FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 |
For the quarterly period ended March 31, 2006
or
|
|
|
o |
|
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
(State of incorporation)
|
|
13-3912578
(I.R.S. Employer Identification No.) |
|
|
|
50 ROCKEFELLER PLAZA |
|
|
NEW YORK, NEW YORK
|
|
10020 |
(Address of principal executive offices)
|
|
(Zip Code) |
Investor Relations (212) 492-8920
(212) 492-1100
(Registrants telephone numbers, including area code)
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
Registrant has 37,908,491 Listed Shares, no par value, outstanding at May 3, 2006.
W. P. CAREY & CO. LLC
INDEX
|
|
|
* |
|
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. |
Forward Looking Statements
This quarterly report on Form 10-Q, including Managements Discussion and Analysis of Financial
Condition and Results of Operations in Item 2 of Part I of this report, contains forward-looking
statements that involve risks, uncertainties and assumptions. 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 1A of our Annual Report on
Form 10-K for the year ended December 31, 2005. 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 managements discussion and analysis section in our Annual Report on
Form 10-K for the year ended December 31, 2005. There has been no significant change in such
critical accounting estimates.
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.
1
W. P. CAREY & CO. LLC
PART I
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
March 31, |
|
|
2005 |
|
|
|
2006 |
|
|
(NOTE) |
|
ASSETS |
|
|
|
|
|
|
|
|
Real estate, net |
|
$ |
492,859 |
|
|
$ |
454,478 |
|
Net investment in direct financing leases |
|
|
118,995 |
|
|
|
131,975 |
|
Equity investments |
|
|
133,822 |
|
|
|
134,567 |
|
Operating real estate, net |
|
|
7,761 |
|
|
|
7,865 |
|
Assets held for sale |
|
|
24,870 |
|
|
|
18,815 |
|
Cash and cash equivalents |
|
|
14,833 |
|
|
|
13,014 |
|
Due from affiliates |
|
|
76,417 |
|
|
|
82,933 |
|
Goodwill |
|
|
63,607 |
|
|
|
63,607 |
|
Intangible assets, net |
|
|
38,250 |
|
|
|
40,700 |
|
Other assets, net |
|
|
28,661 |
|
|
|
35,308 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,000,075 |
|
|
$ |
983,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS EQUITY |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Mortgage notes payable |
|
$ |
245,523 |
|
|
$ |
226,701 |
|
Mortgage notes payable on assets held for sale |
|
|
4,373 |
|
|
|
4,412 |
|
Credit facility |
|
|
6,000 |
|
|
|
15,000 |
|
Accrued interest |
|
|
1,647 |
|
|
|
2,036 |
|
Distributions payable |
|
|
17,073 |
|
|
|
16,963 |
|
Due to affiliates |
|
|
1,035 |
|
|
|
2,994 |
|
Accounts payable and accrued expenses |
|
|
18,690 |
|
|
|
23,002 |
|
Prepaid rental income and security deposits |
|
|
6,553 |
|
|
|
4,391 |
|
Accrued income taxes |
|
|
6,305 |
|
|
|
634 |
|
Deferred income taxes, net |
|
|
37,860 |
|
|
|
39,908 |
|
Other liabilities |
|
|
39,691 |
|
|
|
36,064 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
384,750 |
|
|
|
372,105 |
|
|
|
|
|
|
|
|
Minority interest in consolidated entities |
|
|
12,049 |
|
|
|
3,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 8) |
|
|
|
|
|
|
|
|
Members equity: |
|
|
|
|
|
|
|
|
Listed shares, no par value; 37,778,129 and
37,706,247 shares issued and outstanding at
March 31, 2006 and December 31, 2005 |
|
|
736,803 |
|
|
|
740,593 |
|
Dividends in excess of accumulated earnings |
|
|
(137,188 |
) |
|
|
(131,178 |
) |
Unearned
compensation |
|
|
|
|
|
|
(5,119 |
) |
Accumulated other comprehensive income |
|
|
3,661 |
|
|
|
3,172 |
|
|
|
|
|
|
|
|
Total members equity |
|
|
603,276 |
|
|
|
607,468 |
|
|
|
|
|
|
|
|
Total liabilities and members equity |
|
$ |
1,000,075 |
|
|
$ |
983,262 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
|
NOTE: |
|
The consolidated balance sheet at December 31, 2005 has been derived from the audited
consolidated financial statements at that date. |
2
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share and share amounts)
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
REVENUES: |
|
|
|
|
|
|
|
|
Asset management revenue |
|
$ |
17,360 |
|
|
$ |
15,432 |
|
Structuring revenue |
|
|
9,892 |
|
|
|
10,707 |
|
Rental income |
|
|
14,822 |
|
|
|
13,045 |
|
Interest income from direct financing leases |
|
|
3,421 |
|
|
|
3,836 |
|
Other operating income |
|
|
528 |
|
|
|
559 |
|
Revenues of other business operations |
|
|
1,863 |
|
|
|
1,728 |
|
|
|
|
|
|
|
|
|
|
|
47,886 |
|
|
|
45,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
General and administrative |
|
|
(14,156 |
) |
|
|
(13,811 |
) |
Depreciation |
|
|
(3,645 |
) |
|
|
(3,088 |
) |
Amortization |
|
|
(2,284 |
) |
|
|
(2,203 |
) |
Property expenses |
|
|
(1,837 |
) |
|
|
(1,715 |
) |
Impairment charge |
|
|
|
|
|
|
(800 |
) |
Operating expenses of other business operations |
|
|
(1,567 |
) |
|
|
(1,516 |
) |
|
|
|
|
|
|
|
|
|
|
(23,489 |
) |
|
|
(23,133 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME AND EXPENSES: |
|
|
|
|
|
|
|
|
Other interest income |
|
|
727 |
|
|
|
842 |
|
Income from equity investments |
|
|
1,550 |
|
|
|
1,368 |
|
Minority interest in income |
|
|
(862 |
) |
|
|
(632 |
) |
Gain (loss) on foreign currency transactions and other gains, net |
|
|
250 |
|
|
|
(350 |
) |
Interest expense |
|
|
(4,388 |
) |
|
|
(4,227 |
) |
|
|
|
|
|
|
|
|
|
|
(2,723 |
) |
|
|
(2,999 |
) |
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
21,674 |
|
|
|
19,175 |
|
Provision for income taxes |
|
|
(6,722 |
) |
|
|
(5,853 |
) |
|
|
|
|
|
|
|
Income from continuing operations |
|
|
14,952 |
|
|
|
13,322 |
|
|
|
|
|
|
|
|
DISCONTINUED OPERATIONS: |
|
|
|
|
|
|
|
|
(Loss) income from operations of discontinued properties |
|
|
(530 |
) |
|
|
1,425 |
|
Loss on sale of real estate |
|
|
|
|
|
|
(20 |
) |
Impairment charges on assets held for sale |
|
|
(3,357 |
) |
|
|
(8,872 |
) |
|
|
|
|
|
|
|
Loss from discontinued operations |
|
|
(3,887 |
) |
|
|
(7,467 |
) |
|
|
|
|
|
|
|
NET INCOME |
|
$ |
11,065 |
|
|
$ |
5,855 |
|
|
|
|
|
|
|
|
BASIC EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
.40 |
|
|
$ |
.36 |
|
Loss from discontinued operations |
|
|
(.10 |
) |
|
|
(.20 |
) |
|
|
|
|
|
|
|
Net income |
|
$ |
.30 |
|
|
$ |
.16 |
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
.39 |
|
|
$ |
.34 |
|
Loss from discontinued operations |
|
|
(.10 |
) |
|
|
(.19 |
) |
|
|
|
|
|
|
|
Net income |
|
$ |
.29 |
|
|
$ |
.15 |
|
|
|
|
|
|
|
|
DISTRIBUTIONS DECLARED PER SHARE |
|
$ |
0.452 |
|
|
$ |
0.444 |
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES OUTSTANDING: |
|
|
|
|
|
|
|
|
Basic |
|
|
37,727,782 |
|
|
|
37,592,343 |
|
|
|
|
|
|
|
|
Diluted |
|
|
38,627,267 |
|
|
|
39,377,650 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
3
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
Net Income |
|
$ |
11,065 |
|
|
$ |
5,855 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
Change in unrealized appreciation (depreciation) on marketable securities |
|
|
771 |
|
|
|
(1,065 |
) |
Foreign currency translation adjustment |
|
|
(282 |
) |
|
|
(483 |
) |
|
|
|
|
|
|
|
|
|
|
489 |
|
|
|
(1,548 |
) |
|
|
|
|
|
|
|
Comprehensive Income |
|
$ |
11,554 |
|
|
$ |
4,307 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
4
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2006 |
|
|
2005 (Revised) |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
11,065 |
|
|
$ |
5,855 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization including intangible assets and deferred financing costs |
|
|
6,136 |
|
|
|
5,521 |
|
Income from equity investments in excess of distributions received |
|
|
(247 |
) |
|
|
(75 |
) |
Loss on sale of real estate |
|
|
|
|
|
|
20 |
|
Minority interest in income |
|
|
862 |
|
|
|
632 |
|
Straight-line rent adjustments |
|
|
732 |
|
|
|
962 |
|
Management income received in shares of affiliates |
|
|
(7,892 |
) |
|
|
(7,025 |
) |
Unrealized (gain) loss on foreign currency transactions and warrants |
|
|
(165 |
) |
|
|
363 |
|
Impairment charges |
|
|
3,357 |
|
|
|
9,672 |
|
Deferred income taxes |
|
|
(2,048 |
) |
|
|
(1,140 |
) |
Realized gain on foreign currency transactions |
|
|
(85 |
) |
|
|
(14 |
) |
Increase in accrued income taxes |
|
|
5,671 |
|
|
|
3,514 |
|
Decrease in prepaid taxes |
|
|
706 |
|
|
|
|
|
Tax charge share incentive plan |
|
|
|
|
|
|
(228 |
) |
Excess tax benefits associated with stock based compensation awards |
|
|
719 |
|
|
|
830 |
|
Deferred acquisition revenue received |
|
|
12,543 |
|
|
|
8,961 |
|
Increase in structuring revenue receivable |
|
|
(3,039 |
) |
|
|
(1,572 |
) |
Net changes in other operating assets and liabilities |
|
|
(2,968 |
) |
|
|
1,225 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
25,347 |
|
|
|
27,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Distributions received from equity investments in excess of equity income |
|
|
1,400 |
|
|
|
1,937 |
|
Capital expenditures |
|
|
(674 |
) |
|
|
(312 |
) |
Payment of deferred acquisition revenue to an affiliate |
|
|
(524 |
) |
|
|
(524 |
) |
Proceeds from sales of property and investments |
|
|
|
|
|
|
3,613 |
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
202 |
|
|
|
4,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Distributions paid |
|
|
(16,965 |
) |
|
|
(16,584 |
) |
Contributions from minority interests |
|
|
506 |
|
|
|
|
|
Distributions to minority interests |
|
|
(136 |
) |
|
|
|
|
Scheduled payments of mortgage principal |
|
|
(2,916 |
) |
|
|
(2,285 |
) |
Proceeds from mortgages and credit facility |
|
|
10,000 |
|
|
|
20,000 |
|
Prepayments of mortgage principal and credit facility |
|
|
(19,000 |
) |
|
|
(26,893 |
) |
Release of funds from escrow in connection with the financing of properties |
|
|
4,031 |
|
|
|
|
|
Payment of financing costs |
|
|
(217 |
) |
|
|
|
|
Proceeds from issuance of shares |
|
|
1,323 |
|
|
|
1,421 |
|
Excess tax benefits associated with stock based compensation awards |
|
|
77 |
|
|
|
|
|
Retirement of shares |
|
|
(482 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(23,779 |
) |
|
|
(24,341 |
) |
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
49 |
|
|
|
(161 |
) |
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
1,819 |
|
|
|
7,713 |
|
Cash and cash equivalents, beginning of year |
|
|
13,014 |
|
|
|
16,715 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
14,833 |
|
|
$ |
24,428 |
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
Interest paid, net of amounts capitalized |
|
$ |
4,655 |
|
|
$ |
3,706 |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
2,289 |
|
|
$ |
3,752 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
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 real estate and advisory company that invests in
commercial properties leased to companies domestically and internationally, and earns revenue as
the advisor to the following affiliated real estate investment trusts (CPA® REITs)
that each make similar investments: Corporate Property Associates 12 Incorporated
(CPA®:12), Corporate Property Associates 14 Incorporated (CPA®:14),
Corporate Property Associates 15 Incorporated (CPA®:15), Corporate Property Associates
16 Global Incorporated (CPA®:16 Global). Under the advisory agreements with the
CPA® REITs, the Company performs services related to the day-to-day management of the
CPA® REITs and transaction-related services. As of March 31, 2006, the Company owns and
manages over 700 commercial properties domestically and internationally including its own portfolio
which is comprised of 172 commercial properties net leased to 111 tenants and totaling
approximately 17 million square feet.
