10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2006
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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)
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Delaware
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13-3912578 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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50 Rockefeller Plaza |
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New York, New York
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10020 |
(Address of principal executive offices)
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(Zip code) |
Registrants telephone numbers, including area code:
Investor Relations (212) 492-8920
(212) 492-1100
Securities registered pursuant to Section 12(b) of the Act:
Listed Shares, No Par Value
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained in this report, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. 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
Act). Yes o No þ
As of June 30, 2006, the aggregate market value of the registrants Listed Shares held by
non-affiliates was $690,286,930.
As of February 19, 2007, there are 38,265,157 Listed Shares of registrant outstanding.
The registrant incorporates by reference its definitive Proxy Statement with respect to its 2007
Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120
days following the end of its fiscal year, into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
Forward-Looking Statements
This annual report on Form 10-K, including Managements Discussion and Analysis of Financial
Condition and Results of Operations in Item 7 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, those described below in Item 1A Risk Factors. 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.
As used in this annual report on Form 10-K, the terms the Company, we, us and our include
W. P. Carey & Co. LLC, its consolidated subsidiaries and predecessors, unless otherwise indicated.
W. P. Carey 2006 10-K 1
PART I
Financial information in this report is in thousands except share and per share amounts.
Item 1. Business.
(a) General Development of Business
Overview:
We are a real estate advisory and investment company that invests primarily in commercial
properties that are each triple-net leased to single corporate tenants, domestically and
internationally, and earns revenue as the advisor to real estate investment trusts
(CPA® REITs) sponsored by us that invest in similar properties. The CPA®
REITs are publicly owned, non-traded real estate investment trusts. We are currently the advisor to
the following CPA® REITs: Corporate Property Associates 14 Incorporated
(CPA®:14), Corporate Property Associates 15 Incorporated (CPA®:15) and
Corporate Property Associates 16 Global Incorporated (CPA®:16 Global) and were the
advisor to Corporate Property Associates 12 Incorporated (CPA®:12) prior to its merger
with CPA®:14 on December 1, 2006 and Carey Institutional Properties Incorporated
(CIP®) until its merger with CPA®:15 during 2004. We also hold ownership
interests in these CPA® REITs accounted for under the equity method of accounting (see
Note 6 of the accompanying consolidated financial statements).
Our real estate investment portfolio, as well as those of the REITs we advise, consists primarily
of single-tenant commercial real property. Generally, we place primary emphasis on the
creditworthiness of the tenant but we also fully evaluate the underlying real estate. Our leases
generally are full recourse obligations of the tenant or its affiliates, and place the economic
burden of ownership largely on the tenant by requiring it to pay the costs of maintenance,
insurance, taxes, structural repairs and other operating expenses (referred to as triple-net
leases).
Most of our properties either were acquired as a result of our consolidation in 1998 with nine
affiliated Corporate Property Associates limited partnerships and their successors, or were
subsequently acquired from certain CPA® REITs in connection with the provision of
liquidity to shareholders of those REITs, as further described below. Because our advisory
agreements with the existing CPA® REITs require that we use our best efforts to present
to them a continuing and suitable program of investment opportunities that meet their investment
criteria, we generally provide investment opportunities to these funds first and earn revenues from
transaction and asset management services performed on their behalf. Our principal focus on our
owned real estate portfolio in recent years has therefore been on enhancing the value of our
existing properties.
Under advisory agreements that we have with each of the CPA® REITs, we perform services
and earn asset management revenue related to the day-to-day management of the CPA® REITs
and provide transaction-related services and earn structuring revenue in connection with
structuring and negotiating real estate and real estate related investments and mortgage financing
on their behalf. In addition, we provide further services and earn revenue when each
CPA® REIT is liquidated. We are also reimbursed for certain costs incurred in providing
services, including broker-dealer commissions paid on behalf of the CPA® REITs,
marketing costs and the cost of personnel provided for the administration of the CPA®
REITs.
We were formed as a limited liability company under the laws of Delaware on July 15, 1996. Since
January 1, 1998, we have been consolidated with, and wholly own, nine Corporate Property Associates
limited partnerships and their successors. Our shares began trading on the New York Stock Exchange
on January 21, 1998, under the symbol WPC. As a limited liability company, we are not subject to
federal income taxation as long as we satisfy certain requirements relating to our operations and
pass through any tax liabilities or benefits to our shareholders; however, certain of our
subsidiaries engaged in management services operations are subject to federal, state and local
income taxes and certain subsidiaries may be subject to foreign taxes.
Our principal executive offices are located at 50 Rockefeller Plaza, New York, NY 10020 and our
telephone number is (212) 492-1100. As of December 31, 2006, we employed 122 individuals through
our wholly-owned subsidiaries.
W. P. Carey 2006 10-K 2
Significant Developments During 2006
Managed Portfolio Update:
Merger of CPA®:12 and CPA®:14 In June 2006, the boards of directors of
CPA®:12 and CPA®:14 each approved a definitive agreement under which
CPA®:14 would acquire CPA®:12s business for a combination of cash and stock
(the CPA®:12/14 Merger). The CPA®:12/14 Merger was approved by the
shareholders of CPA®:12 and CPA®:14 in November 2006, and completed on
December 1, 2006. In connection with providing a liquidity event for CPA®:12
shareholders, CPA®:12 paid us termination revenue of $25,379 and subordinated
disposition revenue of $24,418. Included in subordinated disposition revenue is $3,779 payable by
CPA®:12 related to properties we acquired from CPA®:12 that was not
recognized as income for financial reporting purposes but reduced the cost of the properties we
acquired.
Prior to the CPA®:12/14 Merger, we acquired interests in 37 properties from
CPA®:12 (the CPA®:12 Acquisition) with a fair value of $126,006 for $67,289
in cash and the assumption of limited recourse mortgage notes payable with a fair value of $58,717.
The amounts are inclusive of our pro rata share of equity interests acquired in the transaction. In
addition, we made a payment to CPA®:12 of $534 in respect of one of the properties which
had been sold at a price below its previously appraised value. The purchase price of the properties
was based on a third party valuation of each of CPA®:12s properties. The properties are
primarily single tenant net-leased properties, with remaining lease terms ranging from three to
seven years. The majority of the properties are encumbered with limited recourse mortgage financing
with fixed annual interest rates ranging from 5.5% to 8.5% and maturity dates ranging from 2009 to
2017. At the time of the merger we owned 2,134,140 shares of CPA®:12 and received $6,808
as a result of the special cash distribution of $3.19 per share, and elected to receive $9,861 in
cash and 1,022,800 shares of CPA®:14 stock in the merger and recorded a gain of $6,521
on the sale and exchange of our CPA®:12 shares.
In connection with the CPA®:12 Acquisition, we agreed that if we enter into a definitive
agreement to sell any of the acquired properties within six months after the closing of the
CPA®:12 Acquisition at a price that is higher than the price we paid to
CPA®:12, we will pay to former CPA®:12 shareholders an amount equal to 85% of
the excess (net of selling expenses and fees) on any such sale.
Acquisition / Disposition Activity We earn revenue from the acquisition and disposition of
properties on behalf of the CPA® REITs. During 2006, we structured 25 investments
totaling approximately $720,000 on behalf of the CPA® REITs, including entering into
four build-to-suit projects with combined estimated construction costs approximating $103,000.
Approximately 76% of these investments were made on behalf of CPA®:16 Global with the
remainder made on behalf of CPA®:15 and approximately 48% of the total investments
structured during 2006 were for international transactions. During 2006, we sold 11 properties on
behalf of the CPA® REITs for approximately $397,400, net of selling costs.
CPA®:16 Global Public Offering
In December 2006, CPA®:16 Global
completed its second public offering of up to $550,000 of its common stock. Our wholly owned
subsidiary, Carey Financial LLC (Carey Financial), acted as dealer-manager of this offering,
which commenced in March 2006. During 2006, we completed the investment on behalf of
CPA®:16 Global of the funds raised in its initial public offering and commenced
investment of the funds raised in its second offering. We are also reimbursed for marketing and
personnel costs incurred in raising capital on behalf of the CPA® REITs, subject to
certain limitations.
Impairment Charges During 2006, impairment charges totaling $4,504 have been recorded (see
Results of Operations below and Note 12 in the accompanying consolidated financial statements).
2006 Impairment Charge Activity:
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Continuing |
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Discontinued |
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Operations |
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Operations |
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First quarter |
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$ |
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$ |
3,357 |
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Second quarter |
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Third quarter |
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Fourth quarter |
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1,147 |
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Total 2006 impairment charges |
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$ |
1,147 |
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3,357 |
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Owned Portfolio Update:
Acquisition /Disposition Activity As discussed in the Merger of CPA®:12 and
CPA®:14 above, we acquired interests in 37 properties from CPA®:12 for a
total consideration of $126,006, including the assumption of $58,717 in third party
limited-recourse debt. Of the 37 properties acquired from CPA®:12, 23 are in France and
the remainder are domestic properties. During 2006, we also
W. P. Carey 2006 10-K 3
completed, together with an affiliate, a domestic investment for $10,530, which reflects our
proportionate share of cost under the equity method of accounting, as we do not have a controlling
interest. In connection with this equity investment in real estate, we obtained limited recourse
mortgage financing of $7,200, which is our proportionate share of the financing, with a fixed
annual interest rate and term of 5.87% and 10 years, respectively.
During 2006, we sold five domestic properties for combined proceeds of $32,038, net of selling
costs, and recognized a net gain of $3,452 exclusive of impairment charges previously recorded
totaling $22,010. In May 2006, we sold our interest of approximately 780,000 shares of Meristar
Hospitality Corp. for $10.45 per share, at which time we received $8,154 and recorded a realized
gain of $4,800. In prior years, we recognized other than temporary impairment charges totaling $11,345 against this
investment.
Self-Storage Investments In November 2006, we formed a subsidiary (Carey Storage), for the
purpose of investing in self-storage real estate properties and their related businesses within the
United States. In December 2006, we contributed $5,012 in cash for equity interests in Carey
Storage and loaned Carey Storage $5,900. Carey Storage used a portion of the proceeds from our
contribution and loan along with borrowings totaling $15,501 under its $105,000 credit facility to
acquire six domestic self-storage properties totaling $24,800. The borrowings have an annual fixed
interest rate and term of 7.6% and 2 years, respectively. We have acquired, and expect to continue
to acquire, additional self-storage properties during 2007. We are evaluating raising third party
capital in connection with these investments. See Real Estate Operations below and Subsequent
Events in Item 7 for further discussion of our self-storage investments.
Financing Activity During 2006, a joint venture in which we and an affiliate each hold a 50%
interest paid a $20,599 balloon payment that was due on a domestic property, and refinanced the
property for $30,000. The new limited recourse mortgage financing has an annual fixed interest rate
of 6.18% and a 10-year term. As a result of adopting the provisions of EITF 04-05 effective January
1, 2006, we now consolidate this investment. Also during 2006, we obtained limited recourse
mortgage financing at an existing property of $6,000 with an annual fixed interest rate and term of
5.5% and 10 years, respectively.
Share Repurchase Program In December 2005, the board of directors approved a $20,000 share
repurchase program. Under this program, we could repurchase up to $20,000 of our common stock in
the open market during the twelve-month period beginning December 16, 2005 as conditions warranted.
During the term of this program, which ended December 15, 2006, we repurchased and retired 166,800
shares totaling $4,138.
SEC Investigation As previously reported, we and Carey Financial, our wholly-owned broker-dealer
subsidiary, are currently subject to an SEC investigation into payments made to third party
broker-dealers in connection with the distribution of REITs managed by us and other matters.
Although no regulatory action has been initiated against us or Carey Financial in connection with
the matters being investigated, we expect that the SEC may pursue an action in the future. The
potential timing of any action and the nature of the relief or remedies the SEC may seek cannot be
predicted at this time. If an action is brought, it could materially affect us and the REITs we
manage. See Item 3-Legal Proceedings for a discussion of this investigation.
Directors The following changes in our board of directors occurred during 2006:
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In December 2006, Benjamin H. Griswold IV was appointed to the board of directors and
will serve as an independent director and chairman of the compensation committee of the
board of directors. Also, in December 2006, Charles C. Townsend Jr. retired as a director
and became a director emeritus. |
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In June 2006, Charles E. Parente was elected to the board of directors and will serve as
an independent director and chairman of the audit committee of the board of directors.
Ralph F. Verni, who previously served as an independent director and chairman of the
investment committee, did not stand for re-election. |
(b) Financial Information About Segments
Refer to Note 16 in the accompanying consolidated financial statements for financial information
about segments.
W. P. Carey 2006 10-K 4
(c) Narrative Description of Business
Business Objectives and Strategy
Our objective is to increase shareholder value and earnings through expansion of our management
services operations and prudent management of our owned real estate assets. We will continue to own
real estate properties as long as we believe ownership helps us attain our objectives.
We have two primary business segments, management services and real estate operations. These
segments are each described below.
Management Services
We earn revenue as the advisor to the CPA® REITs, each of which we formed and initially
offered to the public. Under the advisory agreements with the CPA® REITs, we perform
various services, including but not limited to the day-to-day management of the CPA®
REITs and transaction-related services.
Because of limitations on the amount of non-real estate related income that may be earned by a
limited liability company that is taxed as a publicly traded partnership, our management services
operations are currently conducted largely by taxable corporate subsidiaries.
We are currently exploring alternatives for expanding our management services operations beyond
advising the CPA® REITs, such as our recent investments in self-storage real estate
properties, but no decisions have been made as to whether or how such an expansion may be effected.
Any such expansion could involve the purchase of properties or other investments as a principal,
with the intention of transferring such investments to a newly created fund.
Asset Management Revenue
Generally, we earn asset management revenues totaling 1% per annum of average invested assets for
each CPA® REIT, of which 1/2 of 1% (performance revenue) is contingent upon specific
performance criteria for each CPA® REIT (generally, the payment of a specified
cumulative distribution return to shareholders). We seek to increase our base asset management and
performance revenue by increasing assets under management, both as the CPA® REITs make
new investments and from organizing new investment entities. Such revenue may also increase, or
decrease, based on changes in the value of the assets of the individual CPA® REITs.
Asset valuations are performed annually by a third party, beginning for each CPA® REIT
generally three years after completion of its public offering. Assets under management, and the
resultant revenue earned by us, may also decrease if investments are disposed of, either
individually or in connection with the liquidation of a CPA® REIT. Effective in 2005,
the advisory agreements were amended to allow us to elect to receive restricted stock for any
revenue due from a CPA® REIT. For 2006, we elected to receive all performance revenue,
as well as the base asset management revenue from CPA®:16 Global, in restricted
shares.
Structuring Revenue
In connection with structuring and negotiating investments and related mortgage financing for the
CPA® REITs, the advisory agreements provide for acquisition revenue based on the cost of
investments. Under each of the advisory agreements, we may charge 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 6%. The amount of this revenue is primarily dependent
on the volume of new investments, which is affected by numerous factors, including general
economic, market and competitive conditions, and may be subject to considerable fluctuation from
period to period. In addition, we may be entitled to loan refinancing revenue of up to 1% of the
principal amount refinanced. This loan refinancing revenue, together with the acquisition revenue,
is referred to as structuring revenue.
Other Revenue
We may also earn revenue related to the disposition of properties, subject to subordination
provisions, which will only be recognized as the relevant conditions are met. Such revenue may
include subordinated disposition revenue of no more than 3% of the value of any assets sold,
payable only after shareholders have received back their initial investment plus a specified
preferred return, and subordinated incentive revenue of 15% of the net cash proceeds distributable
to shareholders from the disposition of properties, after recoupment by shareholders of their
initial investment plus a specified preferred return. We may also, in connection with the
termination of the advisory agreement, be entitled to a termination payment based on the amount by
which the fair value of a CPA® REITs properties, less indebtedness, exceeds investors
capital plus a specified preferred return. We will not receive a termination payment in
circumstances where we receive subordinated incentive revenue. In current and past years we have
earned substantial
W. P. Carey 2006 10-K 5
disposition and incentive or termination revenue in connection with providing liquidity to
CPA® REIT shareholders. In general, we begin evaluating liquidity alternatives for
CPA® REIT shareholders about eight years after a CPA® REIT has substantially
invested the net proceeds received in its public offering. These liquidity alternatives may include
listing the CPA® REITs shares on a national securities exchange or including them for
quotation on Nasdaq, selling the assets of the CPA® REIT or merging the affected
CPA® REIT with another entity, which could include another CPA® REIT.
However, the timing of liquidity events depends on market conditions and may also depend on other
factors, including approval of the proposed course of action by the independent directors, and in
some instances the shareholders, of the affected CPA® REIT, and may occur well after the
eighth anniversary of the completion of an offering. Because of these factors, CPA® REIT
liquidity events have not typically taken place every year. In consequence, given the relatively
substantial amounts of disposition revenue, as compared with the ongoing revenue earned from asset
management and structuring investments, income from this business segment may be significantly
higher in those years where a liquidity event takes place. There can be no assurances that a
CPA® REIT liquidity event will occur in the future.
We are also reimbursed by our affiliates for certain costs, primarily broker-dealer commissions
paid on behalf of the CPA® REITs and marketing and personnel costs. Marketing and
personnel costs are apportioned based on the assets of each entity. These reimbursements may be
substantial; for 2006, we received reimbursements of $63,630 from our affiliates, $53,716 of which
related to CPA®:16 Globals second public offering. These reimbursements, together
with asset management revenue payable by a specific CPA® REIT, may be subject to
deferral or reduction if they exceed a specified percentage of that CPA® REITs income
or invested assets.
Real Estate Operations
We invest in commercial properties that are leased to companies domestically and internationally,
primarily on a single-tenant, triple-net leased basis. While our acquisition of new properties is
constrained by our obligation to provide a continuing and suitable investment program to the
CPA® REITs, we seek to maximize the value of our existing portfolio through prudent
management of our real estate assets, which may involve follow-on transactions, dispositions and
favorable lease modifications, as well as refinancing of existing debt. In connection with
providing liquidity alternatives to CPA® REIT shareholders, we may acquire additional
properties from the liquidating CPA® REIT, as we have done during 2006 and 2004. See Our
Portfolio section below for an analysis of our portfolio as of December 31, 2006.
The Investment Strategies, Financing Strategies, Asset Management, Competition and Environmental
Matters sections described below pertain to both our Management Services and Real Estate
Operations.
Investment Strategies
As discussed above, our property acquisitions in recent years have generally been made on behalf of
the CPA® REITs. The following description of our investment process applies to
investments we make on behalf of the CPA® REITs. In general, we would expect to follow a
similar process in connection with any investments in triple-net leased, single-tenant commercial
properties we may make directly, but we are not required to do so.
In analyzing potential investments, we review all aspects of a transaction, including tenant and
real estate fundamentals, to determine whether a potential investment and lease can be structured
to satisfy the CPA® REITs investment criteria. We generally consider, among other
things, the following aspects of each transaction:
Tenant/Borrower Evaluation We evaluate each potential tenant or borrower for its
creditworthiness, typically considering factors such as management experience; industry position
and fundamentals; operating history; and capital structure, as well as other factors that may be
relevant to a particular investment. In evaluating a possible investment, the creditworthiness of a
tenant or borrower often will be a more significant factor than the value of the underlying real
estate, particularly if the underlying property is specifically suited to the needs of the tenant;
however, in certain circumstances where the real estate is attractively valued, the
creditworthiness of the tenant may be a secondary consideration. Whether a prospective tenant or
borrower is creditworthy will be determined by us or the investment committee. Creditworthy does
not mean investment grade.
Properties Important to Tenant/Borrower Operations We generally will focus on properties that we
believe are essential or important to the ongoing operations of the tenant. We believe that these
properties provide better protection in the event of a bankruptcy, since a tenant/borrower is less
likely to risk the loss of a mission critical lease or property in a bankruptcy proceeding.
Diversification We attempt to diversify the CPA® REIT portfolios to avoid dependence
on any one particular tenant, borrower, collateral type, geographic location or tenant/borrower
industry. By diversifying these portfolios, we reduce the adverse effect of a single
under-performing investment or a downturn in any particular industry or geographic region.
W. P. Carey 2006 10-K 6
Lease Terms Generally, the net leased properties in which the CPA® REITs and we invest
will be leased on a full recourse basis to the tenants or their affiliates. In addition, we will
seek to include a clause in each lease that provides for increases in rent over the term of the
lease. These increases are fixed or tied generally to increases in indices such as the Consumer
Price Index (CPI). In the case of retail stores and hotels, the lease may provide for
participation in gross revenues above a stated level. Alternatively, a lease may provide for
mandated rental increases on specific dates, and we may adopt other methods in the future.
Collateral Evaluation We review the physical condition of the property, and conduct a market
evaluation to determine the likelihood of replacing the rental stream if the tenant defaults, or of
a sale of the property in such circumstances. We also generally will conduct, or require the seller
to conduct, Phase I or similar environmental site assessments (including a visual inspection for
the potential presence of asbestos) in an attempt to identify potential environmental liabilities
associated with a property prior to its acquisition. If potential environmental liabilities are
identified, we generally require that identified environmental issues be resolved by the seller
prior to property acquisition or, where such issues cannot be resolved prior to acquisition,
require tenants contractually to assume responsibility for resolving identified environmental
issues post-closing and indemnify us against any potential claims, losses or expenses arising from
such matters. Although we generally rely on our own analysis in determining whether to make an
investment on behalf of the CPA® REITs, each real property purchased by them will be
appraised by a third party appraiser that is independent of ourselves, prior to acquisition. The
contractual purchase price (plus acquisition fees for properties acquired on behalf of the
CPA® REITs) for a real property we acquire on behalf of a CPA® REIT will not
exceed its appraised value. The appraisals may take into consideration, among other things, the
terms and conditions of the particular leaste transaction, the quality of the lessees credit and
the conditions of the credit markets at the time the lease transaction is negotiated. The appraised
value may be greater than the construction cost or the replacement cost of a property, and the
actual sale price of a property if sold may be greater or less than the appraised value. In cases
of special purpose real estate, a property is examined in light of the prospects for the
tenant/borrowers enterprise and the financial strength and the role of that asset in the context
of the tenants overall viability. Operating results of properties and other collateral may be
examined to determine whether or not projected income levels are likely to be met. We will also
consider factors particular to the laws of foreign countries, in addition to the risks normally
associated with real property investments, when considering an investment located outside the
United States.
Transaction Provisions that Enhance and Protect Value We will attempt to include provisions in
the leases that require our consent to specified activity, require the tenant to provide
indemnification protections, or require the tenant to satisfy specific operating tests. These
provisions may help protect an investment from changes in the operating and financial
characteristics of a tenant that may affect its ability to satisfy its obligations to the
CPA® REIT or reduce the value of the investment. We may also seek to enhance the
likelihood of a tenants lease obligations being satisfied through a guaranty of obligations from
the tenants corporate parent or a letter of credit. This credit enhancement, if obtained, provides
additional financial security. However, in markets where competition for net lease transactions is
strong, some or all of these provisions may be difficult to negotiate. In addition, in some
circumstances, tenants may require a right to purchase the property leased by the tenant. The
option purchase price is generally the greater of the contract purchase price and the fair market
value of the property at the time the option is exercised.
Other Equity Enhancements We may attempt to obtain equity enhancements in connection with
transactions. These equity enhancements may involve warrants exercisable at a future time to
purchase stock of the tenant or borrower or their parent. If warrants are obtained, and become
exercisable, and if the value of the stock subsequently exceeds the exercise price of the warrant,
equity enhancements can help achieve the goal of increasing investor returns.
Investment Committee We have an investment committee that provides services to the
CPA® REITs and may provide services to us. Under our current arrangements with the
CPA® REITs, as a transaction is structured, it is evaluated by the chairman of the
investment committee and our chief investment officer with respect to the potential tenants
creditworthiness, business prospects, position within its industry and other characteristics
important to the long-term value of the property and the capability of the tenant to meet its lease
obligations. Before a property is acquired by a CPA® REIT, the transaction is reviewed
by the investment committee to ensure that it satisfies the relevant CPA® REITs
investment criteria. The investment committee is not directly involved in originating or
negotiating potential investments, but instead functions as a separate and final step in the
investment process. We place special emphasis on having experienced individuals serve on our
investment committee and generally do not invest in a transaction on behalf of the CPA®
REITs unless the investment committee approves it. In addition, the investment committee may at the
request of our board of directors or executive committee also review any initial investment in
which we propose to engage directly, although it is not required to do so. Our board of directors
or executive committee may also determine that certain investments that may not meet the
CPA® REITs investment criteria (particularly transactions in emerging markets) may be
acceptable to us. For transactions that meet the investment criteria of more than one
CPA® REIT, the chief investment officer has discretion as to which CPA® REIT
or REITs will hold the investment. In cases where two or more CPA® REITs (or one or more
CPA® REITs and us) will hold the investment, the independent directors of each
CPA® REIT investing in the property must also approve the transaction.
W. P. Carey 2006 10-K 7
The following people currently serve on the investment committee:
|
|
|
Nathaniel S. Coolidge, Chairman Former senior vice president and head of the bond and
corporate finance department of John Hancock Mutual Life Insurance. Mr. Coolidges
responsibilities included overseeing its entire portfolio of fixed income investments. |
|
|
|
|
Frank Hoenemeyer Former Chairman and Chief Investment Officer, Prudential Insurance
Company of America. |
|
|
|
|
Dr. Lawrence R. Klein Currently serving as professor emeritus of economics and finance
at the University of Pennsylvania and its Wharton School. Recipient of the 1980 Nobel Prize
in economic sciences and former consultant to both the Federal Reserve Board and the
Presidents Council of Economic Advisors. |
|
|
|
|
George E. Stoddard Former officer-in-charge of the direct placement department of The
Equitable Life Assurance Society of the United States and our former chief investment
officer. |
|
|
|
|
Dr. Karsten von Köller Currently chairman of Lone Star Germany GmbH and chairman and
member of the board of managing directors of Allgemeine
HypothekenBank Rheinboden AG. Former chairman and member of the board
of managing directors of Eurohypo AG. |
We are required to use our best efforts to present a continuing and suitable investment program to
the CPA® REITs but we are not required to present to the CPA® REITs any
particular investment opportunity, even if it is of a character which, if presented, could be taken
by one or more of the CPA® REITs.
Self-Storage Investments
Overview
In November 2006, we formed a subsidiary (Carey Storage), for the purpose of investing in
self-storage real estate properties and their related businesses within the United States. In
December 2006, we contributed $5,012 in cash for equity interests in Carey Storage and loaned Carey
Storage $5,900. Carey Storage used a portion of the proceeds from our contribution and loan along
with borrowings totaling $15,501 under its $105,000 credit facility to acquire six domestic
self-storage properties totaling $24,800. The borrowings have an annual fixed interest rate and
term of 7.6% and 2 years, respectively. We have acquired, and expect to continue to acquire,
additional self-storage properties during 2007. We are evaluating raising third party capital in
connection with these investments. See Real Estate Operations below and Subsequent Events in Item 7
for further discussion of our self-storage investments.
Carey Storage has an investment committee that will evaluate and approve all new transactions. This
committee is currently comprised of John Miller, our chief investment officer, and Reginald
Winssinger, an independent director. Carey Storages results of operations are included in other real estate income and other real
estate expenses in the accompanying consolidated financial
statements. If we raise third party capital for Carey Storage, the results
of operations of Carey Storage may be reclassified from our real estate operations to our
management services operations. We expect that we would then seek to liquidate the self-storage
investments as a whole within five to seven years thereafter.
2006 Activity
In December 2006, we contributed $5,012 in cash for equity interests in Carey Storage and loaned
Carey Storage $5,900. The loan to Carey Storage matures in 2 years and bears annual interest at the
rate of the one-month LIBOR plus 2%. Carey Storage used a portion of the proceeds from our
contribution and loan along with borrowings totaling $15,501 under its credit facility to acquire
six domestic self-storage properties totaling $24,800.
