note 13 of the accompanying financial
statements, a wholly-owned indirect subsidiary reached a settlement agreement
with the District and certain other parties in October 2005 related to this
project. As a result of entering into this settlement agreement, we expect to
recognize non-cash pre-tax income of approximately $2,700 in the quarter
ending December 31, 2005. Approximately $2,000 of this income represents the
deferral of a portion of gain on sale of land to the District in 2002.
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 $12,376 as of September 30, 2005, a
decrease of $4,339 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 cash flow from our equity distributions that are included in investing
activities to the extent that the distributions in excess of equity income are
the result of non-cash charges such as depreciation and amortization.
Distributions paid to shareholders of $50,101 were substantially funded by cash
flows from operating activities and distributions received from equity
investments of $49,953. Existing cash and cash equivalent reserves were used to
fund the difference. During the nine months ended September 30, 2005, we
received fees of $20,252 in connection with structuring investments and fees of
$15,312, 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 $38,210. 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 for 2005.
Cash flows from operating activities for the nine months ended September 30,
2005, were affected by several factors including the following:
- During 2004, cash flows from operating activities benefited as a
result of fees earned in connection with the CIP(R)and CPA(R):15
merger. The net of tax impact of these fees approximated $27,000 in
2004.
- We paid approximately $23,933 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 $7,662 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.
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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)
We currently expect that annual cash flows from operations will be sufficient to
fund distributions; however, operating cash flows fluctuate on a quarterly basis
due to such factors as the timing of the receipt of investment-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 nine months ended September 30, 2005, we received net proceeds
of $32,591 related to the 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 nine months ended September 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 September 30, 2005 is $1,185. We currently anticipate
using cash from operations to fund the remaining obligation.
During the nine months ended September 30, 2005, we received distributions of
$3,539 from the CPA(R) REITs, of which $1,975 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 $5,205.
FINANCING ACTIVITIES - During the nine months ended September 30, 2005 we paid
distributions to shareholders of $50,101, 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
$11,826 and paying down the outstanding balance on our credit facility by
$24,000. 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 $60,000, which were used for several purposes in the normal course
of business, and repayments were $84,000. The majority of the repayments were
made using cash received in the normal course of business. We also raised $3,529
from the issuance of shares primarily through our Distribution Reinvestment and
Share Purchase Plan.
CASH RESOURCES
As of September 30, 2005, we had $12,376 in cash and cash equivalents, which can
be used for working capital needs and other commitments and may be used for
future real estate investments. We also have a credit facility with unused
capacity of up to $147,000 available as of September 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 $341,254 as
of September 30, 2005 and any proceeds may be used to finance future real estate
investments. In August 2005, we refinanced approximately $9,700 of mortgage
financing that was scheduled to mature in 2006 and had a fixed interest rate of
7% with new 10 year financing at a fixed interest rate of 4.87%. Additionally,
in October 2005 we placed financing of approximately $45,900 on several
previously unleveraged properties at a weighted average rate of 5.13% for an
average term of 9.2 years. Net proceeds from these financings were used to pay
down short-term variable rate debt outstanding on our credit line. We
anticipate adding a further $10,750 of similar long-term debt financing in the
near future. We continue to evaluate 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.
SEPTEMBER 30, 2005 DECEMBER 31, 2004
----------------------- -----------------------
MAXIMUM OUTSTANDING MAXIMUM OUTSTANDING
AVAILABLE BALANCE AVAILABLE BALANCE
--------- ----------- --------- -----------
Credit Facility $225,000 $78,000 $225,000 $102,000
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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)
CASH REQUIREMENTS
During the next twelve months, cash requirements will include paying
distributions to shareholders, scheduled mortgage principal payments, including
mortgage balloon payments totaling $14,637 with $10,304 due in June 2006 and
$4,333 due in July 2006, making distributions to minority partners as well as
other normal recurring operating expenses. We may also seek to use our cash to
invest in new properties and maintain cash balances sufficient to meet working
capital needs. We may issue additional shares in connection with investments in
real estate when it is consistent with the objectives of the seller. As
described above, in August 2005 we refinanced a balloon payment on a mortgage
due in January 2006.
We have budgeted capital expenditures of up to approximately $2,688 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 $800 to be funded to prepare
the Red Bank property for sale to a third party. We have received a grant from
an agency of the State of Ohio, which will reimburse us for certain
environmental costs at Red Bank. In addition, we have entered into an agreement
to share certain other of the expected environmental costs with a third party
which operated a business at the property prior to our ownership.