The Companys Primary Business Segments
MANAGEMENT SERVICES The Company provides services to the CPA® REITs in connection with
structuring and negotiating investment and debt placement transactions (structuring revenue) and
provides on-going management of the portfolio (asset-based management and performance revenue).
Asset-based management and performance revenue for the CPA® REITs are determined based
on real estate related assets under management. As funds available to the CPA® REITs are
invested, the asset base for which the Company earns revenue increases. The Company may elect to
receive revenue in cash or restricted shares of the CPA® REITs. The Company may also
earn incentive and disposition revenue in connection with providing liquidity alternatives to
CPA® REIT shareholders.
REAL ESTATE OPERATIONS The Company invests in commercial 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). Accordingly, they do not
include all information and notes required by accounting principles generally accepted in the United States of America
for complete financial statements. All significant intercompany balances and
transactions have been eliminated. In the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair statement of the results of the
interim periods presented have been included. The results of operations for the interim periods are
not necessarily indicative of results for the full year. These financial statements should be read
in conjunction with the audited consolidated financial statements and notes thereto included in the
Companys Annual Report on Form 10-K for the year ended December 31, 2005.
Principles of Consolidation
The accompanying consolidated financial statements include all accounts of the Company, and its
majority-owned and/or controlled subsidiaries. The portion of these entities not owned by the
Company is presented as minority interest as of and during the periods consolidated. All
intercompany accounts and transactions have been eliminated in consolidation.
When the Company obtains an economic interest in an entity, the Company evaluates the entity to
determine if the entity is deemed a variable interest entity (VIE), and if the Company is deemed
to be the primary beneficiary, in accordance with FASB Interpretation
No. 46(R), Consolidation of
Variable Interest Entities (FIN 46(R)). The Company consolidates (i) entities that are VIEs and
of which the Company is deemed to be the primary beneficiary and (ii) entities that are non-VIEs
which the Company controls. Entities that the Company accounts for under the equity method (i.e.
at cost, increased or decreased by the Companys share of earnings or losses, less distributions)
include (i) entities that are VIEs and of which the Company is not deemed to be the primary
beneficiary and (ii) entities that are non-VIEs which the Company does not control, but over which
the Company has the ability to exercise significant influence. The Company will reconsider its
determination of whether an entity is a VIE and who the primary beneficiary is if certain events
occur that are likely to cause a change in the original determinations.
As a result of adopting the provisions of Emerging Issues Task Force (EITF) Consensus on Issue
No. 04-05, Determining Whether a General Partner, or the General Partners as a Group, Controls a
Limited Partnership or Similar Entity When the Limited Partners Have
6
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
Certain
Rights effective January 1, 2006, the Company now
consolidates a limited liability company that leases property to CheckFree Holdings
Corporation Inc., that was previously accounted for under the equity
method of accounting.
Reclassifications and Revisions
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.
The Company has revised its consolidated statement of cash flow for the period ended March 31, 2005
to present the operating portion of the cash flows attributable to our discontinued operations on a
combined basis.
NOTE 3. Transactions with Related Parties
Through one of its wholly-owned subsidiaries, the Company earns fees as the advisor (advisor) to
the CPA® REITs. Under the advisory agreements with the CPA® REITs, the
Company performs various services, including but not limited to the day-to-day management of the
CPA® REITs and transaction-related services. The Company earns asset management revenue
totaling 1% per annum of average invested assets, as calculated pursuant to the advisory agreements
for each CPA® REIT, of which 1/2 of 1% (performance revenue) is contingent upon
specific performance criteria for each
CPA® REIT, 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 revenue due from each CPA® REIT. For the
three-month periods ended March 31, 2006 and 2005, total asset-based revenue and reimbursements
earned were $17,360 and $15,432, respectively. As of March 31, 2006, CPA®:16 Global
did not meet its performance criterion (a non-compounded cumulative distribution return of 6%), as
defined in its advisory agreement, and since its inception, the Company has deferred cumulative
performance revenue of $5,698 that will be recognized if the performance criterion is met. For
2006, the Company elected to continue to receive all performance revenue from the CPA®
REITs as well as the asset management revenue payable by CPA®:16-Global in restricted
shares.
In connection with structuring and negotiating investments and related mortgage financing for the
CPA® REITs, the advisory agreements provide for structuring revenue based on the cost of
investments. Under each of the advisory agreements, we may receive acquisition revenue of up to an
average of 4.5% of the total cost of all investments made by each CPA® REIT. A portion
of this revenue (generally 2.5%) is paid when the transaction is completed while the remainder
(generally 2%) is payable in equal annual installments ranging from three to eight years, subject
to the relevant CPA® REIT meeting its performance criterion. Unpaid installments bear
interest at annual rates ranging from 5% to 7%. The Company may in certain circumstances be
entitled to loan refinancing revenue of up to 1% of the principal amount refinanced in connection
with structuring and negotiating investments. This loan refinancing revenue, together with the
acquisition revenue, is referred to as structuring revenue.
For the three months ended March 31, 2006 and 2005, the Company earned structuring revenue of
$9,892 and $10,707, respectively. CPA®:16-Global has not met its performance criterion
and since its inception, cumulative deferred acquisition revenue of $19,760 and interest thereon of
$1,087, have been deferred, and will be recognized by the Company if CPA®:16-Global
meets the performance criterion. In addition, the Company may also earn revenue related to the
disposition of properties, subject to subordination provisions, and will only recognize such
revenue as the subordination provisions are achieved.
Included in due from affiliate and other liabilities in the accompanying consolidated balance
sheets as of March 31, 2006 and December 31, 2005 is $26,544 and $23,085, respectively, of deferred
revenue related to providing services to CPA®:16-Global (as described above).
Recognition and ultimate collection of these amounts is subject to CPA®:16-Global
meeting its performance criterion.
The Company owns interests in entities, which range from 22.50% to 50%, a jointly-controlled 36%
tenancy-in-common interest in two properties subject to a net lease with the remaining interests
held by affiliates and owns common stock in each of the CPA® REITs. The Company has a
significant influence in these investments, which are accounted for under the equity method of
accounting.
The Company is the general partner in a limited partnership that leases the Companys home office
spaces and participates in an agreement with certain affiliates, including the CPA®
REITs for the purpose of leasing office space used for the administration of the
7
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
Company and other affiliated real estate entities and sharing the associated costs. During the
fourth quarter of 2005, the Company began consolidating the results of operations of this limited
partnership (effective January 1, 2005) pursuant to Emerging Issues Task Force Issue No. 04-05. As
a result, during the three months ended March 31, 2006, the Company recorded lease revenues of $623
of which $459 was reimbursed by certain affiliates. During the three months ended March 31, 2005
(prior to consolidation) our share of rental expenses under this agreement was $118. The Companys
estimated minimum annual lease payments on the office lease, inclusive of minority interest, as of March 31,
2006 are $28,479 through 2016.
In June 2000,
the Company acquired Carey Management LLC (Carey Management). Prior to its
acquisition by the Company, Carey Management performed certain services for the Company and earned
structuring revenue in connection with the purchase and disposition of properties. The Company is
obligated to pay deferred acquisition compensation in equal annual
installments over a period of no less
than eight years. As of March 31, 2006 and December 31,
2005, unpaid deferred acquisition compensation was $661 and $1,185,
respectively, and bore interest at an annual rate of 6%.
A person who serves as a director and an officer of the Company is the sole shareholder of Livho,
Inc. (Livho), a lessee of the Company. The Company consolidates the accounts of Livho in its
consolidated financial statements in accordance with FIN 46(R) as it is a VIE where the Company is
the primary beneficiary.
A director of the Company has an ownership interest in companies that own the minority interest in
the Companys French majority-owned subsidiaries. The directors ownership interest is subject to
the same terms as all other ownership interests in the subsidiary companies.
Two employees of the Company own a minority interest in W.P. Carey International LLC (WPCI), a
company that structures net lease transactions on behalf of the CPA® REITs outside of
the United States of America.
NOTE 4. Real Estate
Real estate, which consists of land and buildings leased to others, at cost, and accounted for
under the operating method, is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
December 31, 2005 |
|
Cost |
|
$ |
556,962 |
|
|
$ |
515,275 |
|
Less: Accumulated depreciation |
|
|
(64,103 |
) |
|
|
(60,797 |
) |
|
|
|
|
|
|
|
|
|
$ |
492,859 |
|
|
$ |
454,478 |
|
|
|
|
|
|
|
|
Operating real estate, which consists of the Companys hotel operations, at cost, is summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
December 31, 2005 |
|
Cost |
|
$ |
15,108 |
|
|
$ |
15,108 |
|
Less: Accumulated depreciation |
|
|
(7,347 |
) |
|
|
(7,243 |
) |
|
|
|
|
|
|
|
|
|
$ |
7,761 |
|
|
$ |
7,865 |
|
|
|
|
|
|
|
|
NOTE 5. Equity Investments
The Company owns interests in four CPA® REITs with which it has advisory agreements. The
Companys interests in the CPA® REITs are accounted for under the equity method due to
the Companys ability to exercise significant influence as the advisor to the CPA®
REITs. The CPA® REITs are publicly registered and file financial statements with the
SEC. In connection with earning asset management and performance revenue, the Company has elected
to receive restricted shares of common stock in the CPA® REITs rather than cash in
consideration for such revenue (see Note 3).