In December 2006, Carey Storage entered into a credit facility for up to $105,000 with Morgan
Stanley Mortgage Capital Inc. that matures in December 2008. The facility is collateralized by any
self-storage real estate assets acquired. Advances from this facility bear interest at an annual
rate of the one-month LIBOR, plus a spread that ranges from 1.75% to 2.35% depending on the
aggregate debt yield for the collateralized asset pool. Advances can be prepaid at any time,
however advances prepaid prior to March 8, 2008 are subject to a prepayment penalty of 1.25% of the
principal amount of the loan being prepaid. This facility has financial covenants requiring Carey
Storage, among other things, to meet or exceed certain operating and coverage ratios.
W. P. Carey 2006 10-K 8
Our Portfolio
As of December 31, 2006, our portfolio consisted of 187 properties leased to 111 tenants, totaling
approximately 18 million square feet (on a pro rata basis) and had an occupancy rate of 96%. Our
portfolio has the following property and lease characteristics:
Geographic Diversification
Information regarding the geographic diversification of our properties as of December 31, 2006 is
set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Investments |
|
|
Equity Investments in Real Estate (2) |
|
|
|
Annualized |
|
|
% of Annualized |
|
|
Annualized |
|
|
% of Annualized |
|
|
|
Contractual Lease |
|
|
Contractual |
|
|
Contractual Lease |
|
|
Contractual |
|
Region |
|
Revenue (1) |
|
|
Lease Revenue |
|
|
Revenue (1) |
|
|
Lease Revenue |
|
United States |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South |
|
$ |
28,130 |
|
|
|
32.94 |
% |
|
$ |
2,884 |
|
|
|
14.12 |
% |
West |
|
|
20,174 |
|
|
|
23.62 |
|
|
|
1,941 |
|
|
|
9.50 |
|
Midwest |
|
|
16,735 |
|
|
|
19.59 |
|
|
|
2,344 |
|
|
|
11.47 |
|
East |
|
|
11,826 |
|
|
|
13.85 |
|
|
|
2,084 |
|
|
|
10.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. |
|
|
76,865 |
|
|
|
90.00 |
|
|
|
9,253 |
|
|
|
45.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe |
|
|
8,544 |
|
|
|
10.00 |
|
|
|
11,179 |
|
|
|
54.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
85,409 |
|
|
|
100.00 |
% |
|
$ |
20,432 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects annualized contractual minimum base rent for the fourth quarter of 2006. |
|
(2) |
|
Reflects our pro rata share of annualized contractual minimum base rent for the fourth
quarter of 2006 from equity investments in real estate. |
Property Diversification
Information regarding our property diversification as of December 31, 2006 is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Investments |
|
|
Equity Investments in Real Estate (2) |
|
|
|
Annualized |
|
|
% of Annualized |
|
|
Annualized |
|
|
% of Annualized |
|
|
|
Contractual Lease |
|
|
Contractual |
|
|
Contractual Lease |
|
|
Contractual |
|
Property Type |
|
Revenue (1) |
|
|
Lease Revenue |
|
|
Revenue (1) |
|
|
Lease Revenue |
|
Industrial |
|
$ |
32,309 |
|
|
|
37.83 |
% |
|
$ |
2,795 |
|
|
|
13.68 |
% |
Office |
|
|
31,054 |
|
|
|
36.36 |
|
|
|
5,514 |
|
|
|
26.99 |
|
Warehouse/distribution |
|
|
11,777 |
|
|
|
13.79 |
|
|
|
9,524 |
|
|
|
46.61 |
|
Retail |
|
|
6,165 |
|
|
|
7.22 |
|
|
|
|
|
|
|
|
|
Other properties |
|
|
3,943 |
|
|
|
4.62 |
|
|
|
2,599 |
|
|
|
12.72 |
|
Land |
|
|
161 |
|
|
|
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
85,409 |
|
|
|
100.00 |
% |
|
$ |
20,432 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects annualized contractual minimum base rent for the fourth quarter of 2006. |
|
(2) |
|
Reflects our pro rata share of annualized contractual minimum base rent for the fourth
quarter of 2006 from equity investments in real estate. |
W. P. Carey 2006 10-K 9
Tenant Diversification
Information regarding our tenant diversification as of December 31, 2006 is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Investments |
|
|
Equity Investments in Real Estate (2) |
|
|
|
Annualized |
|
|
% of Annualized |
|
|
Annualized |
|
|
% of Annualized |
|
|
|
Contractual Lease |
|
|
Contractual |
|
|
Contractual Lease |
|
|
Contractual |
|
Tenant Industry (3) |
|
Revenue (1) |
|
|
Lease Revenue |
|
|
Revenue (1) |
|
|
Lease Revenue |
|
Business and commercial services |
|
$ |
11,200 |
|
|
|
13.11 |
% |
|
$ |
1,863 |
|
|
|
9.12 |
% |
Telecommunications |
|
|
11,179 |
|
|
|
13.09 |
|
|
|
|
|
|
|
|
|
Electronics |
|
|
5,881 |
|
|
|
6.89 |
|
|
|
1,136 |
|
|
|
5.56 |
|
Retail stores |
|
|
5,325 |
|
|
|
6.23 |
|
|
|
9,096 |
|
|
|
44.52 |
|
Machinery |
|
|
5,282 |
|
|
|
6.18 |
|
|
|
|
|
|
|
|
|
Beverages, food, and tobacco |
|
|
5,033 |
|
|
|
5.89 |
|
|
|
372 |
|
|
|
1.82 |
|
Aerospace and defense |
|
|
4,867 |
|
|
|
5.70 |
|
|
|
|
|
|
|
|
|
Healthcare, education and childcare |
|
|
4,487 |
|
|
|
5.25 |
|
|
|
4,270 |
|
|
|
20.90 |
|
Forest products and paper |
|
|
4,413 |
|
|
|
5.17 |
|
|
|
|
|
|
|
|
|
Transportation personal |
|
|
3,962 |
|
|
|
4.64 |
|
|
|
|
|
|
|
|
|
Consumer and non-durable goods |
|
|
3,135 |
|
|
|
3.67 |
|
|
|
|
|
|
|
|
|
Consumer and durable goods |
|
|
2,647 |
|
|
|
3.10 |
|
|
|
|
|
|
|
|
|
Construction and building |
|
|
2,529 |
|
|
|
2.96 |
|
|
|
|
|
|
|
|
|
Insurance |
|
|
2,471 |
|
|
|
2.89 |
|
|
|
|
|
|
|
|
|
Federal, state and local government |
|
|
2,400 |
|
|
|
2.81 |
|
|
|
|
|
|
|
|
|
Automotive |
|
|
598 |
|
|
|
0.70 |
|
|
|
|
|
|
|
|
|
Transportation cargo |
|
|
269 |
|
|
|
0.31 |
|
|
|
2,747 |
|
|
|
13.44 |
|
Other (4) |
|
|
9,731 |
|
|
|
11.41 |
|
|
|
948 |
|
|
|
4.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
85,409 |
|
|
|
100.00 |
% |
|
$ |
20,432 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects annualized contractual minimum base rent for the fourth quarter of 2006. |
|
(2) |
|
Reflects our pro rata share of annualized contractual minimum base rent for the fourth
quarter of 2006 from equity investments in real estate. |
|
(3) |
|
Based on the Moodys classification system and information provided by the tenant. |
|
(4) |
|
Includes revenue from tenants in banking, chemicals, grocery, hotels, leisure, media, mining
and textiles industries. |
W. P. Carey 2006 10-K 10
Lease Expirations
As of December 31, 2006, lease expirations of our properties are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Investments |
|
|
Equity Investments in Real Estate (2) |
|
|
|
Annualized |
|
|
% of Annualized |
|
|
Annualized |
|
|
% of Annualized |
|
|
|
Contractual Lease |
|
|
Contractual |
|
|
Contractual Lease |
|
|
Contractual |
|
Year of Lease Expiration |
|
Revenue (1) |
|
|
Lease Revenue |
|
|
Revenue (1) |
|
|
Lease Revenue |
|
2007 |
|
$ |
7,139 |
|
|
|
8.36 |
% |
|
$ |
|
|
|
|
|
% |
2008 |
|
|
5,752 |
|
|
|
6.73 |
|
|
|
|
|
|
|
|
|
2009 |
|
|
10,376 |
|
|
|
12.15 |
|
|
|
2,043 |
|
|
|
10.00 |
|
2010 |
|
|
13,743 |
|
|
|
16.09 |
|
|
|
2,082 |
|
|
|
10.19 |
|
2011 |
|
|
10,160 |
|
|
|
11.90 |
|
|
|
7,842 |
|
|
|
38.38 |
|
2012 |
|
|
5,665 |
|
|
|
6.63 |
|
|
|
1,255 |
|
|
|
6.14 |
|
2013 |
|
|
5,167 |
|
|
|
6.05 |
|
|
|
1,863 |
|
|
|
9.12 |
|
2014 |
|
|
10,149 |
|
|
|
11.88 |
|
|
|
|
|
|
|
|
|
2015 |
|
|
5,640 |
|
|
|
6.60 |
|
|
|
|
|
|
|
|
|
2016 |
|
|
1,128 |
|
|
|
1.32 |
|
|
|
516 |
|
|
|
2.53 |
|
2017 |
|
|
2,358 |
|
|
|
2.76 |
|
|
|
|
|
|
|
|
|
2018 |
|
|
3,162 |
|
|
|
3.70 |
|
|
|
|
|
|
|
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
2,747 |
|
|
|
13.44 |
|
2020 |
|
|
4,634 |
|
|
|
5.43 |
|
|
|
|
|
|
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
336 |
|
|
|
0.40 |
|
|
|
1,136 |
|
|
|
5.56 |
|
2023 - 2026 |
|
|
|
|
|
|
|
|
|
|
948 |
|
|
|
4.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
85,409 |
|
|
|
100.00 |
% |
|
$ |
20,432 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects annualized contractual minimum base rent for the fourth quarter of 2006. |
|
(2) |
|
Reflects our pro rata share of annualized contractual minimum base rent for the fourth
quarter of 2006 from equity investments in real estate. |
Financing Strategies
Consistent with our investment policies, we use leverage when available on favorable terms. In
addition to obtaining limited recourse mortgage debt for new investments, we also have secured and
unsecured credit facilities that can be used in connection with refinancing existing debt and
making new investments, as well as to meet other working capital needs. Our secured and unsecured
credit facilities are discussed in detail in the Cash Resources section of Item 7 Managements
Discussion and Analysis of Financial Condition and Results of Operations.
Substantially all of our mortgages, as well as those of the CPA® REITs, are limited
recourse and bear interest at fixed rates. We may refinance properties or defease a loan when a
decline in interest rates makes it profitable to prepay an existing mortgage, when an existing
mortgage matures or if an attractive investment becomes available and the proceeds from the
refinancing can be used to purchase such investment. The benefits of the refinancing may include an
increased cash flow resulting from reduced debt service requirements, an increase in distributions
from proceeds of the refinancing, if any, and/or an increase in property ownership if some
refinancing proceeds are reinvested in real estate. The prepayment of loans may require us to pay a
yield maintenance premium to the lender in order to pay off a loan prior to its maturity.
A lender on limited recourse mortgage debt generally has recourse only to the property
collateralizing such debt and not to any of our other assets, while full recourse financing would
give a lender recourse to all of our assets. The use of limited recourse debt, therefore, helps us
to limit the exposure of all of our assets to any one debt obligation.
Asset Management
We believe that effective management of our assets is essential to maintain and enhance property
values. Important aspects of asset management include restructuring transactions to meet the
evolving needs of current tenants, re-leasing properties, refinancing debt, selling properties and
knowledge of the bankruptcy process.
We monitor, on an ongoing basis, compliance by tenants with their lease obligations and other
factors that could affect the financial performance of any of our properties. Monitoring involves
receiving assurances that each tenant has paid real estate taxes, assessments
W. P. Carey 2006 10-K 11
and other expenses
relating to the properties it occupies and confirming that appropriate insurance coverage is being
maintained by the tenant. We review financial statements of tenants and undertake regular physical
inspections of the condition and maintenance of properties. Additionally, we periodically analyze
each tenants financial condition, the industry in which each tenant operates and each tenants
relative strength in its industry.
Segments
We operate in two operating segments, management services operations and real estate operations.
The management services operations segment derives substantially all of its revenues from the
affiliated CPA® REITs. For the year ended December 31, 2006, no lessee represented more
than 7% of our total lease revenues from our real estate operations.
Competition
In raising funds for investment by the CPA® REITs, we face competition from other funds
with similar investment objectives that seek to raise funds from investors through publicly
registered, non-traded funds, publicly-traded funds, or private funds, such as hedge funds. In
addition, we face broad competition from other forms of investment. Currently, we raise
substantially all of our funds for investment in the CPA® REITs within the United
States; however, in the future we may seek to raise funds for investment from outside the United
States.
We face intense competition for investment opportunities in commercial properties in general, and
commercial properties net leased to major corporations in particular, from many sources, including
insurance companies, credit companies, pension funds, private individuals, financial institutions,
finance companies and investment companies. We also face competition from institutions that provide
or arrange for other types of commercial financing through private or public offerings of equity or
debt or traditional bank financings. We believe that our managements experience in real estate,
credit underwriting and transaction structuring should allow us to compete effectively for
commercial properties. Nevertheless, such competition has increased markedly in recent years, not
only in the United States but in Europe, and competitors may be willing to accept rates of return,
lease terms, other transaction terms or levels of risk that we may find unacceptable. In addition,
the investment committees evaluation of the acceptability of rates of return on behalf of the
CPA® REITs is affected by such factors as the cost of raising capital, the amount of
revenue that the CPA® REITs must pay us and the performance hurdle rates of the relevant
CPA® REITs.
Environmental Matters
We and the CPA® REITS have invested, and expect to continue to invest, in properties
currently or historically used for industrial, manufacturing and commercial properties. Under
various federal, state and local environmental laws and regulations, current and former owners and
operators of property may have liability for the cost of investigating, cleaning-up or disposing of
hazardous materials released at, on, under, in or from the property. These laws typically impose
responsibility and liability without regard to whether the owner or operator knew of or was
responsible for the presence of hazardous materials or contamination, and liability under these
laws is often joint and several. Third parties may also make claims against owners or operators of
properties for personal injuries and property damage associated with releases of hazardous
materials.
While we typically perform assessments of potential environmental risks when evaluating a new
acquisition of property, no assurance can be given that we have performed such assessments on all
of our or the CPA® REITs properties, or that the environmental assessments we do
perform will disclose all potential environmental liabilities. We or the CPA® REITs may
purchase a property that contains hazardous materials in the building, or that is known to have or
be near soil or groundwater contamination. In addition, new environmental conditions, liabilities
or compliance concerns may arise or be discovered during our or the CPA® REITs
ownership.
While we frequently obtain contractual protection (indemnities, cash reserves, letters of credit or
other instruments) from property sellers, tenants, a tenants parent company or another third party
to address these known or potential issues, we cannot eliminate our or the CPA® REITs
statutory liability or the potential for claims against us or the CPA® REITs by
governmental authorities or other third parties, the contractual protection may not cover all
potential damages or liabilities, and the indemnifying party may fail to meet its contractual
obligations. In addition, the existence of any environmental conditions, liabilities or compliance
concerns at or near our or the CPA® REITs properties could adversely affect our or the
CPA® REITs ability to rent or sell property or to borrow using the property as
collateral and could also adversely affect the tenants ability to make rental payments.
As a result of all of the foregoing, we have incurred in the past and will incur in the future
costs and liabilities to investigate environmental matters and to address environmental conditions,
liabilities and compliance concerns. Although we do not currently anticipate incurring any material
liabilities in connection with environmental matters, we cannot assure you that future
environmental costs and liabilities will not be material or will not adversely affect our business.
W. P. Carey 2006 10-K 12
(d) Financial Information About Geographic Areas
See Note 16 of the accompanying consolidated financial statements for financial data pertaining to
our segment and geographic operations.
(e) Available Information
All filings we make with the SEC, including our annual report on Form 10-K, our quarterly reports
on Form 10-Q and our current reports on Form 8-K, and any amendments to those reports, are
available for free on our website, http://www.wpcarey.com as soon as reasonably practicable after
they are filed or furnished to the SEC. Our SEC filings are available to be read or copied at the
SECs Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information regarding
the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
Our filings can also be obtained for free on the SECs Internet
site at http://www.sec.gov. We are
providing our website address solely for the information of investors. We do not intend our website
to be an active link or to otherwise incorporate the information contained on our website into this
report or other filings with the SEC.
Item 1A. Risk Factors.
Future results may be affected by risks and uncertainties including the following:
We are currently being investigated by the SEC.
We and Carey Financial, our wholly-owned broker-dealer subsidiary, are currently subject to an SEC
investigation into payments made to third party broker-dealers in connection with the distribution
of REITs managed by us and other matters. Although no regulatory action has been initiated against
us or Carey Financial in connection with the matters being investigated, we expect that the SEC may
pursue an action in the future. The potential timing of any such action and the nature of the
relief or remedies the SEC may seek cannot be predicted at this time. If an action is brought, it
could materially affect us. See Item 3 Legal Proceedings for a discussion of this investigation.
The revenue streams from the investment advisory agreements with the CPA® REITs are
subject to limitation or cancellation.
The agreements under which we provide investment advisory services may generally be terminated by
each CPA® REIT upon 60 days notice, with or without cause. There can be no assurance
that these agreements will not be terminated. A termination without cause may, however, entitle us
to termination revenue, equal to 15% of the amount by which the net fair value of the relevant
CPA® REITs assets exceeds the remaining amount necessary to provide investors with
total distributions equal to their investment plus a preferred return. Nonetheless, any such
termination could have a material adverse effect on our business, results of operations and
financial condition.
Changes in investor preferences or market conditions could limit our ability to raise funds or make
new investments.
Substantially all of our and the CPA® REITs current investments, as well as the
majority of the investments we expect to originate for the CPA® REITs in 2007, are
investments in single-tenant commercial properties that are subject to triple-net leases. In
addition, we have relied predominantly on raising funds from individual investors through the sale
by participating selected dealers to their customers of publicly-registered, non-traded securities
of the CPA® REITs. Our recent fund raising efforts have been through one major selected
dealer. Certain payments made to this selected dealer in connection with the distribution of our
CPA® REIT offerings to investors are a subject of the SEC investigation described under
Item 3-Legal Proceedings. If, as a result of changes in market receptivity to investments that are
not readily liquid and involve high selected dealer fees, or for other reasons, this capital
raising method were to become less available as a source of capital, our ability to raise funds for
CPA® REIT programs, and consequently our ability to make investments on their behalf,
could be adversely affected. While we are not limited to this particular method of raising funds
for investment (and, among other things, the CPA® REITs may themselves be able to borrow
additional funds to invest), our experience with other means of raising capital is limited. Also,
many factors, including changes in tax laws or accounting rules, may make these types of
investments less attractive to potential sellers and lessees, which could negatively affect our
ability to increase the amount of assets of this type under management.
Our management services operations exposes us to more volatility in earnings than our real estate
investment business.
Growth in revenue from our management services operations is dependent in large part on future
capital raising in existing or future managed entities, as well as on our ability to make
investments that meet the investment criteria of these entities, both of which are subject to
uncertainty, including with respect to capital market and real estate market conditions. This
uncertainty creates more volatility in our earnings because of the resulting increased volatility
in transaction based revenue from our management services operations as compared to revenue from
ownership of real estate subject to triple-net leases, which historically has been less volatile.
Asset management revenue may be affected by factors that include not only our ability to increase
the CPA® REITs portfolio of properties under management, but also changes in valuation
of those properties, as well as sales (through planned liquidation or
W. P. Carey 2006 10-K 13
otherwise) of CPA® REIT properties. In addition, revenue from our management services
operations, including our ability to earn performance revenue, as well as the value of our holdings
of CPA® REIT interests and dividend income from those interests, may be significantly
affected by the results of operations of the CPA® REITs. Each of the CPA®
REITs has invested substantially all of its assets (other than short-term investments) in
triple-net leased properties substantially similar to those we hold, and consequently the results
of operations of, and cash available for distribution by, each of the CPA® REITs, is
likely to be substantially affected by the same market conditions, and subject to the same risk
factors, as the properties we own. Four of the prior thirteen CPA® funds temporarily
reduced the rate of distributions to their investors as a result of adverse developments involving
tenants. Each of the CPA® REITs we currently advise and manage may also incur
significant debt. This significant debt load could restrict their ability to pay revenue owed to us
when due, due to either liquidity problems or restrictive covenants contained in their borrowing
agreements. In addition, the revenue payable under each of our current investment advisory
agreements is subject to a variable annual cap based on a formula tied to the assets and income of
that CPA® REIT. This cap may limit the growth of our management revenue. Furthermore,
our ability to earn revenue related to the disposition of properties is primarily tied to providing
liquidity events for CPA® REIT investors. Our ability to provide that liquidity, and to
do so under circumstances that will satisfy the applicable subordination requirements, will depend
on market conditions at the relevant time, which may vary considerably over a period of years. In
any case, liquidity events typically occur several years apart, and our management services
operations income is likely to be significantly higher in those years in which such events occur.
We face intense competition.
In raising funds for investment by the CPA® REITs, we face competition from other funds
with similar investment objectives that seek to raise funds from investors through publicly
registered, non-traded funds, publicly-traded funds, or private funds. Any change in the
attractiveness to investors of an investment in the type of property principally held by the
CPA® REITs, relative to other types of investments, could adversely affect our ability
to raise funds for future investments, which in turn could ultimately reduce, or limit the growth
of, revenues from our management services operations.
We also face competition for the acquisition of office and industrial properties in general, and
such properties net leased to major corporations in particular, from many sources, including
insurance companies, credit companies, pension funds, private individuals, financial institutions,
finance companies and investment companies. We also face competition from institutions that provide
or arrange for other types of commercial financing through private or public offerings of equity or
debt or traditional bank financings. These institutions may accept greater risk or lower returns,
allowing them to offer more attractive terms to prospective tenants. In addition, our evaluation of
the acceptability of rates of return on behalf of the CPA® REITs is affected by such
factors as the cost of raising capital, the amount of revenue we can earn and the performance
hurdle rates of the relevant CPA® REITs. Thus, the effect of the cost of raising capital
and the revenue we can earn may be to limit the amount of new investments we make on behalf of the
CPA® REITs, which will in turn limit the growth of revenues from our management services
operations.
The inability of a tenant in a single tenant property to pay rent will reduce our revenues.
Most of our properties are occupied by a single tenant and, therefore, the success of our
investments is materially dependent on the financial stability of these tenants. Lease payment
defaults by tenants negatively impact our net income and reduce the amounts available for
distributions to shareholders. As our tenants generally may not have a recognized credit rating,
they may have a higher risk of lease defaults than if our tenants had a recognized credit rating.
In addition, the bankruptcy of a tenant could cause the loss of lease payments as well as an
increase in the costs incurred to carry the property. We have had tenants file for bankruptcy
protection and are involved in bankruptcy-related litigation. In the event of a default, we may
experience delays in enforcing our rights as landlord and may incur substantial costs in protecting
the investment and re-leasing the property. If a lease is terminated, there is no assurance that we
will be able to re-lease the property for the rent previously received or sell the property without
incurring a loss.
We depend on major tenants.
Revenues from several of our tenants and/or their guarantors constitute a significant percentage of
our lease revenues. Our five largest tenants/guarantors represented approximately 29% of total
lease revenues in 2006, 28% in 2005 and 30% in 2004. The default, financial distress or bankruptcy
of any of these tenants could cause interruptions in the receipt of lease revenues from these
tenants and/or result in vacancies in the respective properties, which would reduce our revenues at
least until the affected property is re-leased, and could decrease the ultimate sale value of each
such property.
A substantial amount of our leases will expire within the next five years.
Within the next five years, approximately 55% of our leases are due to expire. If these leases are
not renewed, or if the properties cannot be re-leased on terms that yield payments comparable to
those currently being received, then our lease revenues could be substantially adversely affected.
The terms of any new or renewed leases of these properties may depend on market conditions
prevailing at the time of lease expiration. In addition, if properties are vacated by the current
tenants, we may incur substantial costs in attempting to re-lease such properties. We may also seek
to sell these properties, in which event we may incur losses, depending upon market conditions
prevailing at the time of sale.
W. P. Carey 2006 10-K 14
Our sale-leaseback agreements may permit tenants to purchase a property at a predetermined price,
which could limit our realization of any appreciation or result in a loss.
In some circumstances, we grant tenants a right to purchase the property they lease. The purchase
price may be a fixed price or it may be based on a formula. If a tenant exercises its right to
purchase the property and the propertys market value has increased beyond that price, we would be
limited in fully realizing the appreciation on that property. Additionally, if the price at which
the tenant can purchase the property is less than our purchase price or carrying value (for
example, where the purchase price is based on an appraised value), we may incur a loss.
We may recognize substantial impairment charges on our properties.
Historically, we have incurred substantial impairment charges, which we are required to recognize
whenever we sell a property for less than its carrying value, or we determine that the property has
experienced an other-than-temporary decline in its carrying value (or, for direct financing leases,
that the unguaranteed residual value of the underlying property has declined). For properties
acquired in our 1998 consolidation with nine CPA® limited partnerships, their carrying
value may reflect their appraised value at that time, rather than their original cost of
acquisition by the CPA® limited partnership. By their nature, the timing or extent of
impairment charges are not predictable. We may incur impairment charges in the future, which may
reduce our net income, although it will not necessarily affect our cash flow from operations.
Investments in properties outside of the United States subject us to foreign currency risks which
may adversely affect distributions.
We are subject to foreign currency risk due to potential fluctuations in exchange rates between
foreign currencies and the U.S. dollar. We attempt to mitigate a portion of the risk of currency
fluctuation by financing our properties in the local currencies. Changes in the relation of any
such foreign currency to U.S. dollars may affect our revenues, operating margins and distributions
and may also affect the book value of our assets and the amount of shareholders equity. Although
we have not done so to date, we anticipate that in the future we may engage in direct hedging
activities to mitigate the risks of exchange rate fluctuations.
International investments involve additional risks.
We have invested in and may continue to invest in properties located outside the United States.
These investments may be affected by factors particular to the laws of the jurisdiction in which
the property is located. These laws may expose us to risks that are different from and in addition
to those commonly found in the United States, including:
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Changing governmental rules and policies; |
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Enactment of laws relating to the foreign ownership of property and laws relating to the
ability of foreign entities to remove profits earned from activities within the country to
the United States; |
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Expropriation; |
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The difficulty in conforming obligations in other countries and the burden of complying
with a wide variety of foreign laws; |
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Adverse market conditions caused by changes in national or local economic or political conditions; |
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Tax requirements vary by country and we may be subject to additional taxes as a result of our international investments; |
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Changes in relative interest rates; |
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Changes in the availability, cost and terms of mortgage funds resulting from varying national economic policies; |
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Changes in real estate and other tax rates and other operating expenses in particular countries; |
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Changes in land use and zoning laws; and |
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More stringent environmental laws or changes in such laws. |
In addition, the lack of available information in accordance with accounting principles generally
accepted in the United States of America could impair our ability to analyze transactions and may
cause us to forego an investment opportunity. It may also impair our ability to receive timely and
accurate financial information from tenants necessary to meet our reporting obligations to
financial institutions or governmental or regulatory agencies.
We may have difficulty re-leasing or selling our properties.
Real estate investments are relatively illiquid compared to most financial assets and this
illiquidity will limit our ability to quickly change our portfolio in response to changes in
economic or other conditions. The net leases we may enter into or acquire may be for properties
that are specially suited to the particular needs of the tenant. With these properties, if the
current lease is terminated or not renewed, we may be required to renovate the property or to make
rent concessions in order to lease the property to another tenant. In addition, if we are forced to
sell the property, it may be difficult to sell to a party other than the tenant due to the special
purpose for which the property may have been designed. These and other limitations, such as a
propertys location and/or local economic conditions, may affect our ability to re-lease or sell
properties without adversely affecting returns to shareholders. See Our Portfolio section above
for scheduled lease expirations.
W. P. Carey 2006 10-K 15
Our participation in joint ventures creates additional risk.