We expect to meet our capital requirements to fund future property acquisitions,
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 September 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) $196,864 $24,591 $ 52,946 $64,142 $55,185
Unsecured note payable (1) 84,591 -- 84,591 -- --
Deferred acquisition fees to affiliate (1) 1,304 595 704 5 --
Development project (2) 2,000 2,000 -- -- --
Operating leases (3) 7,797 710 1,432 1,463 4,192
-------- ------- -------- ------- -------
$292,556 $27,896 $139,673 $65,610 $59,377
======== ======= ======== ======= =======
(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.
In October 2005, the Company subsequently entered into a settlement
agreement with the District and certain other parties and as a result the
commitment was revoked (see Subsequent Event below).
(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 September 30, 2005.
SUBSEQUENT EVENT:
In October 2005, a wholly-owned indirect subsidiary reached a settlement
agreement with the District and certain other parties in connection with a
build-to-suit development management agreement to develop and construct a new
high school. Under the terms of the settlement agreement, the subsidiary will
not be entitled to any further payments under the development management
agreement and will discharge all parties to the settlement agreement from any
further obligations arising from the development management
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W. P. CAREY & CO. LLC
agreement. In return, the subsidiary has been released from any liabilities and
obligations to the District and the other parties to the settlement agreement.
We expect to recognize non-cash pre-tax income of approximately $2,700 in the
quarter ending December 31, 2005 as a result of entering into the settlement
agreement. Approximately $2,000 of this income represents the deferral of a
portion of gain on sale of land to the District in 2002.
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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 September 30, 2005, $126,256 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 September 30, 2005 ranged from 6.11% to
10.125%. The interest rates on our variable rate debt as of September 30, 2005
ranged from 4.56% 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 $1,753 $11,650 $23,646 $8,340 $35,269 $45,598 $126,256 $125,631
Weighted average interest rate 7.63% 7.40% 7.99% 7.68% 7.39% 7.25%
Variable rate debt $ 548 $ 2,437 $80,694 $2,975 $ 3,154 $34,511 $124,319 $124,319
Annual interest expense would increase or decrease on variable rate debt by
approximately $1,243 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 September 30, 2005 by approximately $3,506.
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 September 30, 2005 and 2004, we recognized a loss
of $49 and a gain of $86, respectively, and for the nine-month periods ended
September 30, 2005 and 2004, we recognized a loss of $60 and a gain of $425,
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 September 30, 2005 and 2004, we recognized net
unrealized foreign currency gains of $8 and $77, respectively. The cumulative
foreign currency translation adjustment reflects a loss of $461. 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.
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W. P. CAREY & CO. LLC
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 September 30, 2005. We have
implemented remediation steps as described in (b) below with respect to controls
over the calculation and review of estimated deferred taxes. Management has
concluded that these controls have not been in place for a sufficient period of
time in order to conclude that the material weakness has been remediated and
therefore the Chief Executive Officer and acting Chief Financial Officer have
concluded that our disclosure controls and procedures were not effective as of
September 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. During the third
quarter, we implemented several additional controls to provide for a more
comprehensive preparation and review of this calculation. Controls that were
implemented include the addition of new tax rate reconciliations, variance
analyses and checklists. In addition, we have added an additional level of
management review of the deferred tax provision on a quarterly basis. The
implementation of these remediation steps has been completed, however they have
not been operating for a sufficient period of time to conclude on the operating
effectiveness of these controls and testing of the operation of these controls
is 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
PART II
(Amounts in thousands, except share amounts)
ITEM 1. - LEGAL PROCEEDINGS
Refer to Note 7, Commitments and Contingencies, of the consolidated financial
statements for information regarding legal proceedings.
ITEM 6. - EXHIBITS
10.1 Amended and Restated Advisory Agreement, dated as of September 30,
2005, between Carey Asset Management Corp. and Corporate Property
Associates 14 Incorporated
10.2 Amended and Restated Advisory Agreement, dated as of September 30,
2005, between Carey Asset Mangagement Corp. and Corporate Property
Associates 15 Incorporated
10.3 Second Amended and Restated Advisory Agreement, dated as of
September 30, 2005, between Carey Asset Management Corp. and
Corporate Property Associates 16-Global Incorporated
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
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
33
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
11/9/2005 By: /s/ Claude Fernandez
Date -------------------------------------
Claude Fernandez
Managing Director and
acting Chief Financial Officer
(acting Principal Financial Officer)
11/9/2005 By: /s/ Michael D. Roberts
Date -------------------------------------
Michael D. Roberts
Executive Director and Controller
(acting Principal Accounting Officer)
34