As of March 31, 2006, the Companys ownership in the CPA® REITs is as follows:
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
% of outstanding shares |
CPA®:12 |
|
|
1,924,234 |
|
|
|
6.20 |
% |
CPA®:14 |
|
|
3,387,283 |
|
|
|
4.95 |
% |
CPA®:15 |
|
|
3,529,084 |
|
|
|
2.76 |
% |
CPA®:16-Global |
|
|
428,786 |
|
|
|
0.75 |
% |
8
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
The Company owns equity interests as a limited partner in two limited partnerships, three limited
liability companies and a jointly-controlled 36% tenancy-in-common interest in two properties
subject to a master lease with the remaining interests owned by affiliates, all of which net lease
real estate on a single-tenant basis.
Combined financial information of the affiliated equity investees is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
December 31, 2005 |
|
Assets (primarily real estate) |
|
$ |
6,108,170 |
|
|
$ |
5,593,102 |
|
Liabilities (primarily mortgage notes payable) |
|
|
(3,414,599 |
) |
|
|
(2,992,146 |
) |
|
|
|
|
|
|
|
Owners equity |
|
$ |
2,693,571 |
|
|
$ |
2,600,956 |
|
|
|
|
|
|
|
|
Companys share of equity investees net assets |
|
$ |
133,822 |
|
|
$ |
134,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
Revenue (primarily rental income and interest income from direct financing leases) |
|
$ |
124,791 |
|
|
$ |
101,424 |
|
Expenses (primarily depreciation and property expenses) |
|
|
(49,261 |
) |
|
|
(42,782 |
) |
Other interest income |
|
|
3,329 |
|
|
|
2,785 |
|
Income from equity investments |
|
|
11,469 |
|
|
|
12,064 |
|
Minority interest in income |
|
|
(8,625 |
) |
|
|
(4,542 |
) |
Gain (loss) on sales of real estate, derivatives and foreign currency transactions, net |
|
|
1,105 |
|
|
|
(351 |
) |
Interest expense |
|
|
(48,138 |
) |
|
|
(38,771 |
) |
|
|
|
|
|
|
|
Income from continuing operations |
|
|
34,670 |
|
|
|
29,827 |
|
Income from discontinued operations |
|
|
1,655 |
|
|
|
313 |
|
Gain on sale of real estate |
|
|
2,852 |
|
|
|
508 |
|
Impairment charge on properties held for sale |
|
|
|
|
|
|
(3,455 |
) |
|
|
|
|
|
|
|
Net income |
|
$ |
39,177 |
|
|
$ |
27,193 |
|
|
|
|
|
|
|
|
Companys share of net income from equity investments |
|
$ |
1,550 |
|
|
$ |
1,368 |
|
|
|
|
|
|
|
|
NOTE 6. Assets held for Sale and Discontinued Operations
Tenants from time to time may vacate space due to lease buy-out, election not to renew, company
insolvency or lease rejection in the bankruptcy process. In such cases, we assess whether the
highest value is obtained from re-leasing or selling the property. When it is determined that the
most likely outcome will be a sale, the asset is reclassified as an asset held for sale.
Assets Held for Sale
In March 2005, the Company received notification from the lessee of its Amberly Village, Ohio and
Berea, Kentucky properties, that the lessee had exercised its existing option to purchase both
properties, at fair value, pursuant to the terms of the agreement. Fair value was determined
pursuant to an appraisal process in accordance with the terms of the lease agreement between the
Company and the lessee. In December 2005, the tenant completed the purchase of the Kentucky
property (see Discontinued Operations below) and terminated its lease on the Ohio property for a
lease termination payment of $3,000. In March 2006, the Company entered into a contract with a
third party to sell the Ohio property for $6,190, net of expected selling costs. Because the
expected net proceeds are less than the Ohio propertys carrying value of approximately $9,390, the
Company has recognized an impairment charge of $3,200 in the quarter ended March 31, 2006. The
Company recognized impairment charges totaling $9,450 in 2005 related to the Ohio property.
In December 2005, the Company received notification from the lessee of a property in Olive Branch,
Mississippi of its election to exercise its existing option to purchase the property in accordance
with the terms of the lease agreement. In April 2006, the Company completed this sale for $7,700
net of selling costs and recognized an impairment charge of $116 in the first quarter of 2006. The
Company previously recognized an impairment charge of $650 related to this property.
In connection with entering into a commitment to sell a property in Bay Minette, Alabama, to a
third party for $520, the Company recognized an impairment charge of $41 in the first quarter of
2006, as the propertys estimated fair value was lower than its carrying value. The Company had
previously recognized impairment charges totaling $625 related to this property.
In March 2005, the Company entered into a contract to sell its property in Travelers Rest, South
Carolina to a third party for $2,550.
9
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
The Company currently expects to complete this transaction in the first half of 2006 and expects to
record a gain on this sale of approximately $1,000. Impairment charges totaling $2,507 were
recognized in prior years to write down the property value to the estimated net sales proceeds.
Assets held for sale also include a property located in Cincinnati, Ohio that is subject to a
contract for sale for approximately $10,100. Impairment charges totaling $2,700 were previously
recorded in prior years to write down the propertys value to its estimated fair value.
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 $28,850, net of closing costs and recognized a gain on the
sale of $9,152.
As a result of a lessee exercising its existing option to purchase the Companys Berea, Kentucky
property (see Assets Held for Sale above), in December 2005, the Company sold this property for
$8,961, net of closing costs and recognized a gain of $20. During 2005 and 2004, the Company
recognized impairment charges of $5,241 and $1,099, respectively, on this property.
During 2005, the Company sold several domestic properties to third parties for combined sales
proceeds of $4,584, net of closing costs and recognized a combined net gain of $212. Impairment
charges totaling $1,582 were previously recognized on these properties to reduce their property
values to the estimated net sales proceeds.
Impairment charges on properties sold and held for sale as of March 31, 2006 are discussed in Note
9.
Other Information
Included in the Companys operating assets and liabilities in the accompanying consolidated balance
sheet as of March 31, 2006 are assets of $834 and liabilities of $871 related to the Companys
properties held for sale.
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 consolidated financial statements as
discontinued operations for all periods presented and are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
REVENUES: |
|
|
|
|
|
|
|
|
Rental income |
|
$ |
534 |
|
|
$ |
446 |
|
Interest income from direct financing leases |
|
|
|
|
|
|
1,423 |
|
Other operating income |
|
|
76 |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
610 |
|
|
|
1,906 |
|
|
|
|
|
|
|
|
EXPENSES: |
|
|
|
|
|
|
|
|
General and administrative |
|
|
(247 |
) |
|
|
|
|
Depreciation and amortization |
|
|
(54 |
) |
|
|
(93 |
) |
Property expenses |
|
|
(761 |
) |
|
|
(327 |
) |
Impairment charge on assets held for sale |
|
|
(3,357 |
) |
|
|
(8,872 |
) |
Operating expenses of other business operations |
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
(4,419 |
) |
|
|
(9,272 |
) |
|
|
|
|
|
|
|
OTHER INCOME AND EXPENSES: |
|
|
|
|
|
|
|
|
Loss on sale of real estate |
|
|
|
|
|
|
(20 |
) |
Interest expense |
|
|
(78 |
) |
|
|
(81 |
) |
|
|
|
|
|
|
|
|
|
|
(78 |
) |
|
|
(101 |
) |
|
|
|
|
|
|
|
Loss from discontinued operations |
|
$ |
(3,887 |
) |
|
$ |
(7,467 |
) |
|
|
|
|
|
|
|
NOTE 7. Intangibles
In connection with its acquisition of properties, the Company has recorded net lease intangibles of
$20,312. These intangibles are being amortized over periods ranging from 19 months to 27 1/2 years.
Amortization of below-market and above-market rent
10
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
intangibles are recorded as an adjustment to revenue.
Intangibles are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
December 31, 2005 |
|
Amortized Intangibles: |
|
|
|
|
|
|
|
|
Management contracts |
|
$ |
46,348 |
|
|
$ |
46,348 |
|
Less: accumulated amortization |
|
|
(26,352 |
) |
|
|
(25,206 |
) |
|
|
|
|
|
|
|
|
|
|
19,996 |
|
|
|
21,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
(8,042 |
) |
|
|
(6,738 |
) |
|
|
|
|
|
|
|
|
|
|
14,279 |
|
|
|
15,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized Goodwill and Indefinite-Lived Intangible Assets: |
|
|
|
|
|
|
|
|
Trade name |
|
|
3,975 |
|
|
|
3,975 |
|
Goodwill |
|
|
63,607 |
|
|
|
63,607 |
|
|
|
|
|
|
|
|
|
|
$ |
101,857 |
|
|
$ |
104,307 |
|
|
|
|
|
|
|
|
Below-market rent |
|
$ |
(2,009 |
) |
|
$ |
(2,009 |
) |
Less: accumulated amortization |
|
|
235 |
|
|
|
197 |
|
|
|
|
|
|
|
|
|
|
$ |
(1,774 |
) |
|
$ |
(1,812 |
) |
|
|
|
|
|
|
|
Net amortization of intangibles was $2,412 for the three months ended March 31, 2006 and 2005.
Based on the intangibles recorded through March 31, 2006, annual net amortization of intangibles
for each of the next five years is as follows: 2006 $9,406, 2007 $7,295, 2008 $4,211, 2009 -
$4,184, 2010 $3,542 and 2011 $1,643.
NOTE 8. Commitments and Contingencies
As of March 31, 2006, the Company was not involved in any material litigation.
In March 2004, following a broker-dealer examination of Carey Financial, LLC (Carey Financial),
the Companys 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®: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®:15 investors bring a similar
private action, CPA®: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®:15, Carey Financial would be
required to return to CPA®:15 the commissions paid by CPA®: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.
11
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
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®:15 for the interest cost of advancing the commissions that were later recovered by
CPA®: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®:15 during 2002 and 2003. In
December 2004, the scope of the Enforcement Staffs inquiries broadened to include broker-dealer
compensation arrangements in connection with CPA®: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 Staffs subpoenas and requests, the Company and Carey Financial have
produced documents relating to payments made to certain broker-dealers both during and after the
offering process, for certain of the REITs managed by the Company (including Corporate Property
Associates 10 Incorporated (CPA®:10), Carey Institutional Properties Incorporated
(CIP®),CPA®:12, CPA®:14 and CPA®: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®:10 paid in excess of $40; CIP®paid in excess of $875; CPA®:12
paid in excess of $2,455; CPA®:14 paid in excess of $4,990; and CPA®: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 Company expects that 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.