We participate in joint ventures and invest in properties jointly with other entities, some of
which may be unaffiliated with us. There are additional risks involved in these types of
transactions. These risks include the potential of our joint venture partner becoming bankrupt and
the possibility of diverging or inconsistent economic or business interests of our partner and us.
These diverging interests could result in, among other things, exposing us to liabilities of the
joint venture in excess of our proportionate share of these liabilities. The partition rights of
each owner in a jointly owned property could reduce the value of each portion of the divided
property. In addition, the fiduciary obligation that we may owe to our partner in an affiliated
transaction may make it more difficult for us to enforce our rights.
We do not fully control the management of our properties.
The tenants or managers of net lease properties are responsible for maintenance and other
day-to-day management of the properties. If a property is not adequately maintained in accordance
with the terms of the applicable lease, we may incur expenses for deferred maintenance expenditures
or other liabilities once the property becomes free of the lease. While our leases generally
provide for recourse against the tenant in these instances, a bankrupt or financially troubled
tenant may be more likely to defer maintenance and it may be more difficult to enforce remedies
against such a tenant. In addition, to the extent tenants are unable to conduct their operation of
the property on a financially successful basis, their ability to pay rent may be adversely
affected. Although we endeavor to monitor, on an ongoing basis, compliance by tenants with their
lease obligations and other factors that could affect the financial performance of our properties,
such monitoring may not in all circumstances ascertain or forestall deterioration either in the
condition of a property or the financial circumstances of a tenant.
We are subject to possible liabilities relating to environmental matters.
We own commercial properties and are subject to the risk of liabilities under federal, state and
local environmental laws. These responsibilities and liabilities also exist for properties owned by
the CPA® REITs and if they become liable for these costs, their ability to pay for our
services could be materially affected. Some of these laws could impose the following on us:
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Responsibility and liability for the cost of investigation and removal or remediation of
hazardous substances released on our property, generally without regard to our knowledge of
or responsibility for the presence of the contaminants; |
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Liability for the costs of investigation and removal or remediation of hazardous
substances at disposal facilities for persons who arrange for the disposal or treatment of
such substances; |
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Potential liability for common law claims by third parties based on damages and costs of
environmental contaminants; and |
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Claims being made against us by the CPA® REITs for inadequate due diligence. |
Our costs of investigation, remediation or removal of hazardous or toxic substances, or for
third-party claims for damages, may be substantial. The presence of hazardous or toxic substances
at any of our properties, or the failure to properly remediate a contaminated property, could give
rise to a lien in favor of the government for costs it may incur to address the contamination, or
otherwise adversely affect our ability to sell or lease the property or to borrow using the
property as collateral. While we will attempt to mitigate identified environmental risks by
contractually requiring tenants to acknowledge their responsibility for complying with
environmental laws and to assume liability for environmental matters, circumstances may arise in
which a tenant fails, or is unable, to fulfill its contractual obligations. In addition,
environmental liabilities, or costs or operating limitations imposed on a tenant to comply with
environmental laws, could affect its ability to make rental payments to us. Also, and although we
endeavor to avoid doing so, we may be required, in connection with any future divestitures of
property, to provide buyers with indemnification against potential environmental liabilities.
Our use of debt to finance investments could adversely affect our cash flow.
Most of our investments are made by borrowing a portion of the total investment and securing the
loan with a mortgage on the property. If we are unable to make our debt payments as required, a
lender could foreclose on the property or properties securing its debt. This could cause us to lose
part or all of our investment which in turn could cause the value of our portfolio, and revenues
available for distribution to our shareholders to be reduced. We generally borrow on a limited
recourse basis to limit our exposure on any property to the amount of equity invested in the
property. There is no limitation on the amount which we can borrow on a single property.
Some of our financing may also require us to make a lump-sum or balloon payment at maturity. Our
ability to make balloon payments on debt will depend upon our ability either to refinance the
obligation when due, invest additional equity in the property or to sell the related property. When
the balloon payment is due, we may be unable to refinance the balloon payment on terms as favorable
as the original loan or sell the property at a price sufficient to make the balloon payment. Our
ability to accomplish these goals will be affected by various factors existing at the relevant
time, such as the state of the national and regional economies, local real estate conditions,
available mortgage rates, our equity in the mortgaged properties, our financial condition, the
operating history
W. P. Carey 2006 10-K 16
of the mortgaged properties and tax laws. A refinancing or sale could affect the rate of return to
shareholders. Scheduled balloon payments for the next five years are as follows:
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2007 |
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$ |
15,541 |
(1) |
2008 |
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$ |
5,000 |
(2) |
2009 |
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$ |
31,799 |
(3) |
2010 |
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$ |
6,612 |
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2011 |
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$ |
22,325 |
(3) |
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Does not include amounts that will be due upon maturity of our unsecured credit facility as
these amounts are prepayable at any time. As of December 31, 2006, we had drawn $2,000 from
this line of credit. |
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Does not include amounts that will be due upon maturity of our secured credit facility as
these amounts are prepayable at any time. As of December 31, 2006 we had drawn $15,501 from
this line of credit. |
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Excludes our pro rata share of mortgage obligations of equity investments in real estate
totaling $2,173 in 2009 and $24,856 in 2011. |
We may be unable to make investments on an advantageous basis.
A significant element of our business strategy is the enhancement of our portfolio and the
CPA® REIT portfolios through new investments. The consummation of any future investment
will be subject to satisfactory completion of our analysis and due diligence review and to the
negotiation of definitive documentation. There can be no assurance that we or the CPA®
REITs will be able to identify and invest in additional properties or will be able to finance
investments in the future. In addition, there can be no assurance that any such investment, if
consummated, will be profitable for us or the CPA® REITs. If we are unable to consummate
new investments in the future on our own behalf or that of the CPA® REITs, there can be
no assurance that we will be able to maintain the cash available for distribution to our
shareholders, either through net income on investments we own or through net income generated by
our management services operations.
Our portfolio growth is constrained by our obligations to offer property transactions to the
CPA® REITs.
Under our investment advisory agreements with the CPA® REITs, we are required to use our
best efforts to present a continuing and suitable investment program to them. In recent years, new
property investment opportunities have generally been made available by us to the CPA®
REITs. While the allocation of new investments to the CPA® REITs fulfills our duty to
present a continuing and suitable investment program, and enhances the revenues from our management
services operations, it also restricts the potential growth of revenues from our real estate
operations.
We may suffer uninsured losses.
There are certain types of losses (such as due to wars or some natural disasters) that generally
are not insured because they are either uninsurable or not economically insurable. Should an
uninsured loss or a loss in excess of the limits of our insurance occur, we could lose capital
invested in a property, as well as the anticipated future revenues from a property, while remaining
obligated for any mortgage indebtedness or other financial obligations related to the property. Any
such loss would adversely affect our financial condition.
Changes in market interest rates could cause our stock price to go down.
The trading prices of equity securities issued by real estate companies have historically been
affected by changes in broader market interest rates, with increases in interest rates resulting in
decreases in trading prices, and decreases in interest rates resulting in increases in trading
prices. An increase in market interest rates could therefore adversely affect the trading prices of
any equity securities we issued. The stock price could also be affected by factors other than
changes in interest rates, including the risk factors discussed herein.
A potential change in United States accounting standards regarding operating leases may make the
leasing of facilities less attractive to our potential domestic tenants, which could reduce overall
demand for our leasing services.
Under
Statement of Financial Accounting Standard No. 13,
Accounting for Leases, a lease is
classified by a tenant as a capital lease if the significant risks and rewards of ownership are
considered to reside with the tenant. This situation is considered to be met if, among other
things, the non-cancellable lease term is more than 75% of the useful life of the asset or if the
present value of the minimum lease payments equals 90% or more of the leased propertys fair value.
Under capital lease accounting for a tenant, both the leased asset and liability are reflected on
their balance sheet. If the lease does not meet any of the criteria for a capital lease, the lease
is considered an operating lease by the tenant, and the obligation does not appear on the tenants
balance sheet; rather the contractual future minimum payment obligations are only disclosed in the
footnotes thereto. Thus, entering into an operating lease can appear to
W. P. Carey 2006 10-K 17
enhance a tenants balance sheet in comparison to direct ownership. In 2005, the SEC conducted a
study of off-balance-sheet financing which, among other areas, included lease accounting. This
study raised concerns that the current accounting model does not clearly portray the resources and
obligations arising from long term lease transactions with sufficient transparency. In July 2006,
the Financial Accounting Standards Board and the International Accounting Standards Board announced
a joint project to re-evaluate lease accounting. Changes to the accounting guidance could affect
both our accounting for leases as well as that of our current and potential customers.
These changes may affect how the real estate leasing business is conducted both domestically and
internationally. For example, if the accounting standards regarding the financial statement
classification of operating leases are revised, then companies may be less willing to enter into
leases in general or desire to enter into leases with shorter terms because the apparent benefits
to their balance sheets could be reduced or eliminated. This in turn could make it more difficult
for us to enter leases on terms we find favorable.
The value of our real estate is subject to fluctuation.
We are subject to all of the general risks associated with the ownership of real estate. While the
revenues from our leases and those of the CPA® REITs are not directly dependent upon the
value of the real estate owned, significant declines in real estate values could adversely affect
us in many ways, including a decline in the residual values of properties at lease expiration;
possible lease abandonments by tenants; a decline in the attractiveness of REIT investments that
may impede our ability to raise new funds for investment by CPA® REITs and a decline in
the attractiveness of triple-net lease transactions to potential sellers. We also face the risk
that lease revenue will be insufficient to cover all corporate operating expenses and debt service
payments on indebtedness we incur. General risks associated with the ownership of real estate
include:
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Adverse changes in general or local economic conditions, |
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Changes in the supply of or demand for similar or competing properties, |
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Changes in interest rates and operating expenses, |
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Competition for tenants, |
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Changes in market rental rates, |
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Inability to lease properties upon termination of existing leases, |
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Renewal of leases at lower rental rates, |
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Inability to collect rents from tenants due to financial hardship, including bankruptcy, |
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Changes in tax, real estate, zoning and environmental laws that may have an adverse impact upon the value of real estate, |
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Uninsured property liability, property damage or casualty losses, |
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Unexpected expenditures for capital improvements or to bring properties into compliance
with applicable federal, state and local laws, and |
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Acts of God and other factors beyond the control of our management. |
We depend on key personnel for our future success.
We depend on the efforts of our executive officers and key employees. The loss of the services of
these executive officers and key employees could have a material adverse effect on our operations.
Our governing documents and capital structure may discourage a takeover.
William P. Carey, Chairman, is the beneficial owner of approximately 26% of our outstanding shares.
The provisions of our Amended and Restated Limited Liability Company Agreement and the share
ownership of Mr. Carey may discourage a tender offer for our shares or a hostile takeover, even
though these may be attractive to shareholders.
Our business, results of operations, financial condition or our ability to pay distributions at the
current rate could be materially adversely affected by the above conditions. The risk factors may
have affected, and in the future could affect, our actual operating and financial results and could
cause such results to differ materially from those in any forward-looking statements. You should
not consider this list exhaustive. New risk factors emerge periodically, and we cannot completely
assure you that the factors described above list all material risks to us at any specific point in
time. We have disclosed many of the important risk factors discussed above in our previous filings
with the SEC.
W. P. Carey 2006 10-K 18
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our principal offices are located at 50 Rockefeller Plaza, New York, NY 10020. The lease for our
primary corporate office space expires in 2016. We believe that this lease is suitable for our
operations for the foreseeable future. We also maintain regional offices in Dallas, Texas and
London, England.
See Item 1 Our Portfolio for a discussion of the properties we hold for rental operations and
Item 8 Schedule III Real Estate and Accumulated Depreciation for a detailed listing of such
properties.
Item 3. Legal Proceedings.
In March 2004, following a broker-dealer examination of Carey Financial, our wholly-owned
broker-dealer subsidiary, by the staff of the SEC, Carey Financial received a letter from the staff
of the SEC alleging certain infractions by Carey Financial of the Securities Act of 1933, the
Securities Exchange Act of 1934, the rules and regulations thereunder and those of the National
Association of Securities Dealers, Inc. (NASD).
The staff alleged that in connection with a public offering of shares of CPA®: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 us, the SEC could seek disgorgement of
any such commissions or different or additional penalties or relief, including without limitation,
injunctive relief and/or civil monetary penalties, irrespective of the outcome of any rescission
offer. We cannot predict the potential effect such a rescission offer or SEC action may ultimately
have on the operations of Carey Financial or us. There can be no assurance that the effect, if any,
would not be material.
The staff also alleged in the March 2004 letter that the prospectus delivered with respect to the
Phase I Offering contained material misrepresentations and omissions in violation of Section 17 of
the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder in that the prospectus failed to disclose that (i) the proceeds of the Phase I Offering
would be used to advance commissions and expenses payable with respect to the Phase II Offering,
and (ii) the payment of dividends to Phase II shareholders whose funds had been held in escrow
pending effectiveness of the registration statement resulted in significantly higher annualized
rates of return than were being earned by Phase I shareholders. Carey Financial has reimbursed
CPA®: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 us, as
well as the disclosure of such arrangements. At that time we and Carey Financial received a
subpoena from the Enforcement Staff seeking documents relating to payments by us, Carey Financial,
and REITs managed by us to (or requests for payment received from) any broker-dealer, excluding
selling commissions and selected dealer fees. We and Carey Financial subsequently received
additional subpoenas and requests for information from the Enforcement Staff seeking, among other
things, information relating to any revenue sharing agreements or payments (defined to include any
payment to a broker-dealer, excluding selling commissions and selected dealer fees) made by us,
Carey Financial or any REIT managed by us in connection with the distribution of our 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.
W. P. Carey 2006 10-K 19
In response to the Enforcement Staffs subpoenas and requests, we and Carey Financial have produced
documents relating to payments made to certain broker-dealers both during and after the offering
process, for certain of the REITs managed by us (including CPA®:10, 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.
We 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 us or Carey Financial in connection with the matters being
investigated, we expect the SEC may pursue such an action against either or both. The nature of the
relief or remedies the SEC may seek cannot be predicted at this time. If such an action is brought,
it could have a material adverse effect on us, 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 and
CPA®:15 relating to the matters described above. While one or more states may commence
proceedings against Carey Financial in connection with these inquiries, we do not currently expect
that these inquiries and proceedings will have a material effect on us incremental to that caused
by any SEC action.
In October 2006, a revised complaint was filed in the Los Angeles Superior Court in an action that
had named a wholly-owned indirect subsidiary, and other unrelated parties, in a state court action
by a private plaintiff alleging various claims under the California False Claims Act that focus on
alleged conduct by the Los Angeles Unified School District in connection with its direct
application and invoicing for school development and construction funding for a new high school,
for which our subsidiary acted as the development manager. We and another of our subsidiaries were
named for the first time in the revised complaint, by virtue of an alleged relationship to the
subsidiary that was a party to the development agreement, but were not served. In February 2007,
the judge dismissed the action against our wholly-owned indirect subsidiary, as well as other defendants, following
various substantive and procedural motions. However, the plaintiff may appeal the dismissal and may
still seek to serve us and our other subsidiary in this action. Although no assurance can be given
that the dismissal will be sustained if appealed, or that the claims alleged by plaintiff against
us and our subsidiaries, if proven, would not have a material effect on us, we believe, based on
the information currently available to us, that we and our subsidiaries have meritorious defences
to such claims.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth quarter of the year ended
December 31, 2006.
W. P. Carey 2006 10-K 20
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
Listed Shares and Distributions
Our common stock is listed on the New York Stock Exchange under the ticker symbol WPC. As of
December 31, 2006 there were 26,816 holders of record of our common stock. The following table
shows the high and low prices per share and quarterly cash distributions declared for the past two
fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
|
|
|
|
|
|
|
Cash |
|
|
|
|
|
|
|
|
|
|
Distributions |
|
|
|
|
|
|
|
|
|
Distributions |
Period |
|
High |
|
Low |
|
Declared |
|
High |
|
Low |
|
Declared |
First quarter |
|
$ |
27.59 |
|
|
$ |
25.29 |
|
|
$ |
0.452 |
|
|
$ |
35.94 |
|
|
$ |
29.05 |
|
|
$ |
0.444 |
|
Second quarter |
|
|
28.18 |
|
|
|
24.60 |
|
|
|
0.454 |
|
|
|
30.95 |
|
|
|
26.35 |
|
|
|
0.446 |
|
Third quarter |
|
|
27.98 |
|
|
|
24.10 |
|
|
|
0.456 |
|
|
|
29.85 |
|
|
|
25.90 |
|
|
|
0.448 |
|
Fourth quarter |
|
|
31.00 |
|
|
|
27.50 |
|
|
|
0.458 |
|
|
|
27.87 |
|
|
|
23.85 |
|
|
|
0.450 |
|
Issuer Purchases of Equity Securities
(In thousands except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum number (or |
|
|
|
|
|
|
|
|
|
|
Total number of shares |
|
approximate dollar value) of |
|
|
|
|
|
|
|
|
|
|
purchased as part of |
|
shares that may yet be |
|
|
Total number of |
|
Average price |
|
publicly announced |
|
purchased under the |
2006 Period |
|
shares
purchased
(1) |
|
paid per share |
|
plans
or programs
(1) |
|
plans
or programs
(1) |
October |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
15,862 |
|
November |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,862 |
|
December |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In December 2005, our board of directors approved a share repurchase program that gave us
authorization to repurchase up to $20,000 of our common stock in the open market beginning
December 16, 2005 and ending December 15, 2006 as conditions warranted. During the term of
this program, which ended December 15, 2006, we repurchased and retired 166,800 shares
totaling $4,138. |
W. P. Carey 2006 10-K 21
Item 6. Selected Financial Data.
(In thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
Operating Data: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from continuing operations (2) |
|
$ |
273,258 |
|
|
$ |
168,784 |
|
|
$ |
219,552 |
|
|
$ |
151,379 |
|
|
$ |
144,006 |
|
Income from continuing operations |
|
|
87,554 |
|
|
|
47,245 |
|
|
|
65,592 |
|
|
|
55,646 |
|
|
|
45,512 |
|
Basic earnings from continuing operations per share |
|
|
2.32 |
|
|
|
1.25 |
|
|
|
1.75 |
|
|
|
1.52 |
|
|
|
1.23 |
|
Diluted earnings from continuing operations per share |
|
|
2.25 |
|
|
|
1.21 |
|
|
|
1.68 |
|
|
|
1.45 |
|
|
|
1.20 |
|
Net income |
|
|
86,303 |
|
|
|
48,604 |
|
|
|
65,841 |
|
|
|
62,878 |
|
|
|
46,588 |
|
Basic earnings per share |
|
|
2.29 |
|
|
|
1.29 |
|
|
|
1.76 |
|
|
|
1.72 |
|
|
|
1.31 |
|
Diluted earnings per share |
|
|
2.22 |
|
|
|
1.25 |
|
|
|
1.69 |
|
|
|
1.64 |
|
|
|
1.28 |
|
Cash provided by operating activities |
|
|
119,940 |
|
|
|
52,707 |
|
|
|
98,849 |
|
|
|
67,295 |
|
|
|
75,896 |
|
Cash distributions paid |
|
|
68,615 |
|
|
|
67,004 |
|
|
|
65,073 |
|
|
|
62,978 |
|
|
|
60,708 |
|
Cash distributions declared per share |
|
|
1.82 |
|
|
|
1.79 |
|
|
|
1.76 |
|
|
|
1.73 |
|
|
|
1.72 |
|
Payment of mortgage principal (3) |
|
|
11,742 |
|
|
|
9,229 |
|
|
|
9,428 |
|
|
|
8,548 |
|
|
|
8,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate, net (4) |
|
$ |
574,110 |
|
|
$ |
462,343 |
|
|
$ |
485,505 |
|
|
$ |
421,543 |
|
|
$ |
440,193 |
|
Net investment in direct financing leases |
|
|
108,581 |
|
|
|
131,975 |
|
|
|
190,644 |
|
|
|
182,452 |
|
|
|
189,339 |
|
Total assets |
|
|
1,093,010 |
|
|
|
983,262 |
|
|
|
1,013,539 |
|
|
|
906,505 |
|
|
|
893,524 |
|
Long-term obligations (5) |
|
|
279,314 |
|
|
|
247,298 |
|
|
|
294,629 |
|
|
|
211,426 |
|
|
|
237,806 |
|
|
|
|
(1) |
|
Certain prior year amounts have been reclassified from continuing operations to discontinued
operations. |
|
(2) |
|
Includes revenue earned in connection with CPA® REIT merger transactions in 2006
and 2004. |
|
(3) |
|
Represents scheduled mortgage principal paid. |
|
(4) |
|
Includes real estate accounted for under operating leases, operating real estate and real
estate under construction, net of accumulated depreciation. |
|
(5) |
|
Represents mortgage and note obligations and deferred acquisition revenue installments. |
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
(In thousands, except share and per share amounts)
Executive Overview
Business Overview
As described in more detail in Item 1 of this annual report, we are a publicly traded limited
liability company. Our stock is listed on the New York Stock Exchange. We operate in two operating
segments, management services operations and real estate operations. Within our management services
operations, we are currently the advisor to the following affiliated publicly-owned, non-traded,
real estate investment trusts: Corporate Property Associates 14 Incorporated
(CPA®:14), Corporate Property Associates 15 Incorporated (CPA®:15) and
Corporate Property Associates 16 Global Incorporated (CPA®:16 Global) and served
in this capacity for Corporate Property Associates 12 Incorporated (CPA®:12) until its
merger with CPA®:14 in December 2006 and Carey Institutional Properties Incorporated
(CIP®) until its merger with CPA®:15 in September 2004 (collectively, the
CPA® REITs).
Current Developments and Trends
Significant business developments that occurred during 2006 are detailed in the Significant
Developments During 2006 section of Item 1 of this annual report.
Current trends include:
During 2006, we continued to see intense competition in both the domestic and international markets
for triple-net leased properties, as capital continued 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
W. P. Carey 2006 10-K 22
estate, thus creating increased capital flows and a more competitive investment environment. We
currently expect these trends to continue in 2007 but currently believe that several factors may
provide us with continued investment opportunities in 2007, both domestically and internationally.
These factors include 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 year ended December 31, 2006, international investments accounted for 48% of total
investments made on behalf of the CPA® REITs. 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.
Real estate valuations have risen significantly in recent years. We benefit from increases in the
valuations of the CPA® REIT portfolios. 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 our 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.) continue to
experience a challenging environment, which has resulted in several companies filing for bankruptcy
protection in recent years. We currently have several automotive industry related tenants in the
portfolios we manage, including our own portfolio. Some of these tenants have filed voluntary
petitions of bankruptcy. As of December 31, 2006, tenants in the automotive industry in our
portfolio and the portfolios we manage represented less than 1% of the asset carrying value of
total real estate assets, respectively. 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 asset
management revenue. Despite these conditions, we continue to evaluate opportunities in these
industries as we believe there still may be attractive investment opportunities.
How We Earn Revenue
As described in more detail in Item 1 of this annual report, our management services operations
earn revenue by providing services to the CPA® REITs in connection with structuring and
negotiating investments and related debt placement (structuring revenue) and providing on-going
management of the portfolio (asset-based management and performance revenue). The revenues of this
business segment are subject to fluctuation because the volume and timing of transactions that are
originated on behalf of the CPA® REITs are subject to various uncertainties, including
competition for triple-net lease transactions, the requirement that each investment meet
suitability standards and due diligence requirements, including approval of each investment by the
investment committee, and the ability to raise capital on behalf of the CPA® REITs.
As described in more detail in Item 1 of this annual report, our real estate operations earn
revenue primarily from leasing real estate. We invest in and own commercial properties that we then
lease to companies domestically and internationally, primarily on a triple-net lease basis. Revenue
from this business segment is subject to fluctuation because of lease expirations, lease
terminations, the timing of new lease transactions, tenant defaults and sales of property. Because
of our emphasis on growth of assets under management, we generally limit our direct acquisitions of
properties, as described in Item 1.
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 its efforts on
improving underperforming assets through re-leasing efforts, including negotiation of lease
renewals, or selectively selling 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 effects of unrealized gains and
losses, which may cause fluctuations in net income for comparable periods but have no impact on
cash flows, and to other non-cash
W. P. Carey 2006 10-K 23
charges such as depreciation and impairment charges. 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.
Management considers cash flows from operations, cash flows from investing activities and cash
flows from financing activities to be important measures in the evaluation of our results of
operations, liquidity and capital resources. Cash flows from operations are sourced primarily by
revenues earned from structuring investments and providing asset-based management services on
behalf of the CPA® REITs we manage and long-term lease contracts from our real estate
operations. Managements evaluation of the amount and expected fluctuation of cash flows from
operations is essential in evaluating our ability to fund operating expenses, service debt and fund
distributions to shareholders.
Management considers cash flows from operating activities plus cash distributions from equity
investments in real estate in excess of equity income as a supplemental measure of liquidity in
evaluating our ability to sustain distributions to shareholders. Management considers this measure
useful as a supplemental measure to the extent the source of distributions in excess of equity
income is the result of non-cash charges, such as depreciation and amortization, because it allows
management to evaluate such cash flows from consolidated and unconsolidated investments in a
comparable manner. In deriving this measure, cash distributions from equity investments in real
estate that are sourced from sales of equity investees assets or refinancing of debt are excluded
because they are deemed to be returns of investment and not returns on investment.
Management focuses on measures of cash flows from investing activities and cash flows from
financing activities in its evaluation of our capital resources. Investing activities typically
consist of the acquisition or disposition of investments in real property and the funding of
capital expenditures with respect to real properties. Cash flows from financing activities
primarily consist of the payment of distributions to shareholders, borrowings and repayments under
our lines of credit and the payment of mortgage principal amortization.
Results of Operations
We evaluate our results from operations by our two major business segments as follows:
Management Services This business segment includes management services performed for the
CPA® REITs pursuant to 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 payments due
under the advisory agreements. In connection with maintaining our status as a publicly traded
partnership, this business segment is carried out largely by corporate subsidiaries which are
subject to federal, state, local and foreign taxes as applicable. Our financial statements are
prepared on a consolidated basis including these taxable operations and include a provision for
current and deferred taxes on these operations.
Real Estate This business segment includes the operations of properties under operating leases,
properties under direct financing leases, real estate under construction and development, operating
real estate, assets held for sale and equity investments in real estate in ventures accounted for
under the equity method which are engaged in these activities. Because of our legal structure,
these operations are generally not subject to federal income taxes; however, they may be subject to
certain state, local and foreign taxes.