Several state securities regulators have sought information from Carey Financial relating to the
matters described above. While one or more states may commence proceedings against Carey Financial
in connection with these inquiries, the Company does not currently
expect that these inquiries will
have a material effect on it incremental to that caused by any SEC action.
NOTE 9. Impairment Charges
The Company recorded impairment charges of $3,357 and $9,672 for the three months ended March 31,
2006 and 2005, respectively, related to assets held for sale.
In March 2005, the Company received notification from the lessee of its Amberly Village, Ohio and
Berea, Kentucky properties, that the lessee had exercised its existing option to purchase both
properties, at fair value, pursuant to the terms of the agreement. Fair value was determined
pursuant to an appraisal process in accordance with the terms of the lease agreement between the
Company and the
12
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
lessee. In connection with this transaction, in the quarter ended March 31, 2005, the Company
recognized an 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 recognized an additional impairment charge of $5,819 in
the quarter ended June 30, 2005. In December 2005, the tenant completed the purchase of the
Kentucky property and terminated its lease on the Ohio property for a lease termination payment of
$3,000. In March 2006, the Company entered into a contract with a third party to sell the Ohio
property for $6,190, net of expected selling costs. Because the expected net proceeds are less that
the Ohio propertys carrying value of approximately $9,390, the Company has recognized an
impairment charge of $3,200 in the quarter ended March 31, 2006. The Company previously recognized
an impairment charge of $1,099 in 2004 related to the Kentucky property. The sales of these
properties are discussed in Note 6.
In connection with the sale of a property in Olive Branch, Mississippi, the Company recognized an
impairment charge of $116 in the first quarter of 2006, as the net proceeds are less than the
propertys carrying value. The sale was completed in April 2006 (see Note 6 for a discussion of the
sale of this property). The Company previously recognized an impairment charge of $650 in December
2005 related to this property.
In connection with entering into a commitment to sell a property in Bay Minette, Alabama, the
Company recognized an impairment charge of $41 in the first quarter of 2006, as the propertys
estimated fair value was lower than its carrying value. The Company had previously recognized
impairment charges totaling $625 related to this property.
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 an impairment charge of $800, as the
propertys estimated fair value was lower than its carrying value. The Company had previously
recognized an impairment charge of $7,500 during the quarter ended September 30, 2004 related to
this property. In the fourth quarter of 2005 the Company terminated its plan to sell the property
and entered into an agreement with the proposed buyer to upgrade and manage the facility on a fee
basis.
NOTE 10. Members Equity and Stock Based Compensation
Stock Based Compensation
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS
123(R), Share-Based Payment, using the modified prospective application method and therefore has
not restated prior periods results. Under this transition method, stock-based compensation expense
for the three months ended March 31, 2006 included compensation expense for all stock-based
compensation awards granted prior to, but not yet vested as of January 1, 2006, based on the grant
date fair value estimated in accordance with the original provisions of SFAS 123. Stock-based
compensation expense for all stock-based compensation awards granted subsequent to January 1, 2006
is based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R).
The Company recognizes these compensation costs for only those shares expected to vest on a
straight-line basis over the requisite service period of the award.
As a result of adopting SFAS 123(R), income from continuing operations before income taxes and net
income for the three months ended March 31, 2006 were $277 and
$268 lower, respectively, than if we
had continued to account for stock-based compensation awards under APB 25. Earnings per share
basic and diluted were also lower by $.01, respectively. In addition, prior to the adoption of
SFAS 123(R), the Company presented the tax benefit of stock option exercises as operating cash
flows. Upon the adoption of SFAS 123(R), tax benefits resulting from the tax deductions in excess
of the compensation cost recognized for those options totaling $77 for the three months ended March
31, 2006 are classified as financing cash flow inflows with a
corresponding decrease included within operating cash flows.
13
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
The pro forma table below reflects net income and basic and diluted earnings per share for the
three months ended March 31, 2005, had the Company applied the fair value recognition provisions of
SFAS 123, as follows:
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2005 |
|
Net income as reported |
|
$ |
5,855 |
|
Add: Stock based compensation included in net income as reported, net of related tax effects |
|
|
503 |
|
Less: Stock based compensation determined under fair value based methods for all awards,
net of related tax effects |
|
|
(653 |
) |
|
|
|
|
Pro forma net income |
|
$ |
5,705 |
|
|
|
|
|
Earnings per share as reported: |
|
|
|
|
Basic |
|
$ |
.16 |
|
Diluted |
|
$ |
.15 |
|
Pro forma earnings per share: |
|
|
|
|
Basic |
|
$ |
.15 |
|
Diluted |
|
$ |
.14 |
|
At
March 31, 2006, the Company had the following stock-based
compensation plans as described below.
The total compensation expense for these plans was $719 and $876 for the
three months ended March 31, 2006 and 2005.
The tax benefit recognized in the three months ended March 31,
2006 and 2005 related to stock-based compensation plans totaled $318
and $394, respectively.
Prior to January 1, 2006, the Company accounted for these
plans under the provisions of APB 25.
1997 Share Incentive Plan
The Company maintains the 1997 Share Incentive Plan (the Incentive Plan), as amended, which
authorizes the issuance of up to 6,200,000 shares. The Incentive Plan provides for the grant of (i)
share options which may or may not qualify as incentive stock options, (ii) performance shares,
(iii) dividend equivalent rights and (iv) restricted shares. Options granted under the Incentive
Plan generally have a 10-year term and generally vest over periods ranging from three to ten years
from the date of grant. The vesting of grants is accelerated upon a change in control of the
Company and under certain other conditions.
Non-Employee Directors Plan
The Company maintains the Non-Employee Directors Plan (the Directors Plan), which authorizes
the issuance of up to 300,000 shares. The Directors Plan provides for the grant of (i) share
options which may or may not qualify as incentive stock options, (ii) performance shares, (iii)
dividend equivalent rights and (iv) restricted shares. Options granted under the Directors Plan
have a 10-year term and vest over three years from the date of grant.
Employee Share Purchase Plan
The Company sponsors the Carey Diversified LLC Employee Share Purchase Plan (ESPP), pursuant to
which eligible employees may contribute up to 10% of compensation, subject to certain limits, to
purchase the Companys common stock. Employees can purchase stock semi-annually at a price equal to
85% of the fair market value at certain plan defined dates. The ESPP is not material to our results
of operations.
Carey Management Warrants
In January 1998, the predecessor of Carey Management was granted warrants to purchase 2,284,800
shares exercisable at $21 per share and 725,930 shares exercisable at $23 per share as compensation
for investment banking services in connection with structuring the consolidation of the
CPA® Partnerships. The warrants are exercisable until January 2009. These warrants and
shares were fully vested prior to January 1, 2006.
14
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
Partnership Equity Plan Unit
During 2003, the Company adopted a non-qualified deferred compensation plan under which a portion
of any participating officers cash compensation in excess of designated amounts will be deferred
and the officer will be awarded a Partnership Equity Plan Unit (PEP Unit). The value of each PEP
Unit is intended to correspond to the value of a share of the CPA® REIT designated at
the time of such award. Redemption will occur at the earlier of a liquidity event of the underlying
CPA® REIT or twelve years from the date of award. The award is fully vested upon grant,
and the Company may terminate the plan at any time. The value of each PEP Unit will be adjusted to
reflect the underlying appraised value of the CPA® REIT. Additionally, each PEP Unit
will be entitled to a distribution equal to the distribution rate of the CPA® REIT. All
issuances of PEP Units, changes in the fair value of PEP Units and distributions paid are included
in compensation expense of the Company. The PEP plan is a deferred compensation plan and is
therefore considered to be outside the scope of SFAS 123(R).
WPCI Stock Option Plan
On June 30, 2003, WPCI granted an incentive award to certain officers of WPCI consisting of
1,500,000 restricted shares, representing an approximate 13% interest in WPCI, and 1,500,000
options for WPCI common stock with a combined fair value of $2,485 at that date. Both the options
and restricted stock were issued in 2003 and are vesting ratably over five years. The options are
exercisable at $1 per share for a period of ten years from the initial vesting date. The vested
restricted stock and stock received upon the exercise of options of WPCI by minority interest
holders may be redeemed commencing December 31, 2012 and thereafter solely in exchange for shares
of the Company. Any redemption will be subject to a third party valuation of WPCI.
Option and warrant activity as of March 31, 2006 and changes during the three months ended March
31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining Contractual |
|
|
Aggregate Intrinsic |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term (in years) |
|
|
Value (in 000s) |
|
Outstanding at January 1, 2006 |
|
|
5,360,967 |
|
|
$ |
22.64 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
187,000 |
|
|
|
26.07 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(41,667 |
) |
|
|
20.30 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(4,000 |
) |
|
|
30.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006 |
|
|
5,502,300 |
|
|
|
22.78 |
|
|
|
4.49 |
|
|
$ |
25,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at March 31, 2006 |
|
|
5,430,263 |
|
|
$ |
16.26 |
|
|
|
4.44 |
|
|
$ |
25,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2006 |
|
|
4,390,252 |
|
|
$ |
21.11 |
|
|
|
3.47 |
|
|
$ |
24,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted during the three months ended March
31, 2006 and 2005 was $1.93 and $2.12, respectively. The total intrinsic value of options exercised
during the three months ended March 31, 2006 and 2005, was $243 and $155, respectively.
Nonvested restricted stock awards as of March 31, 2006 and changes during the three months ended
March 31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average Grant |
|
|
|
Shares |
|
|
Date Fair Value |
|
Nonvested at January 1, 2006 |
|
|
248,579 |
|
|
$ |
29.75 |
|
Granted |
|
|
29,550 |
|
|
|
26.19 |
|
Vested |
|
|
(76,188 |
) |
|
|
28.18 |
|
Forfeited |
|
|
(13,500 |
) |
|
|
23.00 |
|
|
|
|
|
|
|
|
Nonvested at March 31, 2006 |
|
|
188,441 |
|
|
|
30.31 |
|
|
|
|
|
|
|
|
The total fair value of shares vested during the three months ended March 31, 2006 and 2005 was
$2,147 and $1,911, respectively.
The fair value of share-based payment awards is estimated using the Black-Scholes option pricing
formula (options and warrants) which involves the use of assumptions
which are used in estimating the fair value of share based payment awards. The risk-free
interest rate for periods within the contractual life of the award is based on the U.S. Treasury
yield
15
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
curve in effect at the time of grant. The dividend yield is based upon the trailing quarterly
distribution for the four quarters prior to March 31, 2006 expressed as a percentage of the
Companys stock price. Expected volatilities are based on a review of the five and ten-year
historical volatility of the Companys stock as well as the historical volatilities and implied
volatilities of common stock and exchange traded options of selected comparable companies. The
expected term of awards granted is derived from an analysis of the remaining life of the Companys
awards giving consideration to their maturity dates and remaining time to vest. The Company uses
historical data to estimate option exercise and employee termination within the valuation model;
separate groups of employees that have similar historical exercise behavior are considered
separately for valuation purposes. For the three months ended March 31, 2006 and 2005, the
following assumptions and weighted average fair values were used:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
2006 |
|
2005 |
Risk-free interest rates |
|
|
4.61 - 4.75 |
% |
|
|
4.10 - 4.23 |
% |
Dividend yields |
|
|
6.83 - 6.89 |
% |
|
|
7.80 |
% |
Expected volatility |
|
|
17.50 |
% |
|
|
20.00 |
% |
Expected term in years |
|
|
6.22 - 8.50 |
|
|
|
10 |
|
As of
March 31, 2006, approximately $7,200 of total unrecognized compensation expense related to nonvested
stock-based compensation awards is expected to be recognized over a
weighted-average period of approximately 4.5 years.
The Company has the ability and intent to issue shares upon stock option exercises. Historically,
the Company has issued new common stock to satisfy such exercises. Cash received from stock option
exercises and purchases under the ESPP during the three months ended March 31, 2006 was $846.
Earnings Per Share
Basic and diluted earnings per share were calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
Net income |
|
$ |
11,065 |
|
|
$ |
5,855 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic |
|
|
37,727,782 |
|
|
|
37,592,343 |
|
Effect of dilutive securities: Stock options |
|
|
899,485 |
|
|
|
1,785,307 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted |
|
|
38,627,267 |
|
|
|
39,377,650 |
|
|
|
|
|
|
|
|
Securities
totaling 384,799 in 2006 were excluded from the earnings per share
computations above as their effect would have been anti-dilutive.
There were no such anti-dilutive securities for the comparable period
in 2005.
Share Repurchase Program
In December 2005, the board of directors approved a $20,000 share repurchase program. Under this
program, the Company may repurchase up to $20,000 of its common stock in the open market during the
twelve-month period beginning December 16, 2005 as conditions warrant. Through March 31, 2006 we
repurchased shares totaling $2,684 under this program.
NOTE 11. Segment Reporting
The Company evaluates its results from operations by major business segment as follows:
Management Services Operations
This business segment includes management operations services performed for the CPA®
REITs pursuant to the advisory agreements. This business line also includes interest on deferred
revenue and earnings from unconsolidated investments in the CPA® REITs accounted for
under the equity method which were received in lieu of cash for certain compensation payments. This
business segment is carried out largely by corporate subsidiaries which are subject to federal,
state, local and foreign taxes as applicable. The Companys 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 lease, properties under
direct financing leases, real estate
16
W. P. CAREY & CO. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
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
Companys and its subsidiaries legal structure, these operations are not generally subject to
federal income taxes; however, they may be subject to certain state, local and foreign taxes.
A summary of comparative results of these business segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
MANAGEMENT SERVICES |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
27,252 |
|
|
$ |
26,173 |
|
Operating expenses |
|
|
(14,071 |
) |
|
|
(13,623 |
) |
Interest expense |
|
|
|
|
|
|
|
|
Other, net (1) |
|
|
1,080 |
|
|
|
867 |
|
Provision for income taxes |
|
|
(6,532 |
) |
|
|
(5,799 |
) |
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
7,729 |
|
|
$ |
7,618 |
|
|
|
|
|
|
|
|
REAL ESTATE (2) |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
20,634 |
|
|
$ |
19,134 |
|
Operating expenses |
|
|
(9,418 |
) |
|
|
(9,510 |
) |
Interest expense |
|
|
(4,388 |
) |
|
|
(4,227 |
) |
Other, net (1) |
|
|
585 |
|
|
|
361 |
|
Provision for income taxes |
|
|
(190 |
) |
|
|
(54 |
) |
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
7,223 |
|
|
$ |
5,704 |
|
|
|
|
|
|
|
|
TOTAL COMPANY |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
47,886 |
|
|
$ |
45,307 |
|
Operating expenses |
|
|
(23,489 |
) |
|
|
(23,133 |
) |
Interest expense |
|
|
(4,388 |
) |
|
|
(4,227 |
) |
Other, net (1) |
|
|
1,665 |
|
|
|
1,228 |
|
Provision for income taxes |
|
|
(6,722 |
) |
|
|
(5,853 |
) |
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
14,952 |
|
|
$ |
13,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Lived Assets (3) |
|
|
Equity Investments |
|
|
Total Assets |
|
|
|
As of |
|
|
As of |
|
|
As of |
|
|
As of |
|
|
As of |
|
|
As of |
|
|
|
March 31, 2006 |
|
|
December 31, 2005 |
|
|
March 31, 2006 |
|
|
December 31, 2005 |
|
|
March 31, 2006 |
|
|
December 31, 2005 |
|
Management Services |
|
$ |
112,295 |
|
|
$ |
109,204 |
|
|
$ |
97,597 |
|
|
$ |
90,411 |
|
|
$ |
294,073 |
|
|
$ |
288,926 |
|
Real Estate |
|
|
675,416 |
|
|
|
656,406 |
|
|
|
36,225 |
|
|
|
44,156 |
|
|
|
706,002 |
|
|
|
694,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company |
|
$ |
787,711 |
|
|
$ |
765,610 |
|
|
$ |
133,822 |
|
|
$ |
134,567 |
|
|
$ |
1,000,075 |
|
|
$ |
983,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes interest income, minority interest, income from equity investments and gains and
losses on sales and foreign currency transactions. |
|
(2) |
|
Includes two investments in France that accounted for lease revenues (rental income and
interest income in direct financing leases) of $1,988 and $2,061 for the three months ended
March 31, 2006 and 2005, respectively, and income from equity investments of $203 and $214 for the
three months ended March 31, 2006 and 2005, respectively. These investments also accounted for
long-lived assets as of March 31, 2006 and December 31, 2005 of $56,096 and $55,213,
respectively. |
|
(3) |
|
Includes real estate, net investment in direct financing leases, equity investments,
operating real estate and intangible assets related to management contracts. |
17
W. P. CAREY & CO. LLC
ITEM 2. MANAGEMENTS 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 should be read in conjunction with the consolidated
financial statements and notes thereto as of March 31, 2006.
EXECUTIVE OVERVIEW
Business Overview
We are a real estate and advisory company that invests in commercial properties leased to companies
domestically and internationally, and earns revenue as the advisor to the following affiliated real
estate investment trusts (CPA® REITs) that each make similar investments: Corporate
Property Associates 12 Incorporated (CPA®:12), Corporate Property Associates 14
Incorporated (CPA®:14), Corporate Property Associates 15 Incorporated
(CPA®:15), Corporate Property Associates 16 Global Incorporated (CPA®:16
- Global). Under the advisory agreements with the CPA® REITs, we perform services
related to the day-to-day management of the CPA® REITs and transaction-related services.
As of March 31, 2006, we own and manage over 700 commercial properties domestically and
internationally including our own portfolio which is comprised of 172 commercial properties net
leased to 111 tenants and totaling approximately 17 million square feet.
Our primary business segments are:
MANAGEMENT SERVICES We provide services to the CPA® REITs in connection with
structuring and negotiating investment and debt placement transactions (structuring revenue) and
provide on-going management of the portfolio (asset-based management and performance revenue).
Asset-based management and performance revenue for the CPA® REITs are determined based
on real estate related assets under management. As funds available to the CPA® REITs are
invested, 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
revenue in connection with providing liquidity alternatives to CPA® REIT shareholders.
REAL ESTATE OPERATIONS We invest in commercial 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 We earn revenue from the acquisition and disposition of properties on behalf
of the CPA® REITs. During the three months ended March 31, 2006, we structured
approximately $255,000 in investments on behalf of the CPA® REITs, including entering
into two build-to-suit projects with combined estimated construction costs approximating $40,680.
Approximately 60% of these investments were made on behalf of CPA®:15 with the remainder
made on behalf of CPA®:16 Global. Additionally, 72% of the total investments
structured were for international transactions. We did not acquire any properties for our own
portfolio in the three months ended March 31, 2006.
IMPAIRMENT CHARGES Impairment charges totaling $3,357 were recognized in the three months ended
March 31, 2006 on three properties held for sale as of
March 31, 2006 to reduce the properties
carrying values to the expected net sales proceeds.
CPA®:16 GLOBAL PUBLIC OFFERING Effective March 27, 2006, CPA®:16 Global
commenced its second public offering to raise up to $550,000. We are reimbursed for marketing and
personnel costs incurred in raising capital on behalf of CPA®:16 Global.
QUARTERLY DISTRIBUTION In March 2006, our board of directors approved and increased the 2006
first quarter distribution to $0.452 per share payable in April 2006 to shareholders of record as
of March 31, 2006.
Current trends include:
We continue to see intense competition in both the domestic and international markets for
triple-net leased properties as capital continues to flow into real estate, in general, and
triple-net leased real estate, in particular. We believe that low long-term interest
rates by historical standards have created greater investor demand for yield-based investments, such
as triple-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
18
W. P. CAREY & CO. LLC
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
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 three months ended March 31, 2006, international investments accounted for 72% of total
investments. For the year ended December 31, 2005, international investments accounted for 54%
of total investments. We currently expect international commercial real estate to continue to
comprise a significant portion of the investments we make on behalf of the CPA® 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.
Real estate valuations have risen significantly in recent years. To the extent that disposing of
properties fits with our strategic plans, we may look to take advantage of the increase in real
estate prices by selectively disposing of properties, particularly in the more mature portfolios
that we manage.
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 and partially offset the
impact of declining property values. 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 on behalf of the CPA® REITs. Some of these tenants have filed
voluntary petitions of bankruptcy. 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.
For the three months ended March 31, 2006, cash flow from operations and equity investments were
sufficient to fund distributions paid to shareholders and minority partners and scheduled mortgage
principal payments.
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. Management focuses efforts on
underperforming assets through re-leasing efforts, including negotiation of lease renewals, or
selectively selling such assets in order to increase value in our real estate portfolio. The
ability to increase assets under management by structuring investments on behalf of the
CPA® REITs is affected, among other things, by the CPA® REITs ability to
raise capital and our ability to identify appropriate investments.
Managements evaluation of operating results includes our ability to generate necessary cash flow
in order to fund distributions to our shareholders. As a result, managements 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. Managements evaluation of our potential for generating cash flow includes an
assessment of the long-term sustainability of both our real estate portfolio and the assets we
manage on behalf of the CPA® REITs.