W. P. Carey 2006 10-K 24
A summary of comparative results of these business segments is as follows:
Management Services Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
2005 |
|
|
2004 |
|
|
Change |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset management revenue |
|
$ |
57,633 |
|
|
$ |
52,332 |
|
|
$ |
5,301 |
|
|
$ |
52,332 |
|
|
$ |
45,806 |
|
|
$ |
6,526 |
|
Structuring revenue |
|
|
22,506 |
|
|
|
28,197 |
|
|
|
(5,691 |
) |
|
|
28,197 |
|
|
|
33,675 |
|
|
|
(5,478 |
) |
Incentive, termination and subordinated disposition
revenue from mergers |
|
|
46,018 |
|
|
|
|
|
|
|
46,018 |
|
|
|
|
|
|
|
53,588 |
|
|
|
(53,588 |
) |
Reimbursed costs from affiliates |
|
|
63,630 |
|
|
|
9,962 |
|
|
|
53,668 |
|
|
|
9,962 |
|
|
|
15,388 |
|
|
|
(5,426 |
) |
Other income |
|
|
|
|
|
|
372 |
|
|
|
(372 |
) |
|
|
372 |
|
|
|
(1,303 |
) |
|
|
1,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189,787 |
|
|
|
90,863 |
|
|
|
98,924 |
|
|
|
90,863 |
|
|
|
147,154 |
|
|
|
(56,291 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
(35,742 |
) |
|
|
(39,458 |
) |
|
|
3,716 |
|
|
|
(39,458 |
) |
|
|
(30,107 |
) |
|
|
(9,351 |
) |
Reimbursable costs |
|
|
(63,630 |
) |
|
|
(9,962 |
) |
|
|
(53,668 |
) |
|
|
(9,962 |
) |
|
|
(15,388 |
) |
|
|
5,426 |
|
Depreciation and amortization |
|
|
(7,643 |
) |
|
|
(5,602 |
) |
|
|
(2,041 |
) |
|
|
(5,602 |
) |
|
|
(9,366 |
) |
|
|
3,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(107,015 |
) |
|
|
(55,022 |
) |
|
|
(51,993 |
) |
|
|
(55,022 |
) |
|
|
(54,861 |
) |
|
|
(161 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other interest income |
|
|
2,853 |
|
|
|
3,176 |
|
|
|
(323 |
) |
|
|
3,176 |
|
|
|
2,822 |
|
|
|
354 |
|
Income from equity investments in real estate |
|
|
5,002 |
|
|
|
2,092 |
|
|
|
2,910 |
|
|
|
2,092 |
|
|
|
1,643 |
|
|
|
449 |
|
Minority interest in loss (income) |
|
|
892 |
|
|
|
235 |
|
|
|
657 |
|
|
|
235 |
|
|
|
(1,010 |
) |
|
|
1,245 |
|
Gain on foreign currency transactions and other gains, net |
|
|
6,521 |
|
|
|
2,000 |
|
|
|
4,521 |
|
|
|
2,000 |
|
|
|
|
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,268 |
|
|
|
7,503 |
|
|
|
7,765 |
|
|
|
7,503 |
|
|
|
3,455 |
|
|
|
4,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
98,040 |
|
|
|
43,344 |
|
|
|
54,696 |
|
|
|
43,344 |
|
|
|
95,748 |
|
|
|
(52,404 |
) |
Provision for income taxes |
|
|
(44,710 |
) |
|
|
(18,662 |
) |
|
|
(26,048 |
) |
|
|
(18,662 |
) |
|
|
(49,546 |
) |
|
|
30,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from management services operations |
|
$ |
53,330 |
|
|
$ |
24,682 |
|
|
$ |
28,648 |
|
|
$ |
24,682 |
|
|
$ |
46,202 |
|
|
$ |
(21,520 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
bases resulting from sales of investments; or (iii) increases or decreases in the asset valuations
of CPA® REIT funds (which are not recorded for financial reporting purposes).
2006 vs. 2005 For the years ended December 31, 2006 and 2005, asset management revenue increased
$5,301 primarily due to a net increase in our assets under management as a result of recent
investment activity of the
CPA® REITs, including the investment by CPA®:16
Global of proceeds from its public offerings, as well as increases in the annual asset valuations
of the CPA® REITs, including CPA®:15, which had its initial appraisal in
December 2005. The acquisition of properties from CPA®:12 (the CPA®:12
Acquisition) for $126,006 prior to its merger with CPA®:14 (the CPA®:12/14
Merger) in December 2006 had minimal impact on our asset management revenue for 2006, but will
result in a decrease in these revenues of approximately $1,300 in 2007.
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 had not yet been satisfied as of December 31,
2006, resulting in our deferral of $5,527 in performance revenue for the year ended December 31,
2006. Since the inception of CPA®:16 Global, we have deferred cumulative performance
revenue of $10,045. 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 December 31, 2006, CPA®:16 Globals
current distribution rate was 6.44% and its cumulative distribution return was 5.87%. Based on our
current assessment, CPA®:16 Global is expected to meet the cumulative performance
criterion during the second quarter 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 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
W. P. Carey 2006 10-K 25
compensation related to achievement of the performance criterion in the amount of approximately
$5,900 (exclusive of interest) as of December 31, 2006, would become payable by us to certain
employees.
2005 vs. 2004 For the years ended December 31, 2005 and 2004, asset management revenue increased
$6,526 primarily due to an increase of $7,475 in revenue arising from an increase in assets under
management, as described above. This increase was partially offset by a decrease of $949 in asset
management revenues as a result of the acquisition of properties from CIP® (the
CIP® Acquisition) for $142,161 prior to its merger with CPA®:15 (the
CIP®/CPA®:15 Merger) in September 2004.
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 significant
period-to-period variation. As described above in the Current Developments and Trends section
above, we continue to face intense competition for investments in commercial properties both
domestically and internationally.
2006 vs. 2005 For the years ended December 31, 2006 and 2005, structuring revenue decreased
$5,691, primarily due to a reduction in investment volume and a change in the mix of investment
volume between the CPA® REITs. We structured investments totaling $720,000 and $865,000
for the years ended December 31, 2006 and 2005, respectively. Approximately 76% of these
investments were structured for CPA®:16 Global in 2006 as compared with approximately
68% for 2005. As CPA®:16 Global has not achieved its performance criterion, no
deferred acquisition revenue was recorded for these investments. The increase in the percentage of
investments structured on behalf of CPA®:16 Global resulted in a larger deferral of
revenue until CPA®:16 Globals performance criterion is achieved. The reduction in
structuring revenue was partially offset by our having charged a reduced fee on an investment
completed on behalf of CPA®:16 Global during the first quarter 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 December 31, 2006, resulting in our deferral of $10,809 in structuring revenue for the year
ended December 31, 2006. Since the inception of CPA®:16 Global, we have deferred
cumulative structuring revenue of $28,517 and interest thereon of $1,928. 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 above. Given that we expect
CPA®:16 Global to represent a significant portion of our 2007 investment volume
relative to the other CPA® REITs, structuring revenue in 2007 is likely to continue to
decrease until the performance criterion is met, which we currently anticipate occurring in the
second quarter of 2007.
2005 vs. 2004 For the years ended December 31, 2005 and 2004, structuring revenue decreased
$5,478 primarily due to the same reasons described above. We structured approximately $865,000 of
investments for the year ended December 31, 2005 as compared with approximately $890,000 in 2004.
Approximately 68% of investments structured during the year ended December 31, 2005 related to
CPA®:16 Global as compared with approximately 45% in 2004. The increase in the
percentage of investments structured on behalf of CPA®:16 Global resulted in a larger
deferral of revenue until CPA®:16 Globals performance criterion is achieved.
Incentive, Termination and Subordinated Disposition Revenue from Mergers
Incentive, termination and disposition revenues are generally earned in connection with events
which provide liquidity or alternatives to the CPA® REIT shareholders. These events do
not occur every year and no such event occurred in 2005.
2006 vs. 2005 In connection with the CPA®:12/14 Merger in December 2006, we earned
termination revenue of $25,379 and subordinated disposition revenue of $24,418 from
CPA®:12. Subordinated disposition revenue of $3,779 due from CPA®:12 related
to properties we acquired from CPA®:12 was not recognized as income but reduced the cost
of the properties we acquired.
We agreed to waive any structuring revenue due from CPA®:14 under its advisory agreement
with us in connection with this merger. We also agreed to waive any disposition revenues that may
subsequently be payable by CPA®:14 to us upon a sale of the assets they acquired from
CPA®:12 in the merger.
2005 vs. 2004 In connection with the
CIP®/CPA®:15 Merger in September 2004,
we earned incentive revenue of $23,681, subordinated disposition revenue of $18,414 and structuring
revenue of $11,493 from
CIP®.
Subordinated disposition revenue of $4,265 due from
CIP®
related to properties we acquired from
CIP®
was not recognized as income but reduced the cost of the properties
we acquired.
Reimbursed and Reimbursable Costs
Reimbursed costs from affiliates (revenue) and reimbursable costs (expenses) represent costs
incurred by us on behalf of the CPA® REITs, primarily broker-dealer commissions and
marketing and personnel costs, which are reimbursed by the CPA® REITs. Revenue from
reimbursed costs from affiliates is offset by corresponding charges to reimbursable costs and as
such there is no impact on net income related to this income.
W. P. Carey 2006 10-K 26
2006 vs. 2005 For the years ended December 31, 2006 and 2005, reimbursed and reimbursable costs
increased $53,668, primarily due to broker-dealer commissions and marketing costs related to
CPA®:16 Globals second public offering, which commenced in March 2006 and was
completed in December 2006.
2005 vs. 2004 For the years ended December 31, 2005 and 2004, reimbursed and reimbursable costs
decreased $5,426, primarily due to broker-dealer commissions related to CPA®:16
Globals initial public offering. This offering was terminated in March 2005, and as a result we
incurred and were reimbursed less in 2005 than in 2004.
General and Administrative
2006 vs. 2005 For the years ended December 31, 2006 and 2005, general and administrative expenses
decreased $3,716 primarily due to reductions in business development expenses of $2,884 and
professional fees of $2,148. These decreases were partially offset by an increase in compensation
related costs of $1,307.
The decrease in business development related expenses was primarily the result of reductions in
advertising costs and costs associated with potential investment opportunities that were ultimately
not pursued. In addition, during 2005 we wrote off approximately $811 of costs due to the
withdrawal of Corporate Property Associates International Incorporateds (CPAI) registration
statement related to its proposed public offering of common stock. The decrease in professional
fees was primarily due to reduced legal related costs related to ongoing securities law compliance,
including compliance with the Sarbanes-Oxley Act, costs associated with the ongoing SEC
investigation and legal expenses associated with our settlement in 2005 for a build-to-suit
development management agreement with the Los Angeles Unified School District. The increase in
compensation related costs was primarily due to severance costs of $2,100 recognized in 2006
related to several former employees.
2005 vs. 2004 For the years ended December 31, 2005 and 2004, general and administrative expenses
increased $9,351 primarily due to increases in professional fees of $4,114, business development
related expenses of $2,862 and other office expenses of $2,205.
The increase in professional fees was primarily related to ongoing securities law compliance,
including increased costs of compliance with the Sarbanes-Oxley Act, an increase in costs
associated with the ongoing SEC investigation and legal expenses associated with the district
settlement referred to above and other legal matters. The increase in business development expenses
is a combination of increased advertising expenses and increased costs associated with potential
investment opportunities that were ultimately not pursued. Also included in business development
expenses for 2005 is the write-off of approximately $811 in CPAI registration statement costs as
described above. The increase in office expenses is mainly attributable to the consolidation, since
January 1, 2005, of the results of operations of a limited partnership that was previously
established to administer an office sharing agreement. As a result, rental and other office sharing
expenses have increased compared with 2004, although this increase is partially offset by a
corresponding decrease in minority interest in income.
Depreciation and Amortization
2006 vs. 2005 For the years ended December 31, 2006 and 2005, depreciation and amortization
expense increased by $2,041. The increase is primarily due to accelerated amortization on
intangible assets related to a management contract with CPA®:12, which was terminated as
a result of the CPA®:12/14 Merger.
2005 vs. 2004 For the years ended December 31, 2005 and 2004, depreciation and amortization
expense decreased by $3,764. The decrease is primarily due to $2,798 of accelerated amortization
and $1,445 of scheduled amortization in 2004 on certain intangible assets related to a management
contract with CIP® that was terminated as a result of the
CIP®/CPA®:15 Merger and resulted in no corresponding amortization expense in
2005. These decreases were partially offset by additional depreciation expense in 2005 as a result
of an increase in our average fixed asset base as a result of assets acquired in the
CIP® Acquisition.
Income from Equity Investments in Real Estate
Income from equity investments in real estate represents our proportionate share of net income
(revenues less expenses) from our investments in the CPA® REITs in which we have a
non-controlling interest but exercise significant influence.
2006 vs. 2005 For the years ended December 31, 2006 and 2005, income from equity investments in
real estate increased by $2,910, primarily due to the recognition of our share of the overall
increase in net income of the CPA® REITs compared to 2005. The increase is also the
result of receiving restricted shares in consideration for base asset management and performance
revenue from certain of the CPA® REITs.
W. P. Carey 2006 10-K 27
2005 vs. 2004 For the years ended December 31, 2005 and 2004, income from equity investments in
real estate increased $449, 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.
Gain on Foreign Currency Transactions and Other Gains, Net
2006 We recognized a gain of $6,521 during 2006, in accordance with SFAS 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, from the disposal
of our interests in CPA®:12 in the CPA®:12/14 Merger. We owned 2,134,140
shares of CPA®:12 at the time of the merger and elected to receive $9,861 in cash and
1,022,800 shares of CPA®:14 stock (see Merger of CPA®:12 and
CPA®:14 in Item 1 above).
2005 We recognized a non-cash gain of $2,000 during 2005 as a result of entering into a
settlement agreement with the Los Angeles Unified School District and certain other parties in
connection with a build-to-suit development management agreement. The income represents the
deferral of a portion of the gain on sale of land to the district in 2002.
Provision for Income Taxes
2006 vs. 2005 For the years ended December 31, 2006 and 2005, the provision for income taxes
increased $26,048 due to increased pre-tax earnings in 2006 primarily as a result of the revenue
earned in connection with the CPA®:12/14 Merger. Approximately 78% of our management
revenue in 2006 was earned by a taxable, wholly owned subsidiary. The effective tax rate for 2006
was 46% as compared to 43% in 2005.
2005 vs. 2004 For the years ended December 31, 2005 and 2004, the provision for income taxes
decreased $30,884 due to decreased pre-tax earnings in 2005 primarily as a result of revenue earned
in 2004 in connection with the CIP®/CPA®:15 Merger and a decrease in the
effective tax rate. Approximately 86% of our management revenue in 2005 was earned by a taxable,
wholly owned subsidiary. The effective tax rate for 2005 was 43% as compared to 52% in 2004. The
decrease is primarily due to a significant portion of our 2004 revenue being earned in states with
higher tax rates.
Net Income from Management Services Operations
2006 vs. 2005 For the years ended December 31, 2006 and 2005, net income from management services
operations increased by $28,648, primarily due to revenue we earned in 2006 totaling approximately
$25,000, net of taxes, in connection with the CPA®:12/14 Merger. In accordance with SFAS
140, we recognized a gain of $6,521 on the disposal of our shares in CPA®:12. An
increase in asset management revenue resulting primarily from the growth in assets under management
was offset by a reduction in structuring revenue primarily due to lower investment volume in 2006
as compared to 2005. These variances are described above.
2005 vs. 2004 For the years ended December 31, 2005 and 2004, net income from management services
operations decreased $21,520 primarily due to the revenue we earned in 2004 related to the
CIP®/CPA®:15 Merger. The net of tax impact of revenue earned from this merger
approximated $27,000. A reduction in structuring revenue as a result of lower investment volume in
2005 as compared to 2004 and an increase in the percentage of investments structured for
CPA®:16 Global also contributed to the decrease in net income from management services
operations in 2005, as did the increase in general and administrative expenses described above.
These decreases were partially offset by the increased income from other business operations and
decreased depreciation and amortization expense as described above.
W. P. Carey 2006 10-K 28
Real Estate Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
2005 |
|
|
2004 |
|
|
Change |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease revenues |
|
$ |
74,090 |
|
|
$ |
67,215 |
|
|
$ |
6,875 |
|
|
$ |
67,215 |
|
|
$ |
59,747 |
|
|
$ |
7,468 |
|
Other real estate income |
|
|
9,381 |
|
|
|
10,706 |
|
|
|
(1,325 |
) |
|
|
10,706 |
|
|
|
12,651 |
|
|
|
(1,945 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,471 |
|
|
|
77,921 |
|
|
|
5,550 |
|
|
|
77,921 |
|
|
|
72,398 |
|
|
|
5,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
(5,752 |
) |
|
|
(5,761 |
) |
|
|
9 |
|
|
|
(5,761 |
) |
|
|
(5,490 |
) |
|
|
(271 |
) |
Depreciation and amortization |
|
|
(18,405 |
) |
|
|
(15,350 |
) |
|
|
(3,055 |
) |
|
|
(15,350 |
) |
|
|
(11,807 |
) |
|
|
(3,543 |
) |
Property expenses |
|
|
(7,046 |
) |
|
|
(6,932 |
) |
|
|
(114 |
) |
|
|
(6,932 |
) |
|
|
(5,329 |
) |
|
|
(1,603 |
) |
Impairment charges and loan losses |
|
|
(1,147 |
) |
|
|
(5,704 |
) |
|
|
4,557 |
|
|
|
(5,704 |
) |
|
|
(12,899 |
) |
|
|
7,195 |
|
Other real estate expenses |
|
|
(5,881 |
) |
|
|
(6,327 |
) |
|
|
446 |
|
|
|
(6,327 |
) |
|
|
(6,261 |
) |
|
|
(66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,231 |
) |
|
|
(40,074 |
) |
|
|
1,843 |
|
|
|
(40,074 |
) |
|
|
(41,786 |
) |
|
|
1,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other interest income |
|
|
580 |
|
|
|
335 |
|
|
|
245 |
|
|
|
335 |
|
|
|
270 |
|
|
|
65 |
|
Income from equity investments in real estate |
|
|
2,606 |
|
|
|
3,090 |
|
|
|
(484 |
) |
|
|
3,090 |
|
|
|
3,665 |
|
|
|
(575 |
) |
Minority interest in income |
|
|
(1,704 |
) |
|
|
(499 |
) |
|
|
(1,205 |
) |
|
|
(499 |
) |
|
|
(489 |
) |
|
|
(10 |
) |
Gain (loss) on sale of securities, foreign currency
transactions and other gains, net |
|
|
6,422 |
|
|
|
(695 |
) |
|
|
7,117 |
|
|
|
(695 |
) |
|
|
1,222 |
|
|
|
(1,917 |
) |
Interest expense |
|
|
(18,139 |
) |
|
|
(16,787 |
) |
|
|
(1,352 |
) |
|
|
(16,787 |
) |
|
|
(14,453 |
) |
|
|
(2,334 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,235 |
) |
|
|
(14,556 |
) |
|
|
4,321 |
|
|
|
(14,556 |
) |
|
|
(9,785 |
) |
|
|
(4,771 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
35,005 |
|
|
|
23,291 |
|
|
|
11,714 |
|
|
|
23,291 |
|
|
|
20,827 |
|
|
|
2,464 |
|
Provision for income taxes |
|
|
(781 |
) |
|
|
(728 |
) |
|
|
(53 |
) |
|
|
(728 |
) |
|
|
(1,437 |
) |
|
|
709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
34,224 |
|
|
|
22,563 |
|
|
|
11,661 |
|
|
|
22,563 |
|
|
|
19,390 |
|
|
|
3,173 |
|
(Loss) income from discontinued operations |
|
|
(1,251 |
) |
|
|
1,359 |
|
|
|
(2,610 |
) |
|
|
1,359 |
|
|
|
249 |
|
|
|
1,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from real estate operations |
|
$ |
32,973 |
|
|
$ |
23,922 |
|
|
$ |
9,051 |
|
|
$ |
23,922 |
|
|
$ |
19,639 |
|
|
$ |
4,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The presentation of results of operations for our real estate operations for the year ended
December 31, 2006 was 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 in real estate. This
contributed to the increases described below for lease revenues, depreciation and amortization and
interest expense. This also resulted in a decrease of $1,129 in income from equity investments in
real estate and an increase of $949 in minority interest in income as compared to 2005.
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 years ended December 31, 2006,
2005 and 2004, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Rental income |
|
$ |
60,640 |
|
|
$ |
51,764 |
|
|
$ |
44,236 |
|
Interest income from direct financing leases |
|
|
13,450 |
|
|
|
15,451 |
|
|
|
15,511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
74,090 |
|
|
$ |
67,215 |
|
|
$ |
59,747 |
|
|
|
|
|
|
|
|
|
|
|
W. P. Carey 2006 10-K 29
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Bouygues Telecom, S.A. (a) (b) |
|
$ |
4,786 |
|
|
$ |
4,674 |
|
|
$ |
4,436 |
|
Detroit Diesel Corporation (i) |
|
|
4,615 |
|
|
|
4,396 |
|
|
|
4,158 |
|
CheckFree Holdings Corporation Inc. (b) (c) |
|
|
4,604 |
|
|
|
|
|
|
|
|
|
Dr Pepper Bottling Company of Texas |
|
|
4,444 |
|
|
|
4,382 |
|
|
|
4,334 |
|
Orbital Sciences Corporation (d) |
|
|
3,023 |
|
|
|
3,023 |
|
|
|
2,747 |
|
Titan Corporation (e) |
|
|
2,912 |
|
|
|
2,898 |
|
|
|
965 |
|
America West Holdings Corp. |
|
|
2,838 |
|
|
|
2,838 |
|
|
|
2,838 |
|
AutoZone, Inc. |
|
|
2,320 |
|
|
|
2,326 |
|
|
|
2,362 |
|
Quebecor Printing, Inc. (i) |
|
|
1,941 |
|
|
|
1,941 |
|
|
|
1,523 |
|
Sybron Dental Specialties Inc. |
|
|
1,770 |
|
|
|
1,770 |
|
|
|
1,770 |
|
Unisource Worldwide, Inc. |
|
|
1,694 |
|
|
|
1,609 |
|
|
|
1,705 |
|
BE Aerospace, Inc. |
|
|
1,575 |
|
|
|
1,580 |
|
|
|
1,585 |
|
CSS Industries, Inc. (f) |
|
|
1,570 |
|
|
|
1,380 |
|
|
|
1,637 |
|
Eagle Hardware & Garden, Inc., a wholly owned subsidiary of Lowes Companies Inc. (i) |
|
|
1,543 |
|
|
|
1,549 |
|
|
|
1,306 |
|
Lucent Technologies, Inc. (e) |
|
|
1,518 |
|
|
|
1,518 |
|
|
|
524 |
|
Sprint Spectrum, L.P. |
|
|
1,425 |
|
|
|
1,425 |
|
|
|
1,425 |
|
Enviro Works, Inc. (e) |
|
|
1,326 |
|
|
|
1,254 |
|
|
|
433 |
|
AT&T Corporation |
|
|
1,259 |
|
|
|
1,259 |
|
|
|
1,259 |
|
BellSouth Telecommunications, Inc. |
|
|
1,224 |
|
|
|
1,224 |
|
|
|
1,224 |
|
Werner Corporation (g) |
|
|
1,206 |
|
|
|
|
|
|
|
|
|
United States Postal Service |
|
|
1,175 |
|
|
|
1,233 |
|
|
|
1,233 |
|
Omnicom Group Inc. (e) |
|
|
1,168 |
|
|
|
1,140 |
|
|
|
378 |
|
Swat-Fame, Inc. (i) (j) |
|
|
1,120 |
|
|
|
1,239 |
|
|
|
1,086 |
|
Other (a) (b) (e) (h) |
|
|
23,034 |
|
|
|
22,557 |
|
|
|
20,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
74,090 |
|
|
$ |
67,215 |
|
|
$ |
59,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Revenue amounts are subject to fluctuations in foreign currency exchange rates. |
|
(b) |
|
Lease revenues applicable to minority interests in the consolidated amounts above total
$4,030, $1,677 and $1,597 as of December 31, 2006, 2005 and 2004, respectively. |
|
(c) |
|
Property is consolidated beginning January 1, 2006 as a result of implementation of EITF
04-05. |
|
(d) |
|
Increase is due to rent increase in 2004. |
|
(e) |
|
Includes the CIP® real estate interests acquired in September 2004. |
|
(f) |
|
Decrease in 2005 due to a reduction in the estimated residual value of property under direct
finance lease. Property reclassified as an operating lease from a direct financing lease in
January 2006. |
|
(g) |
|
New tenant at existing property. |
|
(h) |
|
Includes the CPA®:12 real estate interests acquired in December 2006. |
|
(i) |
|
Increase is due to rent increase in 2005. |
|
(j) |
|
Tenant vacated a portion of this property in September 2006. |
W. P. Carey 2006 10-K 30
We recognize income from equity investments in real estate of which lease revenues are a
significant component. Our ownership interests range from 33% to 60%. Our share of net lease
revenues in the following lease obligations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Carrefour France, SA (a) (g) |
|
$ |
4,054 |
|
|
$ |
3,496 |
|
|
$ |
3,417 |
|
Federal Express Corporation |
|
|
2,727 |
|
|
|
2,697 |
|
|
|
2,668 |
|
Information Resources, Inc. |
|
|
1,863 |
|
|
|
1,698 |
|
|
|
1,644 |
|
Sicor, Inc. (c) |
|
|
1,671 |
|
|
|
1,671 |
|
|
|
557 |
|
Hologic, Inc. |
|
|
1,141 |
|
|
|
1,136 |
|
|
|
1,136 |
|
Childtime Childcare, Inc. |
|
|
512 |
|
|
|
472 |
|
|
|
472 |
|
Consolidated Systems, Inc. (f) |
|
|
287 |
|
|
|
|
|
|
|
|
|
Medica France, SA (a) (b) |
|
|
173 |
|
|
|
|
|
|
|
|
|
The Retail Distribution Group (b) |
|
|
26 |
|
|
|
|
|
|
|
|
|
CheckFree Holdings Corporation Inc. (d) |
|
|
|
|
|
|
2,247 |
|
|
|
2,180 |
|
Titan Corporation (e) |
|
|
|
|
|
|
|
|
|
|
354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,454 |
|
|
$ |
13,417 |
|
|
$ |
12,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Revenue amounts are subject to fluctuations in foreign currency exchange rates. |
|
(b) |
|
Includes the CPA®:12 real estate interests acquired in December 2006. |
|
(c) |
|
Includes the CIP® real estate interests acquired in September 2004. |
|
(d) |
|
Property is consolidated beginning January 1, 2006 as a result of implementation of EITF
04-05. |
|
(e) |
|
We acquired the remaining interest in this property with the September 2004 acquisition of
CIP® real estate interests. |
|
(f) |
|
We acquired our interest in this property in 2006. |
|
(g) |
|
We increased our interest in this property in December 2006 as a result of the CPA®:12 Acquisition. |
Lease Revenues
2006 vs. 2005 For the years ended December 31, 2006 and 2005, lease revenues (rental income and
interest income from direct financing leases) increased by $6,875 primarily due to the
consolidation of an investment that we previously accounted for as an equity investment in real
estate, rent increases and new lease activity at existing properties and to a lesser extent,
revenue earned from properties acquired in the
CPA®:12 Acquisition in December 2006.
As a result of adopting EITF 04-05 effective January 1, 2006, we recognized revenue of $4,605 from
the consolidation of our investment in a property leased to CheckFree Holdings. Rent increases and
rent from new tenants at existing properties contributed $2,402 while lease revenue from the
CPA®:12 Acquisition contributed $405 of the increase. These increases were partially
offset by a lease expiration in July 2006.
2005 vs. 2004 For the years ended December 31, 2005 and 2004, lease revenues increased
$7,468 primarily due to $7,126 in revenue from properties acquired in the CIP®
Acquisition in September 2004, $1,530 in rent increases from existing tenants and $448 of rent
increases from new tenants at existing properties. These increases were partially offset by a
reduction in rent of $1,272 primarily due to lease expirations at certain properties and a
reduction of $734 in interest income from direct financing leases for financial reporting purposes
as a result of reducing estimated residual values on several leases.
Our net leases generally have rent increases based on formulas indexed to increases in the CPI or
other indices for the jurisdiction in which the property is located, sales overrides or other
periodic increases, which are designed to increase lease revenues in the future.
Other Real Estate Income
Other real estate income generally consists of revenue from other business operations of Livho,
Inc., a Holiday Inn hotel franchise that we operate at our property in Livonia, Michigan and from
our domestic self-storage properties as well as lease termination payments and other non-rent
related revenues from real estate operations including, but not limited to, settlements of claims
against former lessees. We receive settlements in the ordinary course of business; however, the
timing and amount of such settlements cannot always be estimated.
2006 vs. 2005 For the years ended December 31, 2006 and 2005, other operating income decreased by
$1,325, primarily due to the receipt of bankruptcy proceeds of $1,169 during the year ended
December 31, 2005.
2005 vs. 2004 For the years ended December 31, 2005 and 2004, other operating income
decreased by $1,945. The decrease is primarily due to a reduction of $2,620 in settlement proceeds
received from outstanding bankruptcy claims which were partially offset
W. P. Carey 2006 10-K 31
by an increase of $570 in
reimbursable tenant costs. Actual recoveries of reimbursable tenant costs are recorded as both
revenue and expense and therefore have no impact on net income.