19
W. P. CAREY & CO. LLC
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
RESULTS OF OPERATIONS
We evaluate our results from operations by our two major business segments management services
operations and real estate operations. A summary of comparative results of these business segments
is as follows:
Management Services Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
Asset management revenue |
|
$ |
17,360 |
|
|
$ |
15,432 |
|
|
$ |
1,928 |
|
Structuring revenue |
|
|
9,892 |
|
|
|
10,707 |
|
|
|
(815 |
) |
Revenues of other business operations |
|
|
|
|
|
|
34 |
|
|
|
(34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
27,252 |
|
|
|
26,173 |
|
|
|
1,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
(12,616 |
) |
|
|
(12,311 |
) |
|
|
(305 |
) |
Depreciation and amortization |
|
|
(1,455 |
) |
|
|
(1,312 |
) |
|
|
(143 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,071 |
) |
|
|
(13,623 |
) |
|
|
(448 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME AND EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
Other interest income |
|
|
542 |
|
|
|
797 |
|
|
|
(255 |
) |
Income from equity investments |
|
|
984 |
|
|
|
545 |
|
|
|
439 |
|
Minority interest in income |
|
|
(446 |
) |
|
|
(475 |
) |
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,080 |
|
|
|
867 |
|
|
|
213 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
14,261 |
|
|
|
13,417 |
|
|
|
844 |
|
Provision for income taxes |
|
|
(6,532 |
) |
|
|
(5,799 |
) |
|
|
(733 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,729 |
|
|
$ |
7,618 |
|
|
$ |
111 |
|
|
|
|
|
|
|
|
|
|
|
Asset Management Revenue
We earn asset management revenue (asset-based management and performance revenue) from the
CPA® REITs based on assets under management. As funds available to the CPA®
REITs are invested, the asset base for which we earn revenue increases. The asset management
revenue that we earn may increase or decrease depending upon (i) increases in the CPA®
REIT asset bases as a result of new investments; (ii) decreases in the CPA® REIT asset
base resulting from sales of investments; or (iii) increases or decreases in the annual asset
valuations of CPA® REIT funds.
For the comparable three months ended March 31, 2006 and 2005, asset management revenue increased
$1,928 primarily due to an increase in assets under management as a result of recent investment
activity of the CPA® REITs as well as increases in the annual asset valuations of the
CPA® REIT funds, including CPA®:15, which had its initial appraisal in
December 2005. These increases were partially offset by a reduction in marketing reimbursement
costs resulting from CPA®:16-Globals termination of its initial public offering in
March 2005.
A portion of the CPA® REIT asset management revenue is based on each CPA®
REIT meeting specific performance criteria and is earned only if the criteria are achieved. The
performance criterion for CPA®:16-Global has not yet been satisfied as of March 31,
2006, resulting in $1,180 in performance revenue being deferred by us for the three months ended
March 31, 2006. Since the inception of CPA®:16-Global, we have deferred $5,698 of
performance revenue. We will only be able to recognize this revenue if the performance criterion is
met. The performance criterion for CPA®:16-Global is a cumulative non-compounded
distribution return to
shareholders of 6%. As of March 31, 2006, CPA®:16-Globals current distribution rate was
6.3% and its cumulative distribution return was 5.56%. Based on managements current assessment,
CPA®:16-Global is expected to meet the cumulative performance criterion during the first
half of 2007, at which time, we would recognize the cumulative deferred revenue. 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®:16-Globals capital raised in its second offering
of its shares, and in the performance of properties that CPA®: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®:16-Globals board of directors. If the performance criterion is
achieved, deferred incentive and commission compensation related to achievement of the performance
criterion, in the amount of $3,380 as of March 31, 2006, would become payable by us to certain
employees.
20
W. P. CAREY & CO. LLC
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
Structuring Revenue
Structuring revenue includes current and deferred acquisition revenue from structuring investments
and financing on behalf of the CPA® REITs. Investment activity is subject to
fluctuations. As described above in the Current Developments and Trends section, we continue to
face intense competition for investments in commercial properties both domestically and
internationally.
For the comparable three months ended March 31, 2006 and 2005, structuring revenue decreased $815
primarily due to a reduction in investment volume. We structured $255,000 of investments for the
three months ended March 31, 2006 as compared with $367,000 in the comparable prior year period.
The effect of this decrease was offset in part by a reduction in the proportion of investments
structured on behalf of CPA®:16-Global. For the three months ended March 31, 2006,
approximately 40% of investments structured related to CPA®:16 Global as compared with
approximately 75% in the comparable prior year period. Because CPA®:16 Global has not
achieved its performance criterion, this change in investment mix resulted in a lower deferral of
revenue during the three months ended March 31, 2006 as compared to the comparable prior year
period. Additionally, the reduction in structuring revenue was also partially offset by our having
charged a reduced fee on an investment completed on behalf of CPA®:16-Global during the
first three months of 2005.
As discussed above, a portion of the CPA® REIT structuring revenue is based on each
CPA® REIT meeting specific performance criteria and is earned only if the criteria are
achieved. The performance criterion for CPA®:16 Global has not yet been satisfied as
of March 31, 2006, resulting in $2,052 in structuring revenue being deferred by us for the three
months ended March 31, 2006. Since the inception of CPA®:16 Global, we have deferred
$19,760 of structuring revenue and interest thereon of $1,087. We will only be able to recognize
this revenue if the performance criterion is met. The current status and anticipated future
achievement of the performance criterion is discussed further above. Given that we expect
CPA®:16 Global to represent a significant portion of our total 2006 investment volume
relative to the other CPA® REITs, structuring revenue will continue to be affected by
the deferral of a portion of such fees until CPA®:16 Global achieves its performance
criterion.
As previously reported, we have begun evaluating liquidity alternatives for CPA®:12. We
currently anticipate that such a liquidity event may take place during 2006; however, no decisions
have been made as to when or in what form such an event might take place.
General and Administrative Expenses
For the three months ended March 31, 2006 and 2005, general and administrative expenses increased
$305 primarily due to increases in office expenses and reimbursable
commission costs totaling $860,
which were partially offset by a reduction in personnel related costs
of $525.
The increase in office expenses is primarily due to the consolidation, beginning in 2005, of the
results of operations of a limited partnership that was previously established to administer an
office sharing agreement. As a result, our rental and other office sharing expenses have increased
compared with the comparable prior year period, although this increase is offset by a corresponding
increase in lease revenues as a result of this consolidation. Prior to July 2005, commissions with
respect to the reinvestment of distributions by shareholders of the CPA® REITs were paid
by the CPA® REITs directly to broker-dealers. Beginning in July 2005, one of our
subsidiaries began paying these commissions on behalf of the CPA® REITs and is
reimbursed by the CPA® REITs for such payments. During the three months ended March 31,
2006 general and administrative expenses increased by $510 as a result of these payments which were
offset by a corresponding increase in asset management revenues, and as such there is no impact on
net income. These increases were substantially offset by a net decrease in personnel related costs
of $525 primarily due to a reduction in investment related commissions resulting from a lower
investment volume.
Income from Equity Investments
For the three months ended March 31, 2006 and 2005, income from equity investments increased $439
primarily due to an increase in our ownership of shares in the CPA® REITs as a result of
receiving restricted shares in consideration for base asset management and performance revenue from
certain of the CPA® REITs.
21
W. P. CAREY & CO. LLC
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
Income from Continuing Operations
For the comparable three months ended March 31, 2006 and 2005, income from continuing operations
before income taxes increased by $844, primarily due to net increases in revenues and income from equity investments
totaling $1,518. As described above, the overall increase in revenue and equity income was
primarily from increases in assets under management and our ownership in the CPA® REITs
partially offset by lower structuring revenue resulting from lower investment volume. Expenses were
also higher in the three months ended March 31, 2006.
Real Estate Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
Lease revenues |
|
$ |
18,243 |
|
|
$ |
16,881 |
|
|
$ |
1,362 |
|
Other operating income |
|
|
528 |
|
|
|
559 |
|
|
|
(31 |
) |
Revenues of other business operations |
|
|
1,863 |
|
|
|
1,694 |
|
|
|
169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,634 |
|
|
|
19,134 |
|
|
|
1,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
(1,540 |
) |
|
|
(1,500 |
) |
|
|
(40 |
) |
Depreciation and amortization |
|
|
(4,474 |
) |
|
|
(3,979 |
) |
|
|
(495 |
) |
Property expenses |
|
|
(1,837 |
) |
|
|
(1,715 |
) |
|
|
(122 |
) |
Impairment charge |
|
|
|
|
|
|
(800 |
) |
|
|
800 |
|
Operating expenses of other business operations |
|
|
(1,567 |
) |
|
|
(1,516 |
) |
|
|
(51 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,418 |
) |
|
|
(9,510 |
) |
|
|
92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME AND EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
Other interest income |
|
|
185 |
|
|
|
45 |
|
|
|
140 |
|
Income from equity investments |
|
|
566 |
|
|
|
823 |
|
|
|
(257 |
) |
Minority interest in income |
|
|
(416 |
) |
|
|
(157 |
) |
|
|
(259 |
) |
Gain (loss) on foreign currency transactions and other gains, net |
|
|
250 |
|
|
|
(350 |
) |
|
|
600 |
|
Interest expense |
|
|
(4,388 |
) |
|
|
(4,227 |
) |
|
|
(161 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,803 |
) |
|
|
(3,866 |
) |
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
7,413 |
|
|
|
5,758 |
|
|
|
1,655 |
|
Provision for income taxes |
|
|
(190 |
) |
|
|
(54 |
) |
|
|
(136 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
7,223 |
|
|
|
5,704 |
|
|
|
1,519 |
|
Loss from discontinued operations |
|
|
(3,887 |
) |
|
|
(7,467 |
) |
|
|
3,580 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,336 |
|
|
$ |
(1,763 |
) |
|
$ |
5,099 |
|
|
|
|
|
|
|
|
|
|
|
Our real estate operations consist of the investment in and the leasing of commercial real estate.