Depreciation and Amortization
2006 vs. 2005 For the years ended December 31, 2006 and 2005, depreciation and amortization
expense increased by $3,055 primarily due to depreciation of $1,744 from the reclassification of a
property as an operating lease that we previously accounted for as a direct financing lease and
depreciation of $935 related to the consolidation of our investment in the CheckFree Holdings
property that we previously accounted for as an equity investment in real estate. Depreciation and
amortization from assets acquired in the CPA®:12 Acquisition contributed an additional
$309 of the increase.
2005 vs. 2004 For the years ended December 31, 2005 and 2004, depreciation and amortization
expense increased by $3,543. The increase is primarily due to $4,292 of depreciation and
amortization expense related to the CIP® Acquisition in September 2004.
Property Expenses
2006 vs. 2005 For the years ended December 31, 2006 and 2005, property expenses remained
relatively unchanged at $7,046 and $6,932, respectively.
2005 vs. 2004 For the years ended December 31, 2005 and 2004, property expenses increased
$1,603 primarily due to increases in property related expenses such as legal and professional fees
at specific properties and increases in reimbursable tenant costs. Actual recoveries of
reimbursable tenant costs are recorded as both revenue and expense and therefore have no impact on
net income.
Impairment Charges and Loan Losses
For the years ended December 31, 2006, 2005 and 2004, we recorded impairment charges and loan
losses related to our continuing real estate operations totaling $1,147, $5,704 and $12,899,
respectively. The table below summarizes the impairment charges recorded for the past three fiscal
years for both assets held for use and assets held for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
Impairment |
|
|
Impairment |
|
|
Impairment |
|
|
|
Property |
|
Charges |
|
|
Charges |
|
|
Charges |
|
|
Reason |
West Mifflin, Pennsylvania |
|
$ |
817 |
|
|
$ |
2,684 |
|
|
$ |
|
|
|
Decline in unguaranteed residual value of property |
Memphis, Tennessee |
|
|
|
|
|
|
|
|
|
|
2,337 |
|
|
Decline in unguaranteed residual value of property |
Winona, Minnesota |
|
|
|
|
|
|
|
|
|
|
1,250 |
|
|
Loan loss related to sale of property |
Livonia, Michigan |
|
|
|
|
|
|
1,130 |
|
|
|
7,500 |
|
|
Decline in asset value |
Various properties |
|
|
330 |
|
|
|
1,890 |
|
|
|
1,812 |
|
|
Decline in unguaranteed residual value of properties or decline in asset value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charges and loan
losses from continuing
operations |
|
$ |
1,147 |
|
|
$ |
5,704 |
|
|
$ |
12,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amberly Village, Ohio |
|
$ |
3,200 |
|
|
$ |
9,450 |
|
|
$ |
|
|
|
Property sold for less than carrying value |
Toledo, Ohio |
|
|
|
|
|
|
|
|
|
|
4,700 |
|
|
Property sold for less than carrying value |
Berea, Kentucky |
|
|
|
|
|
|
5,241 |
|
|
|
1,099 |
|
|
Property sold for less than carrying value |
Frankenmuth, Michigan |
|
|
|
|
|
|
|
|
|
|
1,000 |
|
|
Property sold for less than carrying value |
Various properties |
|
|
157 |
|
|
|
1,375 |
|
|
|
2,400 |
|
|
Property sold / to be sold for less than carrying value or property value has declined |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charges and loan
losses from discontinued
operations |
|
$ |
3,357 |
|
|
$ |
16,066 |
|
|
$ |
9,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Equity Investments in Real Estate
2006 vs. 2005 For the years ended December 31, 2006 and 2005, income from equity investments
in real estate decreased $484, primarily due to a decrease of $1,129 related to the consolidation
of our investment in the CheckFree Holdings propertythat we previously accounted for as an equity
investment in real estate. This decrease was partially offset by increases resulting from equity
investments in real estate acquired during the year as well as the impact of rent increases at
existing properties.
2005 vs. 2004 For the years ended December 31, 2005 and 2004, income from equity investments
in real estate decreased $575, primarily due to the full year effect of an acquisition in September
2004 of a 50% interest in a general partnership and the remaining
W. P. Carey 2006 10-K 32
81.46% interest in a limited
partnership. In 2005, we recorded an increase of $244 in the loss related to the 50% interest in
the general partnership. In addition, income from equity investments in real estate also decreased
$303 as a result of the acquisition of the remaining interests in a limited partnership which,
subsequent to the acquisition, is accounted for as a consolidated subsidiary.
Gain (Loss) on Sale of Securities, Foreign Currency Transactions and Other Gains, net
2006 vs. 2005 For the year ended December 31, 2006, we recognized net gains on the sale of
securities, foreign currency transactions and other gains of $6,422 as compared with a net loss of
$695 for 2005. The net gain for 2006 is comprised primarily of a realized gain of $4,800 from the
sale of our common stock holdings of Meristar Hospitality Corp. as well as net gains on foreign
currency transactions as we benefited from the relative weakening of the U.S. dollar against the
Euro in 2006. The net loss for 2005 is comprised primarily of net losses on foreign currency
transactions due to the relative strengthening of the U.S. dollar against the Euro in 2005.
2005 vs. 2004 For the year ended December 31, 2005, we recognized net losses on the sale of
securities, foreign currency transactions and other gains of $695 as compared with a net gain of
$1,222 for 2004 primarily due to foreign currency exchange movements. As described above, the net
loss in 2005 is due to the relative strengthening of the U.S. dollar against the Euro in 2005,
whereas the net gain in 2004 is primarily the result of the relative weakening of the U.S. dollar
against the Euro in 2004.
Interest Expense
2006 vs. 2005 For the years ended December 31, 2006 and 2005, interest expense increased
$1,352, primarily due to an increase of $2,604 from the full year impact of new mortgage financing
at existing properties that were obtained during 2005 and $1,721 related to the consolidation of
our investment in the CheckFree Holdings property that we previously accounted for as an equity
investment in real estate. These increases were partially offset by a reduction in interest
payments of $2,640 related to our credit facility and a reduction in interest payments from making
scheduled principal payments. The reduction in interest expense on the unsecured credit facility
resulted from lower average outstanding balances during the comparable periods on our facility
partially offset by rising interest rates. The average outstanding balance on our unsecured
facility decreased by approximately $65,000 whereas the average annual interest rate increased
approximately 1.9% compared with 2005.
Debt balances obtained on the properties acquired in the December 2006 CPA®:12
Acquisition and financing obtained on self-storage assets acquired in December 2006 did not have a
significant impact on interest expense in 2006.
2005 vs. 2004 For the years ended December 31, 2005 and 2004, interest expense increased
$2,334, primarily due to an increase of $2,134 related to higher average outstanding borrowings and
higher variable interest rates related to our credit facility, $1,165 related to debt balances
outstanding on the properties acquired in the CIP® Acquisition in September 2004 and
$526 related to new mortgage debt at existing properties. These increases were partially offset by
lower interest payments resulting from paying off mortgage balances and scheduled principal
payments. The average outstanding balance and annual variable interest rate on our unsecured
facility increased by approximately $31,000 and 1.8%, respectively, for the comparable years.
Income from Continuing Operations
2006 vs. 2005 For the years ended December 31, 2006 and 2005, income
from continuing
operations increased $11,661 primarily due to realized gains totaling $4,800 on the sale of our
Meristar common stock holdings and a reduction in impairment charges of $4,557, as well as
increases in lease revenues of $2,402, primarily from rent increases and rent from new tenants at
existing properties. These variances are described above.
2005 vs. 2004 For the years ended December 31, 2005 and 2004, income from continuing
operations increased by $3,173, primarily due to a decrease in impairment charges of $7,195 and the
accretive impact on net income as a result of the CIP® Acquisition. These increases
were partially offset by the negative impact of foreign currency translations, additional interest
expense incurred on our unsecured line of credit and a reduction in other real estate income. These
variances are all described above.
Discontinued Operations
2006 For the year ended December 31, 2006, we incurred a loss from discontinued operations
of $1,251 primarily due to a net loss of $1,346 from the operations of discontinued properties.
Gains totaling $3,452 from the sales of properties were almost entirely offset by impairment
charges on these properties totaling $3,357 during 2006.
2005 For the year ended December 31, 2005, we earned income from discontinued operations of
$1,359 primarily from gains on sales of several properties totaling $10,474 and income of $6,951
from the operations of discontinued properties, largely offset by impairment charges totaling
$16,066 on several of these properties.
W. P. Carey 2006 10-K 33
2004 For the year ended December 31, 2004, we earned income from discontinued operations of
$249, which is comprised primarily of income earned from discontinued operations of $9,359 that
were largely offset by impairment charges incurred on these properties totaling $9,199.
Impairment charges for 2006, 2005 and 2004 are described in Impairment Charges and Loan Losses
above.
The effect of suspending depreciation expense as a result of the classification of properties as
held for sale was $238, $235 and $381 for the years ended December 31, 2006, 2005 and 2004,
respectively.
Financial Condition
Uses of Cash during the Year
There has been no material change in our financial condition since December 31, 2005. Cash and cash
equivalents totaled $22,108 as of December 31, 2006, an increase of $9,094 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 year is described below.
Operating Activities
During 2006, cash flow from operations was sufficient to fund distributions to shareholders of
$68,615. Our real estate operations provided cash flows (contractual lease revenues, net of
property-level debt service) of approximately $49,250. 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.
During 2006, we received revenue of $26,053 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 (see below). We also received revenue of $19,047 in connection with structuring
investments on behalf of the CPA® REITs and termination and subordinated disposition
revenue totaling $46,018 from CPA®:12 for services provided in connection with the
CPA®:12/14 Merger. In January 2006, we received $15,474 related to the annual
installment of deferred acquisition revenue from CPA®:12, CPA®:14 and
CPA®:15, all of which have met their performance criteria, including interest. The
next installment of deferred acquisition revenue was received in January 2007 from
CPA®:14 and CPA®:15 and amounted to $16,701, including interest.
CPA®:16 Global has not yet met the performance criterion and we currently anticipate
that the deferred amounts for CPA®:16 Global will be recognized by us and paid by
them during the first half of 2007. In 2006, we elected 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 elected to receive the base
asset management revenue from CPA®:12 in cash (rather than in stock, as in the prior
year) which benefited operating cash flows by $3,353.
For 2007, 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. We expect that the election to receive restricted shares will
continue to have a negative impact on cash flows during 2007, as this election is annual.
We estimate that the properties we acquired from CPA®:12 will generate annual lease
revenue and cash flow, inclusive of minority interest, of approximately $4,900 and $3,900,
respectively, and annual equity income of approximately $900. This additional cash flow will be
partially offset by lower annual asset management revenue approximating $1,300. There are no
scheduled balloon payments on any of the properties acquired from
CPA®:12
until 2009. In addition, we expect that income taxes related to asset
management revenue earned on the assets purchased by
CPA®:14
in the merger will increase as such revenue will now be earned by one
of our taxable subsidiaries.
Investing Activities
Our investing activities are generally comprised of real estate transactions (purchases and sales)
and capitalized property related costs. During 2006, we used $102,049 to make acquisitions
including our purchase of interests in 37 properties from CPA®:12 in December 2006,
several acquisitions by a wholly owned subsidiary of self-storage properties and an equity
investment with an affiliate. We also received net proceeds of $50,053 from the sales of several
domestic properties and the sale of our CPA®:12 and Meristar holdings.
During 2006, we provided our affiliate, CPA®:15, with $84,000 to fund the early
repayment of a mortgage obligation. This loan was used to facilitate the completion of the sale of
one of its properties and was repaid within the next few business days. In connection with the
CPA®:12/14 Merger in December 2006, we provided our affiliate, CPA®:14,
with $24,000. The loan was used to fund its merger obligations and was repaid within the next few
business days. We also received distributions from the CPA® REITs totaling $15,711 as
a result of our ownership of shares in the CPA® REITs, with $10,709 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.
W. P. Carey 2006 10-K 34
Based on current distribution rates and our current investment in the CPA® REITS, our
annual distributions from the CPA® REITs for 2007 are projected to be approximately
$7,400.
Financing Activities
During 2006, we paid distributions to shareholders of $68,615, an increase over the prior year. In
addition to paying distributions, our financing activities included making scheduled mortgage
principal payments totaling $11,742 and paying down the outstanding balance on our unsecured credit
facility by $13,000. Gross borrowings under the unsecured credit facility were $123,000, which were
used for several purposes in the normal course of business, and repayments were $136,000. In
December 2006, a wholly owned subsidiary entered into a $105,000 secured credit facility to finance
the acquisition of domestic self-storage properties. Gross borrowings under the secured credit
facility were $15,501. In addition, we obtained $36,000 of mortgage financing including $30,000
related to the refinancing of an investment leased to CheckFree Holdings that we now consolidate in
accordance with EITF 04-05. Also during 2006, we received $4,031 from the release of escrow funds
that we deposited during 2005 in connection with obtaining mortgage financing on several
investments and raised $8,660 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 loan, restructure the debt with the existing
lenders or evaluate our ability to satisfy the obligation from our existing resources including our
unsecured 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.
Summary of Financing
The table below summarizes our mortgage notes payable and credit facilities as of December 31, 2006
and 2005, respectively.
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Balance: |
|
|
|
|
|
|
|
|
Fixed rate |
|
$ |
208,665 |
|
|
$ |
181,116 |
|
Variable rate (1) |
|
|
69,988 |
|
|
|
64,997 |
|
|
|
|
|
|
|
|
Total |
|
$ |
278,653 |
|
|
$ |
246,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of total debt: |
|
|
|
|
|
|
|
|
Fixed rate |
|
|
75 |
% |
|
|
74 |
% |
Variable rate (1) |
|
|
25 |
% |
|
|
26 |
% |
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average interest rate at end of period: |
|
|
|
|
|
|
|
|
Fixed rate |
|
|
6.50 |
% |
|
|
6.60 |
% |
Variable rate (1) |
|
|
5.46 |
% |
|
|
5.28 |
% |
|
|
|
(1) |
|
Includes amounts outstanding under our secured credit facility totaling $15,501 at December
31, 2006 and amounts outstanding under our unsecured credit facility totaling $2,000 and
$15,000 at December 31, 2006 and 2005, respectively. Variable rate mortgage notes are
primarily comprised of notes subject to future interest rate resets. |
Cash Resources
As of December 31, 2006, our cash resources consisted of the following:
|
|
|
Cash and cash equivalents totaling $22,108, of which $3,181 was held in foreign bank
accounts to maintain local capital requirements; |
|
|
|
|
Unsecured credit facility with unused capacity of up to $173,000, which may also be used
to loan funds to our affiliates; |
|
|
|
|
Unleveraged properties with a carrying value of $269,321, subject to meeting certain
financial ratios on our unsecured credit facility; and |
|
|
|
|
Secured credit facility with unused capacity of up to $89,499, available to a wholly
owned subsidiary to finance self-storage acquisitions. |
W. P. Carey 2006 10-K 35
Our cash resources can be used for working capital needs and other commitments and may be used for
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. A summary of our secured and
unsecured credit facilities is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
December 31, 2005 |
|
|
Maximum |
|
Outstanding |
|
Maximum |
|
Outstanding |
|
|
Available |
|
Balance |
|
Available |
|
Balance |
Unsecured credit facility |
|
$ |
175,000 |
|
|
$ |
2,000 |
|
|
$ |
225,000 |
|
|
$ |
15,000 |
|
Secured credit facility |
|
|
105,000 |
|
|
|
15,501 |
|
|
|
|
|
|
|
|
|
Unsecured credit facility
The unsecured 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 December 31, 2006. Advances are prepayable at any time. The
unsecured credit facility expires in May 2007, however, we can, at our option, renew this facility
for an additional year on substantially the same terms. We are currently negotiating a renewal or
replacement of this facility. We do not believe that any failure to renew or replace this facility
would materially effect our operations.
Amounts drawn on the credit facility 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.
Secured credit facility
In December 2006, Carey Storage Fund, a wholly owned subsidiary, entered into a credit facility for
up to $105,000 with Morgan Stanley Mortgage Capital Inc. that matures in December 2008. The
facility is collateralized by any self-storage real estate assets acquired with proceeds from the
facility. Advances from this facility bear interest at an annual rate of the one-month LIBOR, plus
a spread that ranges from 1.75% to 2.35% depending on the aggregate debt yield for the
collateralized asset pool. Advances can be prepaid at any time, however advances prepaid prior to
March 8, 2008 are subject to a prepayment penalty of 1.25% of the principal amount of the loan
being prepaid. This facility has financial covenants requiring Carey Storage Fund, among other
things, to meet or exceed certain operating and coverage ratios. For 2006, Carey Storage Fund has
received a covenant compliance waiver from the lender due to its limited operating history as of
December 31, 2006.
Cash Requirements
During 2007, cash requirements will include paying distributions to shareholders, scheduled
mortgage principal payments, including mortgage balloon payments totaling $15,541 with $6,041 due
in August 2007 and $9,500 due in December 2007, making distributions to minority partners as well
as other normal recurring operating expenses. We may also seek to use our cash to invest in new
properties and maintain cash balances sufficient to meet working capital needs. We may issue
additional shares in connection with investments when it is consistent with the objectives of the
seller.
We have budgeted capital expenditures of up to approximately $2,700 at various properties during
2007. 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 unsecured credit facility.
W. P. Carey 2006 10-K 36
Aggregate Contractual Agreements
The table below summarizes our contractual obligations as of December 31, 2006 and the effect that
these obligations are expected to have on our liquidity and cash flow in future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Less than 1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
More than 5 years |
|
Mortgage notes payable Principal |
|
$ |
261,152 |
|
|
$ |
26,274 |
|
|
$ |
55,560 |
|
|
$ |
46,152 |
|
|
$ |
133,166 |
|
Mortgage notes payable Interest (1) |
|
|
81,691 |
|
|
|
15,693 |
|
|
|
25,915 |
|
|
|
17,824 |
|
|
|
22,259 |
|
Unsecured credit facility Principal |
|
|
2,000 |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured credit facility Interest (1) |
|
|
43 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured credit facility Principal |
|
|
15,501 |
|
|
|
|
|
|
|
15,501 |
|
|
|
|
|
|
|
|
|
Secured credit facility Interest (1) |
|
|
2,276 |
|
|
|
1,173 |
|
|
|
1,103 |
|
|
|
|
|
|
|
|
|
Deferred acquisition compensation due to
affiliates Principal |
|
|
661 |
|
|
|
524 |
|
|
|
137 |
|
|
|
|
|
|
|
|
|
Deferred acquisition compensation due to
affiliates Interest |
|
|
48 |
|
|
|
40 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
Operating leases (2) |
|
|
27,732 |
|
|
|
2,439 |
|
|
|
5,697 |
|
|
|
5,569 |
|
|
|
14,027 |
|
Other commitments (3) |
|
|
900 |
|
|
|
150 |
|
|
|
300 |
|
|
|
300 |
|
|
|
150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
392,004 |
|
|
$ |
48,336 |
|
|
$ |
104,221 |
|
|
$ |
69,845 |
|
|
$ |
169,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest on variable rate debt obligations was calculated using the variable interest rate as
of December 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 future
minimum rents under an office cost-sharing agreement. These amounts are allocated among the
entities based on gross revenues and are adjusted quarterly. |
|
(3) |
|
Represents a commitment to contribute capital to an investment in India. |
Amounts related to our foreign operations are based on the exchange rate of the Euro as of December
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 of control.
As of December 31, 2006, we have no material capital lease obligations for which we are the lessee,
either individually or in the aggregate.
We and Carey Financial Corporation (Carey Financial), our wholly-owned broker-dealer subsidiary,
are currently subject to an SEC investigation into payments made to third-party broker-dealers in
connection with the distribution of REITs managed by us and other matters. Although no regulatory
action has been initiated against us or Carey Financial in connection with the matters being
investigated, we expect that the Commission may pursue an action in the future. The potential
timing of any action and the nature of the relief or remedies the Commission may seek cannot be
predicted at this time. If an action is brought, it could materially affect our cash requirements.
See Item 3 Legal Proceedings for a discussion of this investigation.
In connection with the purchase of many of our properties, we required the sellers to perform
environmental reviews. We believe, based on the results of these reviews, that our properties were
in substantial compliance with Federal and state environmental statutes at the time the properties
were acquired. However, portions of certain properties have been subject to some degree of
contamination, principally in connection with leakage from underground storage tanks, surface
spills or historical on-site activities. In most instances where contamination has been identified,
tenants are actively engaged in the remediation process and addressing identified conditions.
Tenants are generally subject to environmental statutes and regulations regarding the discharge of
hazardous materials and any related remediation obligations. In addition, our leases generally
require tenants to indemnify us from all liabilities and losses related to the leased properties
with provisions of such indemnification specifically addressing environmental matters. The leases
generally include provisions that allow for periodic environmental assessments, paid for by the
tenant, and allow us to extend leases until such time as a tenant has satisfied its environmental
obligations. Certain of our leases allow us to require financial assurances from tenants such as
performance bonds or letters of credit if the costs of remediating environmental conditions are, in
our estimation, in excess of specified amounts. Accordingly, we believe that the ultimate
resolution of environmental matters should not have a material adverse effect on our financial
condition, liquidity or results of operations.
W. P. Carey 2006 10-K 37
Subsequent Events
In January and February 2007, Carey Storage acquired three domestic self-storage properties for
approximately $19,600. In connection with these acquisitions, Carey Storage drew down $11,580 from
its secured credit facility. Carey Storage incurs a fixed
annual interest rate equal to the one-month LIBOR plus a spread which ranges from 1.75% to 2.35% on
all borrowings under this facility. All amounts drawn under this facility are due in December 2008.
We formed Corporate Property Associates 17 Global Incorporated (CPA®:17) in
February 2007 for the purpose of investing in a diversified portfolio of income-producing
commercial properties and other real estate related assets, both domestically and outside the
United States. We filed a registration statement on Form S-11 with the SEC during February 2007 to
raise up to $2,500,000 of common stock of CPA®:17 (including amounts under its
dividend reinvestment plan) and expect to commence fundraising during 2007.
Critical Accounting Estimates
Our significant accounting policies are described in Note 2 to the consolidated financial
statements. Many of these accounting policies require certain judgment and the use of certain
estimates and assumptions when applying these policies in the preparation of our consolidated
financial statements. On a quarterly basis, we evaluate these estimates and judgments based on
historical experience as well as other factors that we believe to be reasonable under the
circumstances. These estimates are subject to change in the future if underlying assumptions or
factors change. Certain accounting policies, while significant, may not require the use of
estimates. Those accounting policies that require significant estimation and/or judgment are listed
below.
Classification of Real Estate Assets
We classify our directly owned leased assets for financial reporting purposes or when significant
lease items are amended as either real estate leased under operating leases or net investment in
direct financing leases at the inception of a lease. This classification is based on several
criteria, including, but not limited to, estimates of the remaining economic life of the leased
assets and the calculation of the present value of future minimum rents. In determining the
classification of a lease, we use estimates of remaining economic life provided by third party
appraisals of the leased assets. The calculation of the present value of future minimum rents
includes determining a leases implicit interest rate, which requires an estimate of the residual
value of leased assets as of the end of the non-cancelable lease term. Different estimates of
residual value result in different implicit interest rates and could possibly affect the financial
reporting classification of leased assets. The contractual terms of our leases are not necessarily
different for operating and direct financing leases; however the classification is based on
accounting pronouncements which are intended to indicate whether the risks and rewards of ownership
are retained by the lessor or substantially transferred to the lessee. Management believes that it
retains certain risks of ownership regardless of accounting classification. Assets classified as
net investment in direct financing leases are not depreciated but are written down to expected
residual value over the lease term, therefore, the classification of assets may have a significant
impact on net income even though it has no effect on cash flows.
Identification of Tangible and Intangible Assets in Connection with Real Estate Acquisitions
In connection with the acquisition of properties, purchase costs are allocated to tangible and
intangible assets and liabilities acquired based on their estimated fair values. The value of
tangible assets, consisting of land, buildings and tenant improvements, is determined as if vacant.
Intangible assets including the above-market value of leases, the value of in-place leases and the
value of tenant relationships are recorded at their relative fair values. Below-market values of
leases are also recorded at their relative fair values and are recorded as liabilities in the
accompanying financial statements.
The value attributed to tangible assets is determined in part using a discounted cash flow model
which is intended to approximate what a third party would pay to purchase the property as vacant
and rent at current market rates. In applying the model, we assume that the disinterested party
would sell the property at the end of a market lease term. Assumptions used in the model are
property-specific as it is available; however, when certain necessary information is not available,
we will use available regional and property-type information. Assumptions and estimates include a
discount rate or internal rate of return, marketing period necessary to put a lease in place,
carrying costs during the marketing period, leasing commissions and tenant improvements allowances,
market rents and growth factors of such rents, market lease term and a cap rate to be applied to an
estimate of market rent at the end of the market lease term.
Above-market and below-market lease intangibles are based on the difference between the market rent
and the contractual rents and are discounted to a present value using an interest rate reflecting
our current assessment of the risk associated with the lease acquired. We acquire properties
subject to net leases and consider the credit of the lessee in negotiating the initial rent.
The total amount of other intangibles is allocated to in-place lease values and tenant relationship
intangible values based on our evaluation of the specific characteristics of each tenants lease
and our overall relationship with each tenant. Characteristics we consider in allocating these
values include the expectation of lease renewals, nature and extent of the existing relationship
with the
W. P. Carey 2006 10-K 38
tenant, prospects for developing new business with the tenant and the tenants credit
quality, among other factors. Intangibles for above-market and below-market leases, in-place lease
intangibles and tenant relationships are amortized over their estimated useful lives. In the event
that a lease is terminated, the unamortized portion of each intangible, including market rate
adjustments, in-place lease values and tenant relationship values, are charged to expense.
Factors considered include the estimated carrying costs of the property during a hypothetical
expected lease-up period, current market conditions and costs to execute similar leases. Estimated
carrying costs include real estate taxes, insurance, other property operating costs, expectation of
funding tenant improvements and estimates of lost rentals at market rates during the hypothetical
expected lease-up periods, based on assessments of specific market conditions. Estimated costs to
execute leases include commissions and legal costs to the extent that such costs are not already
incurred with a new lease that has been negotiated in connection with the purchase of the property.
Basis of Consolidation
The accompanying consolidated financial statements include all of our accounts and those of our
majority owned and/or controlled subsidiaries. The portion of these entities not owned by us is
presented as minority interest as of and during the periods consolidated. All material inter-entity
transactions have been eliminated.
When we obtain an economic interest in an entity, we evaluate the entity to determine if the entity
is deemed a variable interest entity (VIE), and if we are deemed to be the primary beneficiary,
in accordance with FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities
(FIN 46(R)). We consolidate (i) entities that are VIEs and of which we are deemed to be the
primary beneficiary and (ii) entities that are non-VIEs which we control. Entities that we account
for under the equity method (i.e. at cost, increased or decreased by our share of earnings or
losses, less distributions) include (i) entities that are VIEs and of which we are not deemed to be
the primary beneficiary and (ii) entities that are non-VIEs which we do not control, but over which
we have the ability to exercise significant influence. We will reconsider our 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.
In determining whether we control a non-VIE, our consideration includes using the 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 Certain Rights (EITF 04-05). The scope of EITF 04-05 is limited to limited
partnerships or similar entities that are not variable interest entities under FIN 46(R). The EITF
reached a consensus that the general partners in a limited partnership (or similar entity) are
presumed to control the entity regardless of the level of their ownership and, accordingly, may be
required to consolidate the entity. This presumption may be overcome if the agreements provide the
limited partners with either (a) the substantive ability to dissolve (liquidate) the limited
partnership or otherwise remove the general partners without cause or (b) substantive participating
rights. If it is deemed that the limited partners rights overcome the presumption of control by a
general partner of the limited partnership, the general partner shall account for its investment in
the limited partnership using the equity method of accounting. As a result of adopting the
provisions of EITF 04-05 effective January 1, 2006, we now consolidate a limited liability company
that leases property to CheckFree Holdings Corporation Inc., that was previously accounted for
under the equity method of accounting. The consolidation of this entity did not have a material
impact on our financial position or results of operations.
The consolidated financial statements also include the accounts of Corporate Property Associates
International Incorporated (CPAI), which was formed in July 2003. We own all of CPAIs
outstanding common stock. During 2005, CPAI withdrew its registration statement with the SEC for a
public offering of its common stock and as a result, we wrote off approximately $811 in
organization costs.
We have several interests in joint ventures that are consolidated and have minority interests that
have finite lives and were considered mandatorily redeemable non-controlling interests prior to the
issuance of Staff Position No. 150-3 (FSP FAS 150-3). As a result of the deferral provisions of
FSP 150-3, these minority interests have been reflected as liabilities.
Impairments
Impairment charges may be recognized on long-lived assets, including but not limited to, real
estate, direct financing leases, assets held for sale, goodwill and equity investments in real
estate. Estimates and judgments are used when evaluating whether these assets are impaired. When
events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable, we perform projections of undiscounted cash flows, and if these cash flows are
insufficient, the assets are adjusted (i.e., written down) to their estimated fair value. An
analysis of whether a real estate asset has been impaired requires us to make our best estimate of
market rents, residual values and holding periods. In our evaluations, we generally obtain market
information from outside sources; however, such information requires us to determine whether the
information received is appropriate to the circumstances. As our investment objective is to hold
properties on a long-term basis, holding periods used in the analyses generally range from five to
ten years.
W. P. Carey 2006 10-K 39
Depending on the assumptions made and estimates used, the future cash flow projected in
the evaluation of long-lived assets can vary within a range of outcomes. We will consider the
likelihood of possible outcomes in determining the best possible estimate of future cash flows.
Because in most cases, each of our properties is leased to one tenant, we are more likely to incur
significant writedowns when circumstances change because of the possibility that a property will be
vacated in its entirety and, therefore, it is different from the risks related to leasing and
managing multi-tenant properties. Events or changes in circumstances can result in further non-cash
writedowns and impact the gain or loss ultimately realized upon sale of the assets.
We perform a review of our estimate of residual value of our direct financing leases at least
annually to determine whether there has been an other than temporary decline in the current
estimate of residual value of the underlying real estate assets (i.e., the estimate of what we
could realize upon sale of the property at the end of the lease term). If the review indicates a
decline in residual value, that is other than temporary, a loss is recognized and the accounting
for the direct financing lease will be revised to reflect the decrease in the expected yield using
the changed estimate, that is, a portion of the future cash flow from the lessee will be recognized
as a return of principal rather than as revenue. While an evaluation of potential impairment of
real estate accounted for under operating leases is determined by a change in circumstances, the
evaluation of a direct financing lease can be affected by changes in long-term market conditions
even though the obligations of the lessee are being met. Changes in circumstances include, but are
not limited to, vacancy of a property not subject to a lease and termination of a lease. We may
also assess properties for impairment because a lessee is experiencing financial difficulty and
because management expects that there is a reasonable probability that the lease will be terminated
in a bankruptcy proceeding or a property remains vacant for a period that exceeds the period
anticipated in a prior impairment evaluation.
We evaluate goodwill for possible impairment at least annually using a two-step process. To
identify any impairment, we first compare the estimated fair value of the reporting unit
(management services segment) with our carrying amount, including goodwill. We calculate the
estimated fair value of the management services segment by applying a multiple, based on comparable
companies, to earnings. If the fair value of the management services segment exceeds its carrying
amount, goodwill is considered not impaired and no further analysis is required. If the carrying
amount of the management services unit exceeds its estimated fair value, then the second step is
performed to measure the amount of the impairment charge.
For the second step, we would determine the impairment charge by comparing the implied fair value
of the goodwill with its carrying amount and record an impairment charge equal to the excess of the
carrying amount over the fair value. The implied fair value of the goodwill is determined by
allocating the estimated fair value of the management services segment to its assets and
liabilities. The excess of the estimated fair value of the management services segment over the
amounts assigned to its assets and liabilities is the implied fair value of the goodwill. We have
performed our annual test for impairment of our management services segment, the reportable unit of
measurement, and concluded that the goodwill is not impaired.
Investments in unconsolidated joint ventures are accounted for under the equity method and are
recorded initially at cost, as equity investments in real estate and subsequently adjusted for our
proportionate share of earnings and cash contributions and distributions. On a periodic basis, we
assess whether there are any indicators that the value of equity investments in real estate may be
impaired and whether or not that impairment is other than temporary. To the extent impairment has
occurred, the charge shall be measured as the excess of the carrying amount of the investment over
the fair value of the investment.
When we identify assets as held for sale, we discontinue depreciating the assets and estimate the
sales price, net of selling costs, of such assets. If in our opinion, the net sales price of the
assets, which have been identified for sale, is less than the net book value of the assets, an
impairment charge is recognized and a valuation allowance is established. To the extent that a
purchase and sale agreement has been entered into, the allowance is based on the negotiated sales
price. To the extent that we have adopted a plan to sell an asset but have not entered into a sales
agreement, we will make judgments of the net sales price based on current market information.
Accordingly, the initial assessment may be greater or less than the purchase price subsequently
committed to and may result in a further adjustment to the fair value of the property. If
circumstances arise that previously were considered unlikely and, as a result, we decide not to
sell a property previously classified as held for sale, the property is reclassified as held and
used. A property that is reclassified is measured and recorded individually at the lower of (a) its
carrying amount before the property was classified as held for sale, adjusted for any depreciation
expense that would have been recognized had the property been continuously classified as held and
used or (b) the fair value at the date of the subsequent decision not to sell.
Provision for Uncollected Amounts from Lessees
On an ongoing basis, we assess our ability to collect rent and other tenant-based receivables and
determine an appropriate allowance for uncollected amounts. Because our real estate operations
segment has a limited number of lessees (23 lessees represented approximately 70% of annual rental
income during 2006), we believe that it is necessary to evaluate the collectibility of these
receivables based on the facts and circumstances of each situation rather than solely using
statistical methods. We generally recognize a provision for uncollected rents and other tenant
receivables and measure our allowance against actual arrearages. For amounts in
W. P. Carey 2006 10-K 40
arrears, we make subjective judgments based on our knowledge of a lessees circumstances and may reserve for the
entire receivable amount from a lessee because there has been significant or continuing
deterioration in the lessees ability to meet its lease obligations.
Determination of Certain Asset Based Management and Performance Revenue
We earn asset-based management and performance revenue for providing property management, leasing,
advisory and other services to the CPA® REITs. For certain CPA® REITs,
this revenue is based on third party annual valuations of the underlying real estate assets of the
CPA® REIT. The valuation uses estimates, including but not limited to, market rents,
residual values and increases in the CPI and discount rates. Differences in the assumptions applied
would affect the amount of revenue that we recognize. Additionally, a
deferred compensation plan for certain officers is valued based on the results of the annual
valuations. The effect of any changes in the annual valuations will affect both revenue and
compensation expense and therefore the determination of net income.
Income Taxes
Significant judgment is required in developing our provision for income taxes, including (i) the
determination of partnership-level state and local taxes and foreign taxes, and (ii) for our
taxable subsidiaries, estimating deferred tax assets and liabilities and any valuation allowance
that might be required against the deferred tax assets. The
Companys taxable subsidiary currently has a net deferred tax
liability in all significant tax jurisdictions. A valuation allowance is required if it is
more likely than not that a portion or all of the deferred tax assets will not be realized. We have
not recorded a valuation allowance based on our current belief that operating income of the taxable
subsidiaries will be sufficient to realize the benefit of these assets over time. For interim
periods, income tax expense for taxable subsidiaries is determined, in part, by applying an
effective tax rate, which takes into account statutory federal, state and local tax rates.
Recent Accounting Pronouncements
SFAS 123(R)
In December 2004, the FASB issued Statement No. 123(R), Share-Based Payment (SFAS 123(R)). We
adopted SFAS 123(R) on January 1, 2006 using the modified prospective application method. Our stock
based compensation accounting policy and transition method are discussed in detail in Note 2 to the
consolidated financial statements. The impact of adopting SFAS 123(R) in 2006 is discussed in Note
14. Results for fiscal years 2005 and prior have not been restated.
FIN 47
In March 2005, the FASB issued Interpretation No. 47 Accounting for Conditional Asset Retirement
Obligations (FIN 47). FIN 47 requires an entity to recognize a liability for a conditional asset
retirement obligation when incurred if the liability can be reasonably estimated. FIN 47 clarifies
that the term Conditional Asset Retirement Obligation refers to a legal obligation (pursuant to
existing laws or by contract) to perform an asset retirement activity in which the timing and/or
method of settlement are conditional on a future event that may or may not be within the control of
the entity. FIN 47 also clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. We adopted FIN 47 as required effective
December 31, 2005 and the initial application of this Interpretation did not have a material effect
on our financial position or results of operations.
EITF 04-05
In June 2005, the Emerging Issues Task Force issued EITF 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 Certain Rights (EITF 04-05). The scope of EITF 04-05 is limited to
limited partnerships or similar entities that are not variable interest entities under FIN 46(R).
The Task Force reached a consensus that the general partners in a limited partnership (or similar
entity) are presumed to control the entity regardless of the level of their ownership and,
accordingly, may be required to consolidate the entity. This presumption may be overcome if the
agreements provide the limited partners with either (a) the substantive ability to dissolve
(liquidate) the limited partnership or otherwise remove the general partners without cause or (b)
substantive participating rights. If it is deemed that the limited partners rights overcome the
presumption of control by a general partner of the limited partnership, the general partner shall
account for its investment in the limited partnership using the equity method of accounting. EITF
04-05 was effective immediately for all arrangements created or modified after June 29, 2005. For
all other arrangements, we adopted EITF 04-05 effective January 1, 2006. As a result of adopting EITF 04-05, we now consolidate a limited
liability company that leases property to CheckFree Holdings Corporation Inc., which was previously
accounted for under the equity method of accounting.
FSP FAS 13-1
In October 2005, the FASB issued Staff Position No. 13-1 Accounting for Rental Costs Incurred
during a Construction Period (FSP FAS 13-1). FSP FAS 13-1 addresses the accounting for rental
costs associated with operating leases that are incurred during the construction period. FSP FAS
13-1 makes no distinction between the right to use a leased asset during the construction period
and the right to use that asset after the construction period. Therefore, rental costs associated
with ground or building operating leases that
W. P. Carey 2006 10-K 41
are incurred during a construction period shall be
recognized as rental expense, allocated over the lease term in accordance with SFAS No. 13 and
Technical Bulletin 85-3. We adopted FSP FAS 13-1 as required on January 1, 2006 and the initial
application of this Staff Position did not have a material impact on our financial position or
results of operations.
SFAS 155
In February 2006, the FASB issued Statement No. 155, Accounting for Certain Hybrid Financial
Instruments an Amendment of FASB No. 133 and 140 (SFAS 155). The purpose of SFAS 155 is to
simplify the accounting for certain hybrid financial instruments by permitting fair value
re-measurement for any hybrid financial instrument that contains an embedded derivative that
otherwise would require bifurcation. SFAS 155 also eliminates the restriction on passive derivative
instruments that a qualifying special-purpose entity may hold. We must adopt SFAS 155 effective
January 1, 2007 and do not believe that this adoption will have a material impact on our financial
position or results of operations.
FIN 48
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes-an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for
uncertainty in income tax positions. This Interpretation requires that we do not recognize in our
consolidated financial statements the impact of a tax position that fails to meet the more likely
than not recognition threshold based on the technical merits of the position. We must adopt FIN 48
effective January 1, 2007. We are currently evaluating the impact of adopting FIN 48 on our
consolidated financial statements.
SAB 108
In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.
SAB 108 was issued in order to eliminate the diversity of practice surrounding how public companies
quantify financial statement misstatements.
Traditionally, there have been two widely-recognized methods for quantifying the effects of
financial statement misstatements: the rollover method and the iron curtain method. The
rollover method focuses primarily on the impact of a misstatement on the income statement
including the reversing effect of prior year misstatements but its use can lead to the
accumulation of misstatements in the balance sheet. The iron curtain method, on the other hand,
focuses primarily on the effect of correcting the period-end balance sheet with less emphasis on
the reversing effects of prior year errors on the income statement. We currently use the iron
curtain method for quantifying identified financial statement misstatements.
In SAB 108, the SEC staff established an approach that requires quantification of financial
statement misstatements based on the effects of the misstatements on each of our financial
statements and the related financial statement disclosures. This model is commonly referred to as a
dual approach because it requires quantification of errors under both the iron curtain and
rollover methods. SAB 108 permits existing public companies to initially apply its provisions
either by (i) restating prior financial statements as if the dual approach had always been used
or (ii) recording the cumulative effect of initially applying the dual approach as adjustments to
the carrying values of assets and liabilities as of January 1, 2006 with an offsetting adjustment
recorded to the opening balance of retained earnings. Use of the cumulative effect transition
method requires detailed disclosure of the nature and amount of each individual error being
corrected through the cumulative adjustment and how and when it arose. We adopted SAB 108 effective
December 31, 2006 using the cumulative effect transition method. The adoption of SAB 108 had no
impact on our financial position or results of operations.
SFAS 157
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (SFAS 157). SFAS
157 provides guidance for using fair value to measure assets and liabilities. This statement
clarifies the principle that fair value should be based on the assumptions that market participants
would use when pricing the asset or liability. SFAS 157 establishes a fair value hierarchy, giving
the highest priority to quoted prices in active markets and the lowest priority to unobservable
data. SFAS 157 applies whenever other standards require assets or liabilities to be measured at
fair value. This statement is effective for our 2008 fiscal year, although early adoption is
permitted. We believe that the adoption of SFAS 157 will not have a material effect on our
financial position or results of operations.
W. P. Carey 2006 10-K 42
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
(In thousands)
Market Risks
Market risk is the exposure to loss resulting from changes in interest rates, 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.
We are exposed to the impact of interest rate changes primarily through our borrowing activities.
We attempt to obtain mortgage financing on a long-term, fixed-rate basis to mitigate this exposure.
Because we transact business in France, we are also exposed to foreign exchange rate movements. We
manage foreign exchange rate movements by generally placing both our debt obligation to the lender
and the tenants rental obligation to us in the local currency.
We do not generally use derivative financial instruments to manage interest rate risk or foreign
exchange rate risk exposure and do not use derivative instruments to hedge credit/market risks or
for speculative purposes.
Interest Rate Risk
The value of our real estate and related fixed debt obligations are subject to fluctuations based
on changes in interest rates. The value of our real estate is also subject to fluctuations based on
local and regional economic conditions and changes in the creditworthiness of lessees, all of which
may affect our ability to refinance property-level mortgage debt when balloon payments are
scheduled.
Interest rates are highly sensitive to many factors, including governmental monetary and tax
policies, domestic and international economic and political conditions, and other factors beyond
our control. An increase in interest rates would likely cause the value of our 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.
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 the fixed rate debt. Annual interest rates on fixed rate debt as of
December 31, 2006 ranged from 4.87% to 10.13%. The annual interest rates on variable rate debt as
of December 31, 2006 ranged from 3.86% to 7.57%. Both our secured and unsecured lines of credit
bear interest at variable rates based on LIBOR plus a spread, which can range from 0.6% to 2.35%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
Thereafter |
|
Total |
|
Fair value |
Fixed rate debt |
|
$ |
23,340 |
|
|
$ |
8,390 |
|
|
$ |
35,473 |
|
|
$ |
13,175 |
|
|
$ |
25,712 |
|
|
$ |
102,575 |
|
|
$ |
208,665 |
|
|
$ |
204,637 |
|
Weighted average interest rate |
|
|
7.77 |
% |
|
|
7.26 |
% |
|
|
7.28 |
% |
|
|
7.33 |
% |
|
|
7.32 |
% |
|
|
5.55 |
% |
|
|
|
|
|
|
|
|
Variable rate debt |
|
$ |
4,934 |
|
|
$ |
23,743 |
|
|
$ |
3,455 |
|
|
$ |
3,553 |
|
|
$ |
3,711 |
|
|
$ |
30,592 |
|
|
$ |
69,988 |
|
|
$ |
69,988 |
|
Annual
interest expense would increase or decrease on variable rate debt by approximately $700 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 December 31, 2006 by approximately $5,772.
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 year ended December 31, 2006, we recognized a gain of $488 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 year ended
December 31, 2006, we recognized net unrealized foreign currency gains of $1,003. The cumulative
foreign currency translation adjustment reflects a loss of $36 as of December 31, 2006. 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.
Scheduled future minimum rents, exclusive of renewals, under non-cancelable operating leases and
scheduled principal payments for mortgage notes payable for our foreign operations during each of
the next five years and thereafter are as follows:
W. P. Carey 2006 10-K 43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
Thereafter |
|
Total |
Future minimum rents (1) |
|
$ |
7,344 |
|
|
$ |
6,904 |
|
|
$ |
6,251 |
|
|
$ |
4,456 |
|
|
$ |
3,884 |
|
|
$ |
5,044 |
|
|
$ |
33,883 |
|
Mortgage notes payable (1) |
|
$ |
2,934 |
|
|
$ |
3,242 |
|
|
$ |
3,455 |
|
|
$ |
3,553 |
|
|
$ |
3,712 |
|
|
$ |
30,591 |
|
|
$ |
47,487 |
|
|
|
|
(1) |
|
Based on the December 31, 2006 exchange rate for the Euro. |
Item 8. Financial Statements and Supplementary Data.
The following financial statements and schedule are filed as a part of this Report:
Financial statement schedules other than those listed above are omitted because the required
information is given in the financial statements, including the notes thereto, or because the
conditions requiring their filing do not exist.
W. P. Carey 2006 10-K 44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of W. P. Carey & Co. LLC:
We have completed integrated audits of W. P. Carey & Co. LLCs consolidated financial statements
and of its internal control over financial reporting as of December 31, 2006, in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Our opinions,
based on our audits, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of W. P. Carey & Co. LLC and its
subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2006 in conformity with
accounting principles generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial statement schedule are
the responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our audits. We conducted our
audits of these statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, managements assessment, included in Managements Report on the Internal
Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective
internal control over financial reporting as of December 31, 2006 based on criteria established
in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006, based on criteria
established in Internal Control Integrated Framework issued by the COSO. The Companys
management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on managements assessment and on the effectiveness of the Companys internal control over financial reporting
based on our audit. We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes obtaining an
understanding of internal control over financial reporting, evaluating managements assessment,
testing and evaluating the design and operating effectiveness of internal control, and performing
such other procedures as we consider necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 26, 2007
W. P. Carey 2006 10-K 45
W. P. CAREY & CO. LLC
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Assets |
|
|
|
|
|
|
|
|
Real estate, net |
|
$ |
540,504 |
|
|
$ |
454,478 |
|
Net investment in direct financing leases |
|
|
108,581 |
|
|
|
131,975 |
|
Equity investments in real estate |
|
|
166,147 |
|
|
|
134,567 |
|
Operating real estate, net |
|
|
33,606 |
|
|
|
7,865 |
|
Assets held for sale |
|
|
1,269 |
|
|
|
18,815 |
|
Cash and cash equivalents |
|
|
22,108 |
|
|
|
13,014 |
|
Due from affiliates |
|
|
88,884 |
|
|
|
82,933 |
|
Goodwill |
|
|
63,607 |
|
|
|
63,607 |
|
Intangible assets, net |
|
|
43,742 |
|
|
|
40,700 |
|
Other assets, net |
|
|
24,562 |
|
|
|
35,308 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,093,010 |
|
|
$ |
983,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Members Equity |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Limited recourse mortgage notes payable |
|
$ |
261,152 |
|
|
$ |
226,701 |
|
Limited recourse mortgage notes payable on assets held for sale |
|
|
|
|
|
|
4,412 |
|
Unsecured credit facility |
|
|
2,000 |
|
|
|
15,000 |
|
Secured credit facility |
|
|
15,501 |
|
|
|
|
|
Accrued interest |
|
|
1,974 |
|
|
|
2,036 |
|
Distributions payable |
|
|
17,481 |
|
|
|
16,963 |
|
Due to affiliates |
|
|
1,239 |
|
|
|
2,994 |
|
Deferred revenue |
|
|
40,490 |
|
|
|
23,085 |
|
Accounts payable and accrued expenses |
|
|
32,073 |
|
|
|
23,002 |
|
Prepaid and deferred rental income and security deposits |
|
|
5,548 |
|
|
|
4,414 |
|
Accrued income taxes |
|
|
21,935 |
|
|
|
634 |
|
Deferred income taxes, net |
|
|
41,527 |
|
|
|
39,908 |
|
Other liabilities |
|
|
12,340 |
|
|
|
12,956 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
453,260 |
|
|
|
372,105 |
|
|
|
|
|
|
|
|
Minority interest in consolidated entities |
|
|
7,765 |
|
|
|
3,689 |
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 11)
|
|
|
|
|
|
|
|
|
Members equity: |
|
|
|
|
|
|
|
|
Listed shares, no par value, 100,000,000 shares authorized;
38,262,157 and 37,706,247 shares issued and outstanding,
respectively |
|
|
745,969 |
|
|
|
740,593 |
|
Distributions in excess of accumulated earnings |
|
|
(114,008 |
) |
|
|
(131,178 |
) |
Unearned compensation |
|
|
|
|
|
|
(5,119 |
) |
Accumulated other comprehensive income |
|
|
24 |
|
|
|
3,172 |
|
|
|
|
|
|
|
|
Total members equity |
|
|
631,985 |
|
|
|
607,468 |
|
|
|
|
|
|
|
|
Total liabilities and members equity |
|
$ |
1,093,010 |
|
|
$ |
983,262 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
W. P. Carey 2006 10-K 46
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Asset management revenue |
|
$ |
57,633 |
|
|
$ |
52,332 |
|
|
$ |
45,806 |
|
Structuring revenue |
|
|
22,506 |
|
|
|
28,197 |
|
|
|
33,675 |
|
Incentive, termination and subordinated disposition revenue from mergers |
|
|
46,018 |
|
|
|
|
|
|
|
53,588 |
|
Reimbursed costs from affiliates |
|
|
63,630 |
|
|
|
9,962 |
|
|
|
15,388 |
|
Lease revenues |
|
|
74,090 |
|
|
|
67,215 |
|
|
|
59,747 |
|
Other real estate income |
|
|
9,381 |
|
|
|
11,078 |
|
|
|
11,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
273,258 |
|
|
|
168,784 |
|
|
|
219,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
(41,494 |
) |
|
|
(45,219 |
) |
|
|
(35,597 |
) |
Reimbursable costs |
|
|
(63,630 |
) |
|
|
(9,962 |
) |
|
|
(15,388 |
) |
Depreciation and amortization |
|
|
(26,048 |
) |
|
|
(20,952 |
) |
|
|
(21,173 |
) |
Property expenses |
|
|
(7,046 |
) |
|
|
(6,932 |
) |
|
|
(5,329 |
) |
Impairment charges and loan losses |
|
|
(1,147 |
) |
|
|
(5,704 |
) |
|
|
(12,899 |
) |
Other real estate expenses |
|
|
(5,881 |
) |
|
|
(6,327 |
) |
|
|
(6,261 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(145,246 |
) |
|
|
(95,096 |
) |
|
|
(96,647 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Other interest income |
|
|
3,433 |
|
|
|
3,511 |
|
|
|
3,092 |
|
Income from equity investments in real estate |
|
|
7,608 |
|
|
|
5,182 |
|
|
|
5,308 |
|
Minority interest in income |
|
|
(812 |
) |
|
|
(264 |
) |
|
|
(1,499 |
) |
Gain on sale of securities, foreign currency transactions and other gains, net |
|
|
12,943 |
|
|
|
1,305 |
|
|
|
1,222 |
|
Interest expense |
|
|
(18,139 |
) |
|
|
(16,787 |
) |
|
|
(14,453 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
5,033 |
|
|
|
(7,053 |
) |
|
|
(6,330 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
133,045 |
|
|
|
66,635 |
|
|
|
116,575 |
|
Provision for income taxes |
|
|
(45,491 |
) |
|
|
(19,390 |
) |
|
|
(50,983 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
87,554 |
|
|
|
47,245 |
|
|
|
65,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations of discontinued properties |
|
|
(1,346 |
) |
|
|
6,951 |
|
|
|
9,359 |
|
Gain on sale of real estate, net |
|
|
3,452 |
|
|
|
10,474 |
|
|
|
89 |
|
Impairment charges on assets held for sale |
|
|
(3,357 |
) |
|
|
(16,066 |
) |
|
|
(9,199 |
) |
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations |
|
|
(1,251 |
) |
|
|
1,359 |
|
|
|
249 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
86,303 |
|
|
$ |
48,604 |
|
|
$ |
65,841 |
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings (Loss) Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
2.32 |
|
|
$ |
1.25 |
|
|
$ |
1.75 |
|
(Loss) income from discontinued operations |
|
|
(0.03 |
) |
|
|
0.04 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2.29 |
|
|
$ |
1.29 |
|
|
$ |
1.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
2.25 |
|
|
$ |
1.21 |
|
|
$ |
1.68 |
|
(Loss) income from discontinued operations |
|
|
(0.03 |
) |
|
|
0.04 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2.22 |
|
|
$ |
1.25 |
|
|
$ |
1.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions Declared Per Share |
|
$ |
1.82 |
|
|
$ |
1.79 |
|
|
$ |
1.76 |
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
37,668,920 |
|
|
|
37,688,835 |
|
|
|
37,417,918 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
39,093,897 |
|
|
|
39,020,801 |
|
|
|
38,961,748 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
W. P. Carey 2006 10-K 47
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Net income |
|
$ |
86,303 |
|
|
$ |
48,604 |
|
|
$ |
65,841 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized
appreciation on
marketable securities,
net of taxes of $379 in
2006, $327 in 2005 and
$1,098 in 2004 |
|
|
799 |
|
|
|
722 |
|
|
|
1,467 |
|
Reversal of unrealized
appreciation on sale of
marketable securities,
net of taxes of $2,254
in 2006 |
|
|
(4,746 |
) |
|
|
|
|
|
|
|
|
Foreign currency
translation adjustment,
net of taxes of $379 in
2006, $611 in 2005 and
$122 in 2004 |
|
|
799 |
|
|
|
(1,350 |
) |
|
|
(163 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,148 |
) |
|
|
(628 |
) |
|
|
1,304 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
83,155 |
|
|
$ |
47,976 |
|
|
$ |
67,145 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
W. P. Carey 2006 10-K 48
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS OF MEMBERS EQUITY
For the years ended December 31, 2006, 2005 and 2004
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of |
|
|
|
|
|
|
Accumulated Other |
|
|
|
|
|
|
|
|
|
|
Paid-in |
|
|
Accumulated |
|
|
Unearned |
|
|
Comprehensive |
|
|
|
|
|
|
Shares |
|
|
Capital |
|
|
Earnings |
|
|
Compensation |
|
|
Income (Loss) |
|
|
Total |
|
Balance at January 1, 2004 |
|
|
36,745,027 |
|
|
$ |
709,724 |
|
|
$ |
(112,570 |
) |
|
$ |
(4,863 |
) |
|
$ |
2,496 |
|
|
$ |
594,787 |
|
Cash proceeds on issuance of shares, net |
|
|
274,262 |
|
|
|
6,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,649 |
|
Shares issued in connection with services rendered |
|
|
8,938 |
|
|
|
271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
271 |
|
Shares issued in connection with prior acquisition |
|
|
500,000 |
|
|
|
13,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,734 |
|
Shares and options issued under share incentive
plans |
|
|
118,683 |
|
|
|
3,538 |
|
|
|
|
|
|
|
(4,409 |
) |
|
|
|
|
|
|
(871 |
) |
Forfeitures
of shares |
|
|
(32,869 |
) |
|
|
(138 |
) |
|
|
|
|
|
|
138 |
|
|
|
|
|
|
|
|
|
Distributions declared |
|
|
|
|
|
|
|
|
|
|
(65,712 |
) |
|
|
|
|
|
|
|
|
|
|
(65,712 |
) |
Tax benefit share incentive plans |
|
|
|
|
|
|
3,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,423 |
|
Amortization of unearned compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,768 |
|
|
|
|
|
|
|
3,768 |
|
Repurchase and retirement of shares |
|
|
(90,579 |
) |
|
|
(2,543 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,543 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
65,841 |
|
|
|
|
|
|
|
|
|
|
|
65,841 |
|
Change in other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,304 |
|
|
|
1,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
|
37,523,462 |
|
|
|