Managements evaluation of the sources of lease revenues for the three months ended March 31, 2006
and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Rental income |
|
$ |
14,822 |
|
|
$ |
13,045 |
|
Interest income from direct financing leases |
|
|
3,421 |
|
|
|
3,836 |
|
|
|
|
|
|
|
|
|
|
$ |
18,243 |
|
|
$ |
16,881 |
|
|
|
|
|
|
|
|
We earned net lease revenues (i.e., rental income and interest income from direct financing leases)
from our direct ownership of real estate from the following lease obligations:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Detroit Diesel Corporation (a) |
|
$ |
1,159 |
|
|
$ |
1,039 |
|
CheckFree Holdings Corporation Inc. (b) (c) |
|
|
1,151 |
|
|
|
|
|
Bouygues Telecom, S.A. (c) (d) |
|
|
1,142 |
|
|
|
1,187 |
|
Dr Pepper Bottling Company of Texas |
|
|
1,102 |
|
|
|
1,088 |
|
22
W. P. CAREY & CO. LLC
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Orbital Sciences Corporation |
|
|
756 |
|
|
|
756 |
|
Titan Corporation |
|
|
725 |
|
|
|
725 |
|
America West Holdings Corp. |
|
|
709 |
|
|
|
709 |
|
AutoZone, Inc. |
|
|
554 |
|
|
|
554 |
|
Quebecor Printing, Inc. |
|
|
485 |
|
|
|
485 |
|
Sybron Dental Specialties Inc. |
|
|
443 |
|
|
|
443 |
|
Unisource Worldwide, Inc. |
|
|
424 |
|
|
|
426 |
|
BE Aerospace, Inc. |
|
|
395 |
|
|
|
395 |
|
CSS Industries, Inc. (e) |
|
|
393 |
|
|
|
349 |
|
Lucent Technologies, Inc. |
|
|
380 |
|
|
|
380 |
|
Eagle Hardware & Garden, Inc., a wholly-owned subsidiary of Lowes Companies Inc. (f) |
|
|
373 |
|
|
|
446 |
|
Sprint Spectrum, L.P. |
|
|
356 |
|
|
|
356 |
|
AT&T Corporation |
|
|
315 |
|
|
|
315 |
|
EnviroWorks, Inc. |
|
|
313 |
|
|
|
313 |
|
Swat-Fame, Inc. |
|
|
311 |
|
|
|
309 |
|
United States Postal Service |
|
|
308 |
|
|
|
308 |
|
BellSouth Telecommunications, Inc. |
|
|
306 |
|
|
|
306 |
|
Werner Co.(g) |
|
|
291 |
|
|
|
|
|
Omnicom Group Inc. |
|
|
285 |
|
|
|
285 |
|
Anthonys Manufacturing Company, Inc. |
|
|
273 |
|
|
|
255 |
|
Other (c) (d) |
|
|
5,294 |
|
|
|
5,452 |
|
|
|
|
|
|
|
|
|
|
$ |
18,243 |
|
|
$ |
16,881 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Increase is due to rent increase in July 2005. |
|
(b) |
|
Property is consolidated beginning January 1, 2006 as a result of implementation of EITF
04-05. |
|
(c) |
|
Lease revenue applicable to minority interests in the consolidated amounts above total $987
and $427 for the three months ended March 31, 2006 and 2005, respectively. |
|
(d) |
|
Revenue amounts are subject to fluctuations in foreign currency exchange rates. |
|
(e) |
|
Property reclassified as an operating lease from a direct financing lease in January 2006. |
|
(f) |
|
Rent increase threshold (percentage of revenue) was not met in 2006. |
|
(g) |
|
Increase is due to new tenant and lease terms at an existing property. |
We recognize income from equity investments of which lease revenues are a significant component.
Our ownership interests range from 22.5% to 50%. Our share of net lease revenues in the following
lease obligations is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Carrefour France, S.A. (a) |
|
$ |
877 |
|
|
$ |
947 |
|
Federal Express Corporation |
|
|
679 |
|
|
|
671 |
|
Information Resources, Inc. (b) |
|
|
466 |
|
|
|
411 |
|
Sicor, Inc. |
|
|
418 |
|
|
|
418 |
|
Hologic, Inc. |
|
|
284 |
|
|
|
284 |
|
Childtime Childcare, Inc. |
|
|
125 |
|
|
|
118 |
|
CheckFree Holdings Corporation Inc. (c) |
|
|
|
|
|
|
562 |
|
|
|
|
|
|
|
|
|
|
$ |
2,849 |
|
|
$ |
3,411 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Revenue amounts are subject to fluctuations in foreign currency exchange rates.
|
|
(b) |
|
Increase is due to rent increase in October 2005. |
|
(c) |
|
Property is consolidated beginning January 1, 2006 as a result of implementation of EITF
04-05. |
The presentation of results of operations for our real estate operations for the three months ended
March 31, 2006 were affected by our adoption of EITF 04-05 effective January 1, 2006. As a result
of adopting EITF 04-05, we now consolidate an investment in a
property leased to CheckFree Holdings Corporation Inc.
that was previously accounted for as an equity investment. This contributed to the increases
23
W. P. CAREY & CO. LLC
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
described below for lease revenues, depreciation and amortization and interest expense. This also
resulted in a decrease of $307 in income from equity investments as compared to the comparable
prior year period and a corresponding increase in minority interest in income.
Lease Revenues
For the three months ended March 31, 2006 and 2005, lease revenues (rental income and interest
income from direct financing leases) increased by $1,362 primarily due to the consolidation of an
investment that was previously accounted for as an equity investment and rent increases at existing
properties. As a result of adopting EITF 04-05 effective January 1, 2006, we recognized revenue of
$1,151 from the consolidation of an investment leased to CheckFree Holdings. Rent increases and
rent from new tenants at existing properties also contributed $517 of the increase. These increases
were partially offset by the impact of a lease expiration and lower average foreign currency
exchange rates in 2006 as compared to 2005 totaling $303. 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.
Revenues of Other Business Operations
Revenues of other business operations consist of revenues from Livho, Inc. (Livho), a Holiday Inn
hotel franchise which we operate at our property in Livonia, Michigan. For the three months ended
March 31, 2006 and 2005, revenues of other business operations increased by $169 primarily due to
an increase in average room rates charged during 2006.
Depreciation and Amortization
For the three months ended March 31, 2006 and 2005, depreciation and amortization expense increased
by $495 primarily due to changes in the accounting treatment of certain properties commencing
January 2006. These changes resulted in depreciation of $409 from the reclassification of a
property as an operating lease that was previously accounted for as a direct financing lease and
depreciation of $234 related to the consolidation of our investment in a property that was
previously accounted for as an equity investment. These increases were partially offset by a
reduction in depreciation of $156 resulting from a prior year writedown in the value of our Livho
property, which reduced the depreciable basis of the asset.
Impairment Charge
No impairment charges were recognized during the three months ended March 31, 2006. During the
three months ended March 31, 2005 we recognized an impairment charge of $800 in connection with
entering into a commitment to sell our Livho property as the propertys estimated fair value was
lower than its carrying value. The proposed transaction was terminated in June 2005.
Gain (Loss) on Foreign Currency Transaction and Other Gains, net
We recognized net unrealized gains on foreign currency transactions and other gains of $250 for the
three months ended March 31, 2006 as compared to a loss of $350 for the comparable prior year
period. This change of $600 resulted primarily from the impact of the relative weakening of the
U.S. dollar compared to the Euro for the three months ended March 31, 2006 as compared to the
strengthening of the U.S. dollar in the comparable prior year period.
Interest Expense
For the three months ended March 31, 2006 and 2005, interest expense increased $161, primarily due
to an increase of $724 related to new fixed rate mortgage financing at existing properties obtained
in 2005 and $364 related to the consolidation of an investment that was previously accounted for as
an equity investment. These increases were partially offset by a net reduction in interest payments
of $708 related to our credit facility resulting from lower average outstanding borrowings (which
in turn was partially offset by higher average interest rates) and was also partially offset by a
reduction in interest payments as a result of making scheduled principal payments.
24
W. P. CAREY & CO. LLC
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
Income from Continuing Operations
For the
three months ended March 31, 2006 and 2005, income from
continuing operations before income taxes increased
$1,655. During the three months ended March 31, 2006, we benefited from rent increases at several
properties and recognized an increase in net unrealized gains on foreign currency transactions of $600.
Additionally, during the comparable prior year period, we recognized an impairment charge of $800
on a property held for sale. Offsetting these benefits was an increase in depreciation and
amortization of $495. These variances are described above.
Discontinued Operations
For the three months ended March 31, 2006, we incurred a loss from discontinued operations of
$3,887 primarily due to impairment charges totaling $3,357.
For the three months ended March 31, 2005, we incurred a loss from discontinued operations of
$7,467 primarily due to impairment charges totaling $8,872, partially offset by income from
discontinued operations.
The effect of suspending depreciation was $114 and $139 for the three months ended March 31, 2006
and 2005, respectively.
FINANCIAL CONDITION
Uses of Cash during the Period
There has been no material change in our financial condition since December 31, 2005. Cash and cash
equivalents totaled $14,833 as of March 31, 2006, an increase of $1,819 from the December 31, 2005
balance. We believe that we will generate sufficient cash from operations and, if necessary, from
the proceeds of limited recourse mortgage loans, unused capacity on our credit facility, unsecured
indebtedness and the issuance of additional equity securities to meet our short-term and long-term
liquidity needs. We assess our ability to access capital on an ongoing basis. Our use of cash
during the period is described below.
OPERATING ACTIVITIES In evaluating cash flow from operations, management includes cash flow from
distributions received on equity investments, which 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. During the three months ended March 31, 2006, cash flow from
operations and equity investments of $26,747 was sufficient to pay distributions to shareholders of
$16,965. For 2006, we have elected to continue to receive all performance revenue from the
CPA® REITs as well as the asset management revenue payable by CPA®:16 -
Global in restricted shares rather than cash. However, for 2006 we have elected to receive the base
asset management revenue from CPA®:12 in cash. Operating cash flows for the three months
ended March 31, 2006 benefited by $938 as a result of receiving CPA®:12s base asset
management revenue in cash instead of restricted shares. We expect that annual cash flows for 2006
will benefit by approximately $3,800.
During the three months ended March 31, 2006, we received revenue of $6,853 in connection with
structuring investments and revenue of $6,591 from providing asset-based management services on
behalf of the CPA® REITs, exclusive of that portion of such revenue being satisfied by
the CPA® REITs through the issuance of their restricted common stock rather than paying
cash. In January 2006, we received $15,474 from the annual installment of deferred acquisition
revenue, including interest. The installments are subject to certain subordination provisions.
CPA®:16-Global has not yet met the subordination provisions and management currently
anticipates that no deferred amounts will be recognized by us and payable by
CPA®:16-Global before the first half of 2007.
Our real estate operations provided cash flows (contractual lease revenues, net of property-level
debt service) of approximately $12,135. Annual cash flow from operations is currently projected to
fund distributions; however, operating cash flow fluctuates on a quarterly basis due to factors
that include the timing of the receipt of transaction-related revenue, the timing of certain
compensation costs that are paid and receipt of the annual installment of deferred acquisition
revenue 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. We did not purchase or sell any
investments during the three months ended March 31, 2006. We made capital improvements totaling
$674 to existing properties and also paid our annual installment of deferred acquisition revenue of
25
W. P. CAREY & CO. LLC
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
$524 to our former management company relating to 1998 and 1999 property acquisitions. The
remaining obligation as of March 31, 2006 is $661. We currently anticipate using cash from
operations to fund the remaining obligation.
During the three months ended March 31, 2006, we received distributions of $1,690 from the
CPA® REITs, with $752 included in cash flows from investing activities, representing an
amount in excess of the income recognized on the CPA® REIT investments for financial
reporting purposes.