734,658 |
|
|
|
(112,441 |
) |
|
|
(5,366 |
) |
|
|
3,800 |
|
|
|
620,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash proceeds on issuance of shares, net |
|
|
182,273 |
|
|
|
4,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,400 |
|
Shares issued in connection with services rendered |
|
|
7,288 |
|
|
|
217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
217 |
|
Shares and options issued under share incentive
plans |
|
|
101,300 |
|
|
|
3,422 |
|
|
|
|
|
|
|
(3,422 |
) |
|
|
|
|
|
|
|
|
Forfeitures
of shares |
|
|
(14,301 |
) |
|
|
(502 |
) |
|
|
|
|
|
|
459 |
|
|
|
|
|
|
|
(43 |
) |
Distributions declared |
|
|
|
|
|
|
|
|
|
|
(67,341 |
) |
|
|
|
|
|
|
|
|
|
|
(67,341 |
) |
Tax benefit share incentive plans |
|
|
|
|
|
|
604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
604 |
|
Amortization of unearned compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,210 |
|
|
|
|
|
|
|
3,210 |
|
Repurchase and retirement of shares |
|
|
(93,775 |
) |
|
|
(2,206 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,206 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
48,604 |
|
|
|
|
|
|
|
|
|
|
|
48,604 |
|
Change in other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(628 |
) |
|
|
(628 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
37,706,247 |
|
|
|
740,593 |
|
|
|
(131,178 |
) |
|
|
(5,119 |
) |
|
|
3,172 |
|
|
|
607,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of unearned compensation on
adoption of SFAS 123(R) |
|
|
|
|
|
|
(5,119 |
) |
|
|
|
|
|
|
5,119 |
|
|
|
|
|
|
|
|
|
Reclassification of prepayment for services
rendered
paid in shares on adoption of SFAS 123(R) |
|
|
|
|
|
|
(307 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(307 |
) |
Cash proceeds on issuance of shares, net |
|
|
521,494 |
|
|
|
8,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,400 |
|
Shares issued in connection with services rendered |
|
|
9,804 |
|
|
|
260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
260 |
|
Shares and options issued under share incentive
plans |
|
|
123,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures
of shares |
|
|
(26,263 |
) |
|
|
(168 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(168 |
) |
Distributions declared |
|
|
|
|
|
|
|
|
|
|
(69,133 |
) |
|
|
|
|
|
|
|
|
|
|
(69,133 |
) |
Tax benefit share incentive plans |
|
|
|
|
|
|
626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
626 |
|
Stock based compensation expense under
SFAS 123(R) |
|
|
|
|
|
|
3,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,621 |
|
Repurchase and retirement of shares |
|
|
(73,025 |
) |
|
|
(1,937 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,937 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
86,303 |
|
|
|
|
|
|
|
|
|
|
|
86,303 |
|
Change in other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,148 |
) |
|
|
(3,148 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
|
38,262,157 |
|
|
$ |
745,969 |
|
|
$ |
(114,008 |
) |
|
$ |
|
|
|
$ |
24 |
|
|
$ |
631,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
W. P. Carey 2006 10-K 49
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
86,303 |
|
|
$ |
48,604 |
|
|
$ |
65,841 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization including intangible assets and deferred financing costs |
|
|
27,207 |
|
|
|
21,942 |
|
|
|
22,546 |
|
Income from equity investments in real estate in excess of distributions received |
|
|
(160 |
) |
|
|
479 |
|
|
|
(793 |
) |
Gains on sale of real estate and investments, net |
|
|
(14,774 |
) |
|
|
(10,570 |
) |
|
|
(90 |
) |
Recognition of deferred gain on completion of development project |
|
|
|
|
|
|
(2,000 |
) |
|
|
|
|
Minority interest in income |
|
|
812 |
|
|
|
264 |
|
|
|
1,499 |
|
Straight-line rent adjustments |
|
|
3,152 |
|
|
|
3,776 |
|
|
|
1,732 |
|
Management income received in shares of affiliates |
|
|
(31,020 |
) |
|
|
(31,858 |
) |
|
|
(20,999 |
) |
Unrealized (gain) loss on foreign currency transactions, warrants and securities |
|
|
(1,128 |
) |
|
|
779 |
|
|
|
(790 |
) |
Impairment charges and loan losses |
|
|
4,504 |
|
|
|
21,770 |
|
|
|
22,098 |
|
Deferred income taxes |
|
|
1,620 |
|
|
|
1,549 |
|
|
|
8,827 |
|
Realized (gain) loss on foreign currency transactions |
|
|
(488 |
) |
|
|
19 |
|
|
|
(430 |
) |
Costs paid by issuance of shares |
|
|
|
|
|
|
201 |
|
|
|
168 |
|
Increase (decrease) in accrued income taxes |
|
|
21,301 |
|
|
|
(3,274 |
) |
|
|
2,099 |
|
Decrease in prepaid income taxes |
|
|
1,390 |
|
|
|
|
|
|
|
|
|
Tax charge share incentive plan |
|
|
|
|
|
|
604 |
|
|
|
3,423 |
|
Stock-based
compensation expense |
|
|
3,453 |
|
|
|
3,936 |
|
|
|
3,768 |
|
Deferred acquisition revenue received |
|
|
12,543 |
|
|
|
8,961 |
|
|
|
5,978 |
|
Increase in structuring revenue receivable |
|
|
(3,459 |
) |
|
|
(5,304 |
) |
|
|
(14,860 |
) |
Net changes in other operating assets and liabilities |
|
|
8,684 |
|
|
|
(7,171 |
) |
|
|
(1,168 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
119,940 |
|
|
|
52,707 |
|
|
|
98,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Distributions received from equity investments in real estate in excess of equity
income |
|
|
13,286 |
|
|
|
6,164 |
|
|
|
6,933 |
|
Purchases of real estate and equity investments in real estate |
|
|
(102,049 |
) |
|
|
|
|
|
|
(115,522 |
) |
Capital expenditures |
|
|
(4,937 |
) |
|
|
(2,975 |
) |
|
|
(1,596 |
) |
Purchase of investment |
|
|
(150 |
) |
|
|
(465 |
) |
|
|
|
|
Loans to affiliates |
|
|
(108,000 |
) |
|
|
|
|
|
|
|
|
Proceeds from repayment of loans to affiliates |
|
|
108,000 |
|
|
|
|
|
|
|
|
|
Proceeds from sales of property and investments |
|
|
50,053 |
|
|
|
45,542 |
|
|
|
6,548 |
|
Release of funds from escrow in connection with the sale of property |
|
|
10,134 |
|
|
|
|
|
|
|
7,185 |
|
Funds placed in escrow in connection with the sale of property |
|
|
(10,374 |
) |
|
|
|
|
|
|
|
|
Payment of deferred acquisition revenue to affiliate |
|
|
(524 |
) |
|
|
(524 |
) |
|
|
(524 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(44,561 |
) |
|
|
47,742 |
|
|
|
(96,976 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Distributions paid |
|
|
(68,615 |
) |
|
|
(67,004 |
) |
|
|
(65,073 |
) |
Contributions from minority interests |
|
|
2,345 |
|
|
|
1,539 |
|
|
|
|
|
Distributions to minority interests |
|
|
(6,226 |
) |
|
|
(355 |
) |
|
|
(1,101 |
) |
Scheduled payments of mortgage principal |
|
|
(11,742 |
) |
|
|
(9,229 |
) |
|
|
(9,428 |
) |
Proceeds from mortgages and credit facility |
|
|
174,501 |
|
|
|
121,764 |
|
|
|
170,000 |
|
Prepayments of mortgage principal and credit facility |
|
|
(166,660 |
) |
|
|
(151,893 |
) |
|
|
(106,962 |
) |
Release of funds from escrow in connection with the financing of properties |
|
|
4,031 |
|
|
|
|
|
|
|
|
|
Payment of financing costs |
|
|
(1,601 |
) |
|
|
(797 |
) |
|
|
(1,238 |
) |
Proceeds from issuance of shares |
|
|
8,660 |
|
|
|
4,400 |
|
|
|
6,649 |
|
Excess tax benefits associated with stock based compensation awards |
|
|
626 |
|
|
|
|
|
|
|
|
|
Repurchase and retirement of shares |
|
|
(1,937 |
) |
|
|
(2,206 |
) |
|
|
(2,543 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(66,618 |
) |
|
|
(103,781 |
) |
|
|
(9,696 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
333 |
|
|
|
(369 |
) |
|
|
179 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
9,094 |
|
|
|
(3,701 |
) |
|
|
(7,644 |
) |
Cash and cash equivalents, beginning of year |
|
|
13,014 |
|
|
|
16,715 |
|
|
|
24,359 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
22,108 |
|
|
$ |
13,014 |
|
|
$ |
16,715 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
(Continued)
W. P. Carey 2006 10-K 50
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share and per share amounts)
Non-cash investing and financing activities:
A. |
|
The Company issued restricted shares valued at $260 in 2006, $217 in 2005 and $271 in 2004,
to certain directors in consideration of service rendered. Restricted shares and stock options
valued at $5,430, $3,422 and $3,538 in 2006, 2005 and 2004, respectively, were issued to
officers and employees and were recorded to additional paid-in
capital of which $168, $459 and
$138, respectively, was forfeited in 2006, 2005 and 2004. Included in compensation expense for
the years ended December 31, 2006, 2005 and 2004 were $3,568, $3,210 and $3,768, respectively,
relating to equity awards from the Companys share incentive plans. |
B. |
|
During 2006, the Company acquired interests in 37 properties from Corporate Property
Associates 12 Incorporated with a fair value of $126,006 for approximately $67,289 in cash and
the assumption of approximately $59,741 in limited recourse mortgage notes payable. The fair
value of the assumed mortgages was $58,717. |
C. |
|
In connection with the acquisition of Carey Management LLC in June 2000, the Company had an
obligation to issue up to an additional 2,000,000 shares over four years if specified
performance criteria were achieved. As of December 31, 2004, 1,900,000 shares had been issued
and our obligation has been satisfied. Based on the performance criteria 500,000 shares were
issued in 2004 for the year ended December 31, 2003 valued at $13,734. The amounts
attributable to the 1,900,000 shares are included in goodwill. |
D. |
|
During 2004, the Company acquired interests in 17 properties from Carey Institutional
Properties Incorporated with a fair value of $142,161 for approximately $115,158 in cash and
the assumption of approximately $27,003 in limited recourse mortgage notes payable. The fair
value of the assumed mortgages was $27,756. |
|
E. |
|
During 2004, $7,185 was released from an escrow account from the sale of a property in 2003. |
Supplemental cash flows information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Interest paid, net of amounts capitalized |
|
$ |
17,206 |
|
|
$ |
15,579 |
|
|
$ |
13,901 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
20,730 |
|
|
$ |
20,989 |
|
|
$ |
36,944 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
W. P. Carey 2006 10-K 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 publicly registered affiliated real estate investment trusts
(CPA® REITs) that each make similar investments: Corporate Property Associates 14
Incorporated (CPA®:14), Corporate Property Associates 15 Incorporated
(CPA®:15) and Corporate Property Associates 16 Global Incorporated
(CPA®:16 Global) and served in this capacity for Corporate Property Associates 12
Incorporated (CPA®:12) until its merger with CPA®:14 during 2006 and
Carey Institutional Properties Incorporated (CIP®) until its merger with
CPA®:15 during 2004. As of December 31, 2006, the Company owns and manages over 800
commercial properties domestically and internationally including its own portfolio, which is
comprised of 187 commercial properties net leased to 111 tenants and totaling approximately 18
million square feet (on a pro rata basis) and had an occupancy rate of approximately 96% as of
December 31, 2006.
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 and receive termination payments
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, primarily on a triple-net leased basis.
Organization
The Company commenced operations on January 1, 1998 by combining the limited partnership interests
in nine CPA® Partnerships, at which time the Company listed on the New York Stock
Exchange. On June 28, 2000, the Company acquired the net lease real estate management operations of
Carey Management LLC (Carey Management) from William P. Carey (Carey), Chairman and then
Co-Chief Executive Officer of the Company, subsequent to receiving shareholder approval. The assets
acquired included the advisory agreements with four affiliated CPA® REITs, the
Companys management agreement, the stock of an affiliated broker-dealer, investments in the common
stock of the CPA® REITs, and certain office furniture, fixtures, equipment and
employees required to carry on the business operations of Carey Management. The purchase price
consisted of the initial issuance of 8,000,000 shares with an additional 2,000,000 shares issuable
over four years if specified performance criteria were achieved through a period ended December 31,
2004 (of which 1,900,000 shares were issued representing an aggregate value of $41,229). The
initial 8,000,000 shares issued were restricted from resale for a period of up to three years and
the additional shares are subject to Section 144 regulations. The acquisition of the interests in
Carey Management was accounted for as a purchase and was recorded at the fair value of the initial
8,000,000 shares issued. The total initial purchase price was approximately $131,300 including the
issuance of 8,000,000 shares, transaction costs of $2,605, the acquisition of Carey Managements
minority interests in the CPA® partnerships and the value of restricted shares and
options issued in respect of the interests of certain officers in a non-qualified deferred
compensation plan of Carey Management.
The purchase price was allocated to the assets and liabilities acquired based upon their fair
market values. Intangible assets acquired, including the advisory agreements with the
CPA® REITs, the Companys management agreement and the trade name (reclassified to
goodwill on January 1, 2002), were determined pursuant to a third party valuation. The value of the
advisory agreements and the management agreement were based on a discounted cash flow analysis of
projected revenue. The excess of the purchase price over the fair values of the identified tangible
and intangible assets has been recorded as goodwill. The value of additional shares issued under
the acquisition agreement is recognized as additional purchase price and recorded as goodwill.
Issuances based on performance criteria are valued based on the market price of the shares on the
date when the performance criteria are achieved.
In 2006, the Company formed Carey REIT, INC. (Carey REIT) to hold certain properties, including
certain properties acquired from
CPA®:12. Carey REIT has issued both common and
preferred stock with the later being held entirely by employees of the Company.
W. P. Carey 2006 10-K 52
Notes to Consolidated Financial Statements
Note 2. Summary of Significant Accounting Policies
Basis of Consolidation
The 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 material inter-entity
transactions have been eliminated.
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.
In determining whether the Company controls a non-VIE, the Companys consideration includes using
the 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 Certain Rights (EITF 04-05). The scope of EITF 04-05 is
limited to limited partnerships or similar entities that are not variable interest entities under
FIN 46(R). The EITF reached a consensus that the general partners in a limited partnership (or
similar entity) are presumed to control the entity regardless of the level of their ownership and,
accordingly, may be required to consolidate the entity. This presumption may be overcome if the
agreements provide the limited partners with either (a) the substantive ability to dissolve
(liquidate) the limited partnership or otherwise remove the general partners without cause or (b)
substantive participating rights. If it is deemed that the limited partners rights overcome the
presumption of control by a general partner of the limited partnership, the general partner shall
account for its investment in the limited partnership using the equity method of accounting. As a
result of adopting the provisions of EITF 04-05 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. The consolidation of
this entity did not have a material impact on the Companys financial position or results of
operations.
The consolidated financial statements include the accounts of Corporate Property Associates
International Incorporated (CPAI), which was formed in July 2003. The Company owns all of CPAIs
outstanding common stock. During 2005, CPAI withdrew its registration statement with the SEC for a
public offering of its common stock and as a result, the Company wrote off approximately $811 in
organization costs.
The Company has several interests in joint ventures that are consolidated and have minority
interests that have finite lives and were considered mandatorily redeemable non-controlling
interests prior to the issuance of Staff Position No. 150-3 (FSP FAS 150-3). As a result of the
deferral provisions of FSP 150-3, these minority interests have been reflected as liabilities.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Reclassification and Revisions
Certain prior year amounts have been reclassified to conform to the current year financial
statement presentation. The consolidated financial statements included in this Form 10-K have been
adjusted to combine rental income and interest income from direct financing leases as lease
revenues, combine other operating income and revenues of other business operations as other income,
reflect reimbursed and reimbursable costs as separate components of revenue and operating expenses
and reflect the disposition (or planned disposition) of certain properties as discontinued
operations for all periods presented.
Purchase Price Allocation
In connection with the Companys acquisition of properties, purchase costs are allocated to the
tangible and intangible assets and liabilities acquired based on their estimated fair values. The
value of the tangible assets, consisting of land, buildings and tenant improvements, are determined
as if vacant. Intangible assets including the above-market value of leases, the value of in-place
leases
W. P. Carey 2006 10-K 53
Notes to Consolidated Financial Statements
and the value of tenant relationships are recorded at their relative fair values. Below-market
value of leases are also recorded at their relative fair values and are recorded as liabilities in
the accompanying consolidated financial statements.
Above-market and below-market in-place lease values for owned properties are recorded based on the
present value (using an interest rate reflecting the risks associated with the leases acquired) of
the difference between (i) the contractual amounts to be paid pursuant to the leases negotiated and
in-place at the time of acquisition of the properties and (ii) managements estimate of fair market
lease rates for the property or equivalent property, measured over a period equal to the remaining
non-cancelable term of the lease. The capitalized above-market lease value is amortized as a
reduction of rental income over the remaining non-cancelable term of each lease. The capitalized
below-market lease value is amortized as an increase to rental income over the initial term and any
fixed rate renewal periods in the respective leases.
The total amount of other intangibles is allocated to in-place lease values and tenant relationship
intangible values based on managements evaluation of the specific characteristics of each tenants
lease and the Companys overall relationship with each tenant. Characteristics that are considered
in allocating these values include the nature and extent of the existing relationship with the
tenant, prospects for developing new business with the tenant, the tenants credit quality and the
expectation of lease renewals among other factors. Third party appraisals or managements estimates
are used to determine these values. Intangibles for above-market and below-market leases, in-place
lease intangibles and tenant relationships are amortized over their estimated useful lives. If a
lease is terminated the unamortized portion of each intangible, including market rate adjustments,
in-place lease values and tenant relationship values, is charged to expense.
Factors considered in the analysis include the estimated carrying costs of the property during a
hypothetical expected lease-up period, current market conditions and costs to execute similar
leases. The Company also considers information obtained about a property in connection with its
pre-acquisition due diligence. Estimated carrying costs include real estate taxes, insurance, other
property operating costs and estimates of lost rentals at market rates during the hypothetical
expected lease-up periods, based on managements assessment of specific market conditions.
Estimated costs to execute leases including commissions and legal costs to the extent that such
costs are not already incurred with a new lease that has been negotiated in connection with the
purchase of the property are also considered.
The value of in-place leases is amortized to expense over the remaining initial term of each lease.
The value of tenant relationship intangibles is amortized to expense over the initial and expected
renewal terms of the leases but no amortization periods for intangibles will exceed the remaining
depreciable life of the building.
Operating Real Estate
Land and buildings and personal property are carried at cost less accumulated depreciation.
Renewals and improvements are capitalized, while replacements, maintenance and repairs that do not
improve or extend the lives of the respective assets are expensed as incurred.
Real Estate Under Construction and Redevelopment
For properties under construction, operating expenses including interest charges and other property
expenses, including real estate taxes, are capitalized rather than expensed and incidental revenue
is recorded as a reduction of capitalized project costs. Interest is capitalized by applying the
interest rate applicable to outstanding borrowings to the average amount of accumulated
expenditures for properties under construction during the period.
Cash Equivalents
The Company considers all short-term, highly liquid investments that are both readily convertible
to cash and have a maturity of three months or less at the time of purchase to be cash equivalents.
Items classified as cash equivalents include money market funds. Substantially all of the Companys
cash and cash equivalents at December 31, 2006 and 2005 were held in the custody of two financial
institutions and these balances, at times, can exceed federally insurable limits. The Company
mitigates this risk by depositing funds only with major financial institutions.
Due to Affiliates
Included in due to affiliates are deferred acquisition revenue and amounts related to issuable
shares for meeting the performance criteria in connection with the acquisition of Carey Management.
Deferred acquisition revenue is payable for services provided by Carey Management prior to the
termination of the management contract, relating to the identification, evaluation, negotiation,
financing and purchase of properties. This revenue is payable in eight equal annual installments
each January following the first anniversary of the date a property was purchased.
W. P. Carey 2006 10-K 54
Notes to Consolidated Financial Statements
Other Assets and Liabilities
Included in other assets are accrued rents and interest receivable, deferred rent receivable, notes
receivable, deferred charges, escrow balances held by lenders, restricted cash balances and
marketable securities. Included in other liabilities are accrued interest, miscellaneous amounts
held on behalf of tenants, deferred revenue, including unamortized below-market rent intangibles,
construction rent and minority interests that are subject to redemption. Deferred charges include
costs incurred in connection with debt financing and refinancing and are amortized and included in
interest expense over the terms of the related debt obligations using the effective interest
method. Deferred rent receivable is primarily the aggregate difference for operating leases between
scheduled rents which vary during the lease term and rent recognized on a straight-line basis.
Minority interests subject to redemption are recorded at fair value based on a cash flow model with
changes in fair value reflected in the determination of net income. Marketable securities are
classified as available-for-sale securities and reported at fair value with the Companys interest
in unrealized gains and losses on these securities reported as a component of other comprehensive
income until realized.
Real Estate Leased to Others
The Companys real estate is leased to others on a net lease basis, whereby the tenant is generally
responsible for all operating expenses relating to the property, including property taxes,
insurance, maintenance, repairs, renewals and improvements. Expenditures for maintenance and
repairs including routine betterments are charged to operations as incurred. Significant
renovations that increase the useful life of the properties are capitalized. For the year ended
December 31, 2006, lessees were responsible for the direct payment of real estate taxes of
approximately $8,000.
Substantially all of the Companys leases provide for either scheduled rent increases, periodic
rent increases based on formulas indexed to increases in the Consumer Price Index (CPI) or sales
overrides. Rents from sales overrides (percentage rents) are recognized as reported by the lessees,
that is, after the level of sales requiring a rental payment to the Company is reached. CPI
increases are contingent on future events and are therefore not included in straight-line rent
calculations.
The leases are accounted for as either direct financing or operating leases. Such methods are
described below:
Direct financing method Leases accounted for under the direct financing method are recorded
at their net investment (see Note 5). Unearned income is deferred and amortized to income over the
lease terms so as to produce a constant periodic rate of return on the Companys net investment in
the lease.
Operating leases Real estate is recorded at cost less accumulated depreciation; minimum
rental revenue is recognized on a straight-line basis over the term of the related leases and
expenses (including depreciation) are charged to operations as incurred (see Note 4).
On an ongoing basis, the Company assesses its ability to collect rent and other tenant-based
receivables and determines an appropriate allowance for uncollected amounts. Because the real
estate operations has a limited number of lessees, the Company believes that it is necessary to
evaluate the collectibility of these receivables based on the facts and circumstances of each
situation rather than solely using statistical methods. The Company generally recognizes a
provision for uncollected rents and other tenant receivables and measures its allowance against
actual arrearages. For amounts in arrears, the Company makes subjective judgments based on its
knowledge of a lessees circumstances and may reserve for the entire receivable amount from a
lessee because there has been significant or continuing deterioration in the lessees ability to
meet its lease obligations.
Assets Held for Sale
Assets held for sale are accounted for at the lower of carrying value or fair value less costs to
dispose. Assets are classified as held for sale when the Company has committed to a plan to
actively market a property for sale and expects that a sale will be completed within one year. The
results of operations and the related gain or loss on sale of properties classified as held for
sale are included in discontinued operations (see Note 7).
If circumstances arise that previously were considered unlikely and, as a result, the Company
decides not to sell a property previously classified as held for sale, the property is reclassified
as held and used. A property that is reclassified is measured and recorded individually at the
lower of (a) its carrying amount before the property was classified as held for sale, adjusted for
any depreciation expense that would have been recognized had the property been continuously
classified as held and used or (b) the fair value at the date of the subsequent decision not to
sell.
The Company recognizes gains and losses on the sale of properties when among other criteria, the
parties are bound by the terms of the contract, all consideration has been exchanged and all
conditions precedent to closing have been performed. At the time the sale is consummated, a gain or
loss is recognized as the difference between the sale price less any closing costs and the carrying
value of the property.
W. P. Carey 2006 10-K 55
Notes to Consolidated Financial Statements
Revenue Recognition
The Company earns structuring and asset-based revenue. Structuring and financing revenue are earned
for investment banking services provided in connection with the analysis, negotiation and
structuring of transactions, including acquisitions and dispositions and the placement of mortgage
financing obtained by the CPA® REITs. Asset-based revenue consists of property
management, leasing and advisory revenue and reimbursement of certain expenses in accordance with
the separate management agreements with each CPA® REIT for administrative services
provided for operation of the CPA® REIT. Receipt of the incentive revenue portion of
the management revenue (performance revenue), however, is subordinated to the achievement of
specified cumulative return requirements by the shareholders of the CPA® REITs. The
performance revenue may be collected in cash or shares of the CPA® REIT at the option
of the Company. During 2006, 2005 and 2004, the Company elected to receive its earned performance
revenue in CPA® REIT shares. Performance revenue of CIP® in the amount of
$1,494 was received in cash in 2004.
All revenue is recognized as earned. Structuring revenue is earned upon the consummation of a
transaction and asset management revenue is earned when services are performed. Revenue subject to
subordination is recognized only when the contingencies affecting the payment of such revenue are
resolved, that is, when the performance criteria of the CPA® REIT is achieved and
contractual limitations are not exceeded. As of December 31, 2006, $800 of structuring revenue from
prior year transactions is recorded as deferred revenue in other liabilities, because a limitation
which provides that certain structuring revenue cannot exceed 4.5% of the aggregate cost of
properties of a CPA® REIT was exceeded. In addition, CPA®:16 Global did
not meet the performance criterion, as defined in the advisory agreements, and therefore, for the
year ended December 31, 2006, performance revenue of $5,527 and deferred acquisition revenue of
$10,809 have been deferred until the performance criterion is met.
The Company is also reimbursed for certain costs incurred in providing services, including
broker-dealer commissions paid on behalf of the CPA® REITs, marketing costs and the
cost of personnel provided for the administration of the CPA® REITs. Reimbursement
income is recorded as the expenses are incurred, subject to limitations on a CPA®
REITs ability to incur offering costs. Prior to 2006,
broker-dealer commissions were paid directly by the CPA® REITs.
Depreciation
Depreciation is computed using the straight-line method over the estimated useful lives of the
properties (generally 40 years) and for furniture, fixtures and equipment (generally up to seven
years).
Impairments
When events or changes in circumstances indicate that the carrying amount may not be recoverable,
the Company assesses the recoverability of its long-lived assets and certain intangible assets
based on projections of undiscounted cash flows, without interest charges, over the life of such
assets. In the event that these cash flows are insufficient, the assets are adjusted to their
estimated fair value. The Company performs a review of its estimate of residual value of its direct
financing leases at least annually to determine whether there has been an other than temporary
decline in the Companys current estimate of residual value of the underlying real estate assets
(i.e., the estimate of what the Company could realize upon sale of the property at the end of the
lease term). If the review indicates a decline in residual value that is other than temporary, a
loss is recognized and the accounting for the direct financing lease will be revised to reflect the
decrease in the expected yield using the changed estimate, that is, a portion of the future cash
flow from the lessee will be recognized as a return of principal rather than as revenue.
The Company tests goodwill for impairment at least annually using a two-step process. To identify
any impairment, the Company first compares the estimated fair value of the reporting unit
(management services segment) with its carrying amount, including goodwill. The Company calculates
the estimated fair value of the management services segment by applying a multiple, based on
comparable companies, to earnings. If the fair value of the management services segment exceeds its
carrying amount, goodwill is not considered to be impaired. If the carrying amount of the
management services unit exceeds its estimated fair value, then the second step is performed to
measure the amount of impairment loss.