FINANCING ACTIVITIES During the three months ended March 31, 2006, we paid distributions to
shareholders of $16,965. In addition to paying distributions, our financing activities included
making scheduled mortgage principal payments of $2,916 and paying down the outstanding balance on
our credit facility by $9,000. Gross borrowings under the credit facility were $10,000, which were
used for several purposes in the normal course of business, and repayments were $19,000. We
received $4,031 from the release of escrow funds that we deposited during 2005 in connection with
obtaining mortgage financing on several investments. We also raised $1,323 from the issuance of
shares primarily through our Distribution Reinvestment and Share Purchase Plan.
In the case of limited recourse mortgage financing that does not fully amortize over its term or is
currently due, we are responsible for the balloon payment only to the extent of our interest in the
encumbered property because the holder generally has recourse only to the collateral. When balloon
payments come due, we may seek to refinance the loans, restructure the debt with the existing
lenders or evaluate our ability to satisfy the obligation from our existing resources including our
revolving line of credit. To the extent the remaining initial lease term on any property remains in
place for a number of years beyond the balloon payment date, we believe that the ability to
refinance balloon payment obligations is enhanced. We also evaluate our outstanding loans for
opportunities to refinance debt at lower interest rates that may occur as a result of decreasing
interest rates or improvements in the credit rating of tenants. We believe we have sufficient
resources to pay off the loans if they are not refinanced. In addition, approximately 72% of our
outstanding mortgage debt has fixed rates of interest so that debt service obligations will not
significantly increase if market interest rates increase.
Cash Resources
As of March 31, 2006, we had $14,833 in cash and cash equivalents, which can be used for working
capital needs and other commitments and may be used for future investments. We also have a credit
facility with unused capacity of up to $219,000 available as of March 31, 2006, 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 $226,202 as of March 31, 2006, and any proceeds may
be used to finance future investments. We continue to evaluate 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, among other things, to maintain a minimum
equity value and to meet or exceed certain operating and coverage ratios. We are in compliance with
these covenants as of March 31, 2006. Advances are prepayable at any time. 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 banks Prime Rate and the Federal Funds
Effective Rate, plus .50%, plus a spread of up to .125% depending on our leverage ratio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
December 31, 2005 |
|
|
Maximum |
|
Outstanding |
|
Maximum |
|
Outstanding |
|
|
Available |
|
Balance |
|
Available |
|
Balance |
Credit Facility (1) |
|
$ |
225,000 |
|
|
$ |
6,000 |
|
|
$ |
225,000 |
|
|
$ |
15,000 |
|
|
|
|
(1) |
|
We have a credit facility for a $175,000 line of credit, which matures in May 2007. This
facility provides us the right, on up to two
occasions through May 27, 2006, to increase the amount available under the line of credit by not
less than $20,000 and not more than $50,000 up to a maximum of $225,000. |
We own approximately 780,000 shares of Meristar Hospitality Corp. In February 2006, Blackstone
Group announced a deal to buy Meristar for $10.45 per share. Based on the proposed purchase price,
we will receive approximately $8,150 and expect to record a realized gain of approximately $4,800
once this deal is completed. We previously recognized impairment charges totaling $11,345 against
this investment.
26
W. P. CAREY & CO. LLC
ITEM 2. MANAGEMENTS 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 $24,931 with
$20,598 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, to repurchase shares under our share repurchase program 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.
We have budgeted capital expenditures of up to approximately $1,675 at various properties during
the next twelve months. The capital expenditures will primarily be for tenant and property
improvements in order to enhance a propertys cash flow or marketability for re-leasing or sale.
We expect to meet our capital requirements to fund future investments, 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.
Aggregate Contractual Agreements
The table below summarizes our contractual obligations as of March 31, 2006 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 |
|
Mortgage notes payable Principal |
|
$ |
249,896 |
|
|
$ |
36,373 |
|
|
$ |
45,440 |
|
|
$ |
60,154 |
|
|
$ |
107,929 |
|
Mortgage notes payable Interest (1) |
|
|
68,359 |
|
|
|
14,014 |
|
|
|
23,149 |
|
|
|
14,662 |
|
|
|
16,534 |
|
Credit facility Principal |
|
|
6,000 |
|
|
|
|
|
|
|
6,000 |
|
|
|
|
|
|
|
|
|
Credit facility Interest (1) |
|
|
418 |
|
|
|
358 |
|
|
|
60 |
|
|
|
|
|
|
|
|
|
Deferred
acquisition compensation due to affiliates Principal |
|
|
661 |
|
|
|
524 |
|
|
|
137 |
|
|
|
|
|
|
|
|
|
Deferred acquisition compensation due to affiliates Interest |
|
|
38 |
|
|
|
32 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
Operating leases (2) |
|
|
29,101 |
|
|
|
1,683 |
|
|
|
5,724 |
|
|
|
5,553 |
|
|
|
16,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
354,473 |
|
|
$ |
52,984 |
|
|
$ |
80,516 |
|
|
$ |
80,369 |
|
|
$ |
140,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest on variable rate debt obligations was calculated using the variable interest rate as
of March 31, 2006. |
|
(2) |
|
Operating lease obligations consist primarily of the total minimum rents payable on the lease
for our principal offices. We are reimbursed by affiliates for their share of the minimum
rents under an office cost-sharing agreement. Such amounts are allocated among the entities,
based on gross revenues and are adjusted quarterly. |
Amounts related to our foreign operations are based on the exchange rate of the Euro as of March
31, 2006.
We have employment contracts with several senior executives. These contracts provide for severance
payments in the event of termination under certain conditions including change in control.
As of March 31, 2006, we have no material capital lease obligations for which we are the lessee,
either individually or in the aggregate.
27
W. P. CAREY & CO. LLC
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(in thousands except share and per share amounts)
Market risk is the exposure to loss resulting from changes in interest, foreign currency exchange
rates and equity prices. In pursuing our business plan, the primary risks to which we are exposed
are interest rate risk and foreign currency exchange risk.
Interest Rate Risk
The value of our real estate is subject to fluctuations based on changes in interest rates, local
and regional economic conditions and changes in the creditworthiness of lessees, all which may
affect our ability to refinance property-level mortgage debt when balloon payments are scheduled.
At March 31, 2006, $178,928 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 and scheduled amortization payments of our debt obligations and
the related weighted-average interest rates by expected maturity dates for our fixed rate debt.
Annual interest rates on fixed rate debt as of
March 31, 2006 ranged from 4.87% to 10.125%. The annual interest rates
on our variable rate debt as of March 31, 2006 ranged from 3.86% to 7.08%.
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 banks Prime Rate and the Federal Funds
Effective Rate, plus .50%, plus a spread of up to .125% depending on our leverage.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
Thereafter |
|
Total |
|
Fair value |
Fixed rate debt |
|
$ |
10,799 |
|
|
$ |
24,742 |
|
|
$ |
9,624 |
|
|
$ |
36,626 |
|
|
$ |
13,447 |
|
|
$ |
83,690 |
|
|
$ |
178,928 |
|
|
$ |
178,637 |
|
Weighted average interest rate |
|
|
7.10 |
% |
|
|
7.77 |
% |
|
|
7.25 |
% |
|
|
7.29 |
% |
|
|
7.55 |
% |
|
|
5.65 |
% |
|
|
|
|
|
|
|
|
Variable rate debt |
|
$ |
22,610 |
|
|
$ |
8,709 |
|
|
$ |
7,991 |
|
|
$ |
3,166 |
|
|
$ |
3,256 |
|
|
$ |
31,236 |
|
|
$ |
76,968 |
|
|
$ |
76,968 |
|
Annual interest expense would increase or decrease on variable rate debt by approximately $770 for
each 1% increase or decrease in interest rates. A change in interest rates of 1% would increase or
decrease the fair value of our fixed rate debt at March 31, 2006 by approximately $3,116.
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 months ended March 31, 2006 and 2005, we recognized
$85 and $14, respectively, in foreign
currency transaction gains in connection with the transfer of cash from foreign operating
subsidiaries to the parent company. The cash received was subsequently converted into dollars. In
addition, for the three months ended March 31, 2006 and 2005, we recognized net unrealized foreign
currency gains of $153 and losses of $363, respectively. The cumulative foreign currency
translation adjustment reflects a loss of $1,116. 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.
28
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
provide reasonable assurance 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
specified in the SECs rules and forms. It should be noted that no system of controls can provide
complete assurance of achieving a companys objectives, and that future events may impact the
effectiveness of a system of controls.
Our chief executive officer and acting chief financial officer have conducted a review of our
disclosure controls and procedures as of March 31, 2006. Based upon this review, our chief
executive officer and acting chief financial officer have concluded that our disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective as of March 31,
2006 at a reasonable level of assurance and procedures to ensure that the information required to
be disclosed in the reports we file under the Exchange Act is recorded, processed, summarized and
reported within the required time periods specified in the SECs rules and forms.
(B) Changes in Internal Control Over Financial Reporting
There have been 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.
29
W. P. CAREY & CO. LLC
PART II
(Amounts in thousands, except share amounts)
ITEM 1. LEGAL PROCEEDINGS
Refer to Note 8, Commitments and Contingencies, of the consolidated financial statements for
information regarding legal proceedings.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of shares |
|
Maximum number (or |
|
|
|
|
|
|
|
|
|
|
purchased as part of |
|
approximate dollar value) of |
|
|
Total number of |
|
Average price |
|
publicly announced |
|
shares that may yet be purchased |
Period |
|
shares purchased (1) |
|
paid per share |
|
plans or programs (1) |
|
under the plans or programs (1) |
January 1, 2006 - January 31, 2006 |
|
|
19,400 |
|
|
$ |
24.80 |
|
|
|
19,400 |
|
|
$ |
17,316 |
|
February 1, 2006 - February 28, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,316 |
|
March 1, 2006 - March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,316 |
|
|
|
|
(1) |
|
In December 2005, our board of directors approved a share repurchase program that gives us
authorization to repurchase up to $20,000 of our common stock in the open market beginning
December 16, 2005 and over the next 12 months as conditions warrant. |
ITEM 6. EXHIBITS
|
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 |
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
30
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 |
|
|
|
|
|
|
|
|
|
Date 5/10/2006
|
|
By:
|
|
/s/ Mark J. DeCesaris |
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark J. DeCesaris |
|
|
|
|
|
|
Managing Director and acting
Chief Financial Officer (acting Principal Financial Officer) |
|
|
|
|
|
|
|
|
|
Date 5/10/2006
|
|
By:
|
|
/s/ Claude Fernandez |
|
|
|
|
|
|
|
|
|
|
|
|
|
Claude Fernandez |
|
|
|
|
|
|
Managing Director and Chief
Accounting Officer (Principal Accounting Officer) |
|
|
31