For the second step, the Company compares the implied fair value of the goodwill with its carrying
amount and records an impairment charge for the excess of the carrying amount over the fair value.
The implied fair value of the goodwill is determined by allocating the estimated fair value of the
management services segment to its assets and liabilities. The excess of the estimated fair value
of the management services segment over the amounts assigned to its assets and liabilities is the
implied fair value of the goodwill. In accordance with the requirements of Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangibles, the Company performed its
annual tests for impairment of its management services segment, the reportable unit of measurement,
and concluded that the goodwill is not impaired.
Investments in unconsolidated joint ventures are accounted for under the equity method and are
recorded initially at cost, and subsequently adjusted for the Companys proportionate share of
earnings and cash contributions and distributions. On a periodic basis,
the Company assesses whether there are any indicators that the value of equity investments in real
estate may be impaired and whether
W. P. Carey 2006 10-K 56
Notes to Consolidated Financial Statements
or not that impairment is other than temporary. To the extent
impairment has occurred, the charge is measured as the excess of the carrying amount of the
investment over the fair value of the investment.
When the Company identifies assets as held for sale, it discontinues depreciating the assets and
estimates the sales price, net of selling costs, of such assets. If in the Companys opinion, the
net sales price of the assets, which have been identified for sale, is less than the net book value
of the assets, an impairment charge is recognized and a valuation allowance is established. To the
extent that a purchase and sale agreement has been entered into, the allowance is based on the
negotiated sales price. To the extent that the Company has adopted a plan to sell an asset but has
not entered into a sales agreement, it makes judgments of the net sales price based on current
market information. Accordingly, the initial assessment may be greater or less than the purchase
price subsequently committed to and may result in a further adjustment to the fair value of the
property.
Stock Based Compensation
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No.
123 (revised 2004), Share-Based Payment (SFAS 123(R)), using the modified prospective
transition method and therefore has not restated results for prior periods. Under this transition
method, stock-based compensation expense in 2006 included stock-based compensation expense for all
share-based payment 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 No. 123,
Accounting for Stock-Based Compensation (SFAS 123). Stock-based compensation expense for all
share-based payment awards granted after 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. Prior to the adoption of SFAS 123(R), the Company accounted
for stock based compensation using the intrinsic value method prescribed in Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations (APB
No. 25). Under APB No. 25, compensation cost for fixed plans was measured as the excess, if any,
of the quoted market price of the Companys shares at the date of grant over the exercise price of
the option granted. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107)
regarding the SECs interpretation of SFAS 123(R) and the valuation of share-based payments for
public companies. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).
The Company has granted restricted shares and stock options to substantially all employees. Shares
were awarded in the name of the employee, who has all the rights of a shareholder, subject to
certain restrictions of transferability and a risk of forfeiture. The forfeiture provisions on the
awards expire annually, over their respective vesting periods. Shares and stock options subject to
forfeiture provisions have been recorded as unearned compensation and were presented as a separate
component of members equity through January 1, 2006. Since adoption of SFAS 123(R), stock-based
compensation has been included within the additional paid-in capital caption of members equity.
Compensation cost for stock options and restricted stock, if any, is recognized over the applicable
vesting periods.
All transactions with non-employees in which the Company issues stock as consideration for services
received are accounted for based on the fair value of the stock issued or services received,
whichever is more reliably determinable.
Foreign Currency Translation
The Company owns interests in several real estate investments in France. The functional currency
for these investments is the Euro. The translation from the Euro to U. S. Dollars is performed for
assets and liabilities using current exchange rates in effect at the balance sheet date and for
revenue and expense accounts using a weighted average exchange rate during the period. The gains
and losses resulting from this translation are reported as a component of other comprehensive
income as part of members equity. The cumulative translation adjustment as of December 31, 2006
and 2005 was a loss of $36 and $835, respectively.
Foreign currency transactions may produce receivables or payables that are fixed in terms of the
amount of foreign currency that will be received or paid. A change in the exchange rates between
the functional currency and the currency in which a transaction is denominated increases or
decreases the expected amount of functional currency cash flows upon settlement of that
transaction. That increase or decrease in the expected functional currency cash flows is a foreign
currency transaction gain or loss that generally will be included in determining net income for the
period in which the exchange rate changes. Likewise, a transaction gain or loss (measured from the
transaction date or the most recent intervening balance sheet date) whichever is later, realized
upon settlement of a foreign currency transaction generally will be included in net income for the
period in which the transaction is settled. Foreign currency transactions that are (i) designated
as, and are effective as, economic hedges of a net investment and (ii) inter-company foreign
currency transactions that are of a long-term nature (that is, settlement is not planned or
anticipated in the foreseeable future), when the entities to the transactions are consolidated or
accounted for by the equity method in the Companys financial statements will not be included in
determining net income but will be accounted for in the same manner as foreign currency translation
adjustments and
reported as a component of other comprehensive income as part of shareholders equity. The
contributions to the equity investments in
W. P. Carey 2006 10-K 57
Notes to Consolidated Financial Statements
real estate were funded in part through subordinated
debt. Foreign currency intercompany transactions that are scheduled for settlement, consisting
primarily of accrued interest and the translation to the reporting currency of intercompany
subordinated debt with scheduled principal payments, are included in the determination of net
income, and, for the years ended December 31, 2006 and 2005, the Company recognized an unrealized
gain of $1,003 and unrealized loss of $830, respectively, from such transactions. In 2006 and 2005,
the Company recognized a realized gain of $488 and realized a loss of $19, respectively, on foreign
currency transactions in connection with the transfer of cash from foreign operating subsidiaries
to the parent company.
Income Taxes
The Company has elected to be treated as a partnership for U.S. Federal income tax purposes. The
Companys real estate operations are conducted through partnership or limited liability companies
electing to be treated as partnerships for U.S Federal income tax purposes. As partnerships, the
Company and its partnership subsidiaries are generally not directly subject to tax and the taxable
income or loss of these operations are included in the income tax returns of the members;
accordingly, no provision for income tax expense or benefit is reflected in the accompanying
consolidated financial statements. These operations are subject to certain state, local and foreign
taxes.
The Company conducts its management services operations though a wholly owned taxable corporation.
These operations are subject to federal, state, local and foreign taxes as applicable. The
Companys financial statements are prepared on a consolidated basis including this taxable
subsidiary and include a provision for current and deferred taxes on these operations.
Deferred income taxes are provided for the corporate subsidiaries based on earnings reported. The
provision for income taxes differs from the amounts currently payable because of temporary
differences in the recognition of certain income and expense items for financial reporting and tax
reporting purposes. Income taxes are computed under the asset and liability method. The asset and
liability method requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between tax bases and financial bases of assets
and liabilities (see Note 15).
In 2006,
the Company formed Carey REIT to hold certain properties, including
certain properties acquired from
CPA®:12.
Carey REIT has issued both common and preferred stock with the later
being held entirely by employees of the Company. Carey REIT will
elect to be treated as a REIT under Sections 856 through 860 of
the Internal Revenue Code of 1986, as amended (the Code)
with the filing of its 2007 return. In order to maintain its
qualification as a REIT, Carey REIT is required to, among other
things, distribute at least 90% of its net taxable income to its
shareholders (excluding net capital gains) and meet certain tests
regarding the nature of its income and assets. As a REIT, Carey REIT
is not subject to U.S. federal income tax to the extent it
distributes its net taxable income annually to its shareholders.
Accordingly, no provision for U.S. federal income taxes is included
in the accompanying consolidated financial statements. The Company
has and intends to continue to operate so that it meets the
requirements for taxation as a REIT. Many of these requirements,
however, are highly technical and complex. If the Company were to
fail to meet these requirements, the Company would be subject to U.S.
federal income tax.
Recent Accounting Pronouncements
SFAS 123(R)
In December 2004, the FASB issued Statement No. 123(R). The Company adopted SFAS 123(R) on January
1, 2006 using the modified prospective application method. The Companys stock based compensation
accounting policy and transition method are discussed in detail under the heading Stock Based
Compensation above. The impact of adopting SFAS 123(R) in 2006 is discussed in Note 14. Results
for fiscal years 2005 and prior have not been restated.
FIN 47
In March 2005, the FASB issued Interpretation No. 47 Accounting for Conditional Asset Retirement
Obligations (FIN 47). FIN 47 requires an entity to recognize a liability for a conditional asset
retirement obligation when incurred if the liability can be reasonably estimated. FIN 47 clarifies
that the term Conditional Asset Retirement Obligation refers to a legal obligation (pursuant to
existing laws or by contract) to perform an asset retirement activity in which the timing and/or
method of settlement are conditional on a future event that may or may not be within the control of
the entity. FIN 47 also clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. The Company adopted FIN 47 as required
effective December 31, 2005 and the initial application of this Interpretation did not have a
material effect on its financial position or results of operations.
EITF 04-05
In June 2005, the Emerging Issues Task Force (EITF) issued its 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 Certain Rights (EITF 04-05). The
scope of EITF 04-05 is limited to limited partnerships or similar entities that are not variable
interest entities under FIN 46(R). The Task Force reached a consensus that the general partners in
a limited partnership (or similar entity) are presumed to control the entity regardless of the
level of their ownership and, accordingly, may be required to consolidate the entity. This
presumption may be overcome if the agreements provide the limited partners with either (a) the
substantive ability to dissolve (liquidate) the limited partnership or otherwise remove the general
partners without cause or (b) substantive participating rights. If it is deemed that the limited
partners rights overcome the presumption of control by a general partner of the limited
partnership, the general partner shall account for its investment in the limited partnership using
the equity method of accounting. EITF 04-05 was effective immediately for all arrangements created
or modified after June 29, 2005. For all other arrangements, the Company adopted EITF 04-05
effective January 1, 2006. As a result of adopting EITF
04-05, the Company now consolidates a limited liability company that leases property to CheckFree
Holdings Corporation Inc., which was previously accounted for under the equity method of
accounting.
W. P. Carey 2006 10-K 58
Notes to Consolidated Financial Statements
FSP FAS 13-1
In October 2005, the FASB issued FSP No. 13-1 Accounting for Rental Costs Incurred during a
Construction Period (FSP FAS 13-1). FSP FAS 13-1 addresses the accounting for rental costs
associated with operating leases that are incurred during the construction period. FSP FAS 13-1
makes no distinction between the right to use a leased asset during the construction period and the
right to use that asset after the construction period. Therefore, rental costs associated with
ground or building operating leases that are incurred during a construction period shall be
recognized as rental expense, allocated over the lease term in accordance with SFAS No. 13 and
Technical Bulletin 85-3. The Company adopted FSP FAS 13-1 as required on January 1, 2006 and the
initial application of this Staff Position did not have a material impact on its financial position
or results of operations.
SFAS 155
In February 2006, the FASB issued Statement No. 155, Accounting for Certain Hybrid Financial
Instruments an Amendment of FASB No. 133 and 140 (SFAS 155). The purpose of SFAS 155 is to
simplify the accounting for certain hybrid financial instruments by permitting fair value
re-measurement for any hybrid financial instrument that contains an embedded derivative that
otherwise would require bifurcation. SFAS 155 also eliminates the restriction on passive derivative
instruments that a qualifying special-purpose entity may hold. The Company must adopt SFAS 155
effective January 1, 2007 and does not believe that this adoption will have a material impact on
its financial position or results of operations.
FIN 48
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes-an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for
uncertainty in income tax positions. This Interpretation requires that the Company not recognize in
its consolidated financial statements the impact of a tax position that fails to meet the more
likely than not recognition threshold based on the technical merits of the position. The Company
must adopt FIN 48 effective January 1, 2007. The Company is currently evaluating the impact of
adopting FIN 48 on its consolidated financial statements.
SAB 108
In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.
SAB 108 was issued in order to eliminate the diversity of practice surrounding how public companies
quantify financial statement misstatements.
Traditionally, there have been two widely-recognized methods for quantifying the effects of
financial statement misstatements: the rollover method and the iron curtain method. The
rollover method focuses primarily on the impact of a misstatement on the income statement
including the reversing effect of prior year misstatements but its use can lead to the
accumulation of misstatements in the balance sheet. The iron curtain method, on the other hand,
focuses primarily on the effect of correcting the period-end balance sheet with less emphasis on
the reversing effects of prior year errors on the income statement. The Company currently uses the
iron curtain method for quantifying identified financial statement misstatements.
In SAB 108, the SEC staff established an approach that requires quantification of financial
statement misstatements based on the effects of the misstatements on each of the Companys
financial statements and the related financial statement disclosures. This model is commonly
referred to as a dual approach because it requires quantification of errors under both the iron
curtain and rollover methods. SAB 108 permits existing public companies to initially apply its
provisions either by (i) restating prior financial statements as if the dual approach had always
been used or (ii) recording the cumulative effect of initially applying the dual approach as
adjustments to the carrying values of assets and liabilities as of January 1, 2006 with an
offsetting adjustment recorded to the opening balance of retained earnings. Use of the cumulative
effect transition method requires detailed disclosure of the nature and amount of each individual
error being corrected through the cumulative adjustment and how and when it arose. The Company
adopted SAB 108 effective December 31, 2006 using the cumulative effect transition method. The
adoption of SAB 108 had no impact on the Companys financial position or results of operations.
SFAS 157
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (SFAS 157). SFAS
157 provides guidance for using fair value to measure assets and liabilities. This statement
clarifies the principle that fair value should be based on the assumptions that market participants
would use when pricing the asset or liability. SFAS 157 establishes a fair value hierarchy, giving
the highest priority to quoted prices in active markets and the lowest priority to unobservable
data. SFAS 157 applies whenever other standards require assets or liabilities to be measured at
fair value. This statement is effective for the Companys 2008 fiscal year, although early adoption
is permitted. The Company believes that the adoption of SFAS 157 will not have a material effect on
its financial position or results of operations.
W. P. Carey 2006 10-K 59
Notes to Consolidated Financial Statements
Note 3. Transactions with Related Parties
Advisory Services
Directly and through one of its wholly-owned subsidiaries, the Company earns revenue 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 broker-dealer commissions paid on behalf of the CPA®
REITs and marketing and personnel costs. 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 years ended December 31, 2006, 2005 and 2004, total asset-based
revenue earned was $57,633, $52,332 and $45,806, respectively, while reimbursed costs totaled
$63,630, $9,962 and $15,388, respectively. As of December 31, 2006, CPA®:16 - Global did not meet its performance criterion (a non-compounded cumulative distribution return of
6% per annum), as defined in its advisory agreement, and since CPA®:16 - Globals
inception, the Company has deferred cumulative performance revenue of $10,045 that will be
recognized if the performance criterion is met. In 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 2005, the Company elected to
receive all performance revenue from the CPA® REITs as well as the asset management
revenue payable by
CPA®:12
and 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, the Company 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 6%. The Company may 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 years ended December 31, 2006, 2005 and 2004, the Company earned structuring revenue of
$22,506, $28,197 and $33,675, respectively.
CPA®:16
- Global has not met its performance
criterion and since its inception, cumulative deferred structuring revenue of $28,517 and interest
thereon of $1,928 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 affiliates and deferred revenue in the accompanying consolidated balance
sheets as of December 31, 2006 and 2005, is $40,490 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. If the performance criterion is achieved, deferred incentive and commission
compensation related to achievement of the performance criterion, in the amount of approximately
$5,900 (exclusive of interest) as of December 31, 2006, would become payable by the Company to
certain employees.
Merger of CPA®:12
and CPA®:14
In June 2006, the boards of directors of CPA®:12 and
CPA®:14 each
approved a definitive agreement under which CPA®:14 would acquire
CPA®:12s business for a combination of cash and stock (the CPA®:12/14
Merger). The CPA®:12/14 Merger was approved by the shareholders of
CPA®:12 and CPA®:14 in November 2006, and completed on December 1, 2006.
In connection with providing a liquidity event for CPA®:12 shareholders,
CPA®:12 paid the Company termination revenue of $25,379 and subordinated disposition
revenue of $24,418. Included in subordinated disposition revenue is $3,779 payable by
CPA®:12 related to properties the Company acquired from CPA®:12 that was
not recognized as income for financial reporting purposes but reduced the cost of the properties
acquired.
Prior to the CPA®:12/14 Merger, the Company acquired interests in 37 properties from
CPA®:12 (the CPA®:12 Acquisition) with a fair value of $126,006 for
$67,289 in cash and the assumption of limited recourse mortgage notes payable with a fair value of
$58,717. The amounts are inclusive of the Companys pro rata share of equity interests acquired in
the transaction. In addition, the Company made a payment to CPA®:12 of $534 in respect
of one of the properties which had been sold at a price below its previously appraised value. The
purchase price of the properties was based on a third party valuation of each of
CPA®:12s properties. The properties are primarily single tenant net-leased
properties, with remaining lease terms ranging from three to seven years. The majority of the
properties are encumbered with limited recourse mortgage financing with fixed annual interest rates
ranging from 5.5% to 8.5%
and
W. P. Carey 2006 10-K 60
Notes to Consolidated Financial Statements
maturity dates ranging from 2009 to 2017. At the time of the merger the Company owned 2,134,140
shares of CPA®:12 and received $6,808 as a result of the special cash distribution of
$3.19 per share, and elected to receive $9,861 in cash and 1,022,800 shares of CPA®:14
stock in the merger and recorded a gain of $6,521 in accordance with SFAS 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
In connection with the CPA®:12 Acquisition, the Company has agreed that if it enters
into a definitive agreement to sell any of the acquired properties within six months after the
closing of the CPA®:12 Acquisition at a price that is higher than the price paid to
CPA®:12, the Company will pay to former CPA®:12 shareholders an amount
equal to 85% of the excess (net of selling expenses and fees) on any such sale.
A subsidiary of the Company has agreed to indemnify CPA®:14 if
CPA®:14
suffers certain losses arising out of a breach by CPA®:12 of its representations and
warranties under the merger agreement and having a material adverse effect on CPA®:14
after the CPA®:12/14 Merger, up to the amount of fees received by such subsidiary of
the Company in connection with the CPA®:12/14 Merger. The Company has evaluated the
exposure related to this indemnification and has determined the exposure to be minimal. The Company
has also agreed to waive any acquisition fees payable by CPA®:14 under its advisory
agreement with the Company in respect of the properties being acquired in the
CPA®:12/14 Merger and has also agreed to waive any disposition fees that may
subsequently be payable by CPA®:14 to the Company upon a sale of such assets.
Merger
of
CIP® and CPA®:15
In July 2004, the boards of directors of CIP® and
CPA®:15 each approved a
definitive agreement under which CPA®:15 would acquire
CIP®s business in
a stock-for-stock merger (the CIP®/CPA®:15 Merger). The
CIP®/CPA®:15 Merger was approved by the shareholders of
CIP®
and CPA®:15 in August 2004, and completed on September 1, 2004. In connection with
providing a liquidity event for CIP® shareholders, CIP® paid the Company
incentive revenue of $23,681 and disposition revenue of $22,679. Disposition revenues relating to
the interests in the properties acquired by the Company of $4,265 were not earned and were applied,
for financial reporting purposes, as a reduction in the cost basis of such interests. The Company
also recognized structuring revenue of $11,493 in connection with CPA®:15s
acquisition of properties in connection with the CIP®/CPA®:15 Merger.
Prior to the CIP®/CPA®:15 Merger, the Company acquired
interests in 17
properties from CIP® with a fair value of $142,161 for $115,158 in cash and the
assumption of $27,003 in limited recourse mortgage notes payable (the CIP®
Acquisition). The amounts are inclusive of the Companys pro rata share of equity interests
acquired in the transaction. The fair value of the assumed mortgages was $27,756. The purchase
price of the properties was based on a third party valuation of each of CIP®s
properties. The properties are primarily single tenant net-leased properties, with remaining lease
terms ranging from 19 months to over ten years at the date of acquisition. Seven of the properties
are encumbered with limited recourse mortgage financing with fixed rates of interest ranging from
7.5% to 10% and maturity dates ranging from December 2007 to June 2012.
Self-Storage Investments
In November 2006, the Company formed a subsidiary (Carey Storage), for the purpose of investing
in self-storage real estate properties and their related businesses within the United States. In
December 2006, the Company contributed $5,012 in cash for equity interests in Carey Storage and
loaned Carey Storage $5,900. Carey Storage used a portion of the proceeds from the Companys
contribution and loan along with borrowings totaling $15,501 under its $105,000 credit facility to
acquire six domestic self-storage properties totaling $24,800. The borrowings have an annual fixed
interest rate and term of 7.6% and 2 years, respectively. The Company has acquired, and expect to
continue to acquire, additional self-storage properties during 2007. The Company is evaluating
raising third party capital in connection with these investments.
Carey Storage's results of operations are included in other real
estate income and other real estate expenses in the accompanying
consolidated financial statements. See Note 10 for further discussion of the Companys self-storage investments.
Carey Storage has an investment committee that will evaluate and approve all new transactions. This
committee is currently comprised of John Miller, the Companys chief investment officer, and
Reginald Winssinger, an independent director. If the Company raises third party capital for Carey
Storage, the results of operations of Carey Storage may be reclassified from its real estate
operations to its management services operations. The Company expects that it would then seek to
liquidate the self-storage investments as a whole within five to seen years thereafter.
General Transactions
The Company owns interests in entities which range from 33% to 60%, 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.
W. P. Carey 2006 10-K 61
Notes to Consolidated Financial Statements
The Company owns equity interests as a limited partner in several limited partnerships,
limited liability companies and jointly-controlled tenancies-in-common subject to master leases
with the remaining interests owned by affiliates and all of which net lease real estate on a
single-tenant basis.
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 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. As a
result, during the year ended December 31, 2006 the Company recorded income from minority interest
partners of $1,924 related to reimbursements from these affiliates. During the years ended December
31, 2005 and 2004 (prior to consolidation) the Companys share of rental expenses under this
agreement was $826 and $531, respectively. The Companys estimated minimum annual lease payments
on the office lease, inclusive of minority interest, as of December 31, 2006 approximate $2,814
through 2016.
In June 2000, the Company acquired 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 December 31, 2006 and 2005, unpaid deferred acquisition compensation was $661 and $1,185,
respectively, and bore interest at an annual rate of 6%. Installments of $524 were paid in 2006,
2005 and 2004.
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
subsidiary company that structures net lease transactions on behalf of the CPA® REITs
outside of the United States of America.
The Company has the right to loan funds under its credit facility to its affiliates. Such loans
bear interest at comparable rates to the Companys rate under the credit facility. During the year
ended December 31, 2006, the Company loaned $84,000 to CPA®:15 to facilitate the early
repayment of a mortgage obligation in connection with the sale of one of its properties. The loan
was repaid within the next few business days. In connection with the CPA®:12/14 Merger,
the Company loaned CPA®:14 $24,000 to fund this transaction. The loan was repaid within
the next few business days. There were no such loans to affiliates during the comparable years
ended December 31, 2005 and 2004.
Note 4. Real Estate
Real estate, which consists of land and buildings leased to others, at cost, and accounted for as
operating leases, is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Cost |
|
$ |
620,472 |
|
|
$ |
515,275 |
|
Less: Accumulated depreciation |
|
|
(79,968 |
) |
|
|
(60,797 |
) |
|
|
|
|
|
|
|
|
|
$ |
540,504 |
|
|
$ |
454,478 |
|
|
|
|
|
|
|
|
W. P. Carey 2006 10-K 62
Notes to Consolidated Financial Statements
Operating real estate, which consists of the Companys hotel operations and self-storage
facilities, at cost, is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Cost (1) |
|
$ |
41,275 |
|
|
$ |
15,108 |
|
Less: Accumulated depreciation |
|
|
(7,669 |
) |
|
|
(7,243 |
) |
|
|
|
|
|
|
|
|
|
$ |
33,606 |
|
|
$ |
7,865 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $1,049 of costs in connection with renovations to the hotel facility which is
scheduled for completion in 2008. |
The scheduled future minimum rents, exclusive of renewals and expenses paid by tenants and future
CPI-based increases, under non-cancelable operating leases are as follows:
|
|
|
|
|
Year ended December 31, |
|
|
|
|
2007 |
|
$ |
58,502 |
|
2008 |
|
|
54,843 |
|
2009 |
|
|
51,481 |
|
2010 |
|
|
40,944 |
|
2011 |
|
|
30,951 |
|
Thereafter through 2026 |
|
|
123,345 |
|
Percentage rent revenue was $262, $369 and $17 in 2006, 2005 and 2004, respectively.
Note 5. Net Investment in Direct Financing Leases
Net investment in direct financing leases is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Minimum lease payments receivable |
|
$ |
69,137 |
|
|
$ |
83,047 |
|
Unguaranteed residual value |
|
|
102,881 |
|
|
|
123,812 |
|
|
|
|
|
|
|
|
|
|
|
172,018 |
|
|
|
206,859 |
|
Less: unearned income |
|
|
(63,437 |
) |
|
|
(74,884 |
) |
|
|
|
|
|
|
|
|
|
$ |
108,581 |
|
|
$ |
131,975 |
|
|
|
|
|
|
|
|
Scheduled future minimum rents, exclusive of renewals and expenses paid by tenants and future
CPI-based increases, under non-cancelable direct financing leases are as follows:
|
|
|
|
|
Year ended December 31, |
|
|
|
|
2007 |
|
$ |
12,040 |
|
2008 |
|
|
10,166 |
|
2009 |
|
|
9,403 |
|
2010 |
|
|
7,378 |
|
2011 |
|
|
5,988 |
|
Thereafter through 2022 |
|
|
24,162 |
|
Percentage rent revenue was approximately $103 in 2006 and $110 in 2005. There was no percentage
rent revenue in 2004.
Note 6. Equity Investments in Real Estate
The Company owns interests in three 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
W. P. Carey 2006 10-K 63
Notes to Consolidated Financial Statements
management and performance revenue, the Company has elected,
in certain cases, to receive restricted shares of common stock in the CPA® REITs rather
than cash in consideration for such revenue (see Note 3). In connection with the
CPA®:12/14 Merger, the
Company elected to receive 1,022,800 shares of common stock in CPA®:14, in exchange for
its CPA®:12 shares, all of which are restricted.
As of December 31, 2006, the Companys ownership in the CPA® REITs is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of outstanding |
|
|
Shares |
|
shares |
CPA®:14 |
|
|
4,948,043 |
|
|
|
5.65 |
% |
CPA®:15 |
|
|
4,528,437 |
|
|
|
3.53 |
% |
CPA®:16 - Global |
|
|
887,426 |
|
|
|
0.78 |
% |
The Company owns equity interests as a limited partner in several limited partnerships, limited
liability companies and jointly-controlled tenancies-in-common subject to master leases with the
remaining interests owned by affiliates and all of which net lease real estate on a single-tenant
basis.
In October 2006, the Company, together with an affiliate, through a venture in which the Company
and the affiliate own 60% and 40% tenancy-in-common interests, respectively, acquired property in
South Carolina for approximately $17,881. In connection with this acquisition, the venture obtained
limited recourse mortgage financing of $12,000 at a fixed interest rate of 5.87% for a 10-year
term. The Companys proportionate share of cost in this investment and financing obtained is
approximately $10,530 and $7,200, respectively.
In connection with the CPA®:12 Acquisition, the Company increased its existing 22.5%
interest in a limited partnership, which leases property to Carrefour France SA, to 49.7% and
continues to account for its interest in Carrefour as an equity investment in real estate. The
Company also acquired CPA®:12s non-controlling interests in two limited partnerships
that lease property to Medica-France (35% interest) and The Retail Distribution Group (40%
interest) and is accounting for these interests under the equity method of accounting.
In connection with the CIP® Acquisition, the Company increased its 18.54% interest in a
limited partnership, which leases property to Titan Corporation, to 100%. The Company accounted for
its 18.54% interest as an equity investment in real estate, and as a result of acquiring the
controlling ownership interest as of September 1, 2004, the Company consolidates this interest as
of such date. The Company also acquired CIP®s 50% non-controlling interest in a limited
partnership, which leases property to Sicor, Inc., and is accounting for this interest under the
equity method of accounting.
Combined financial information of the affiliated equity investees is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Assets (primarily real estate) |
|
$ |
6,849,781 |
|
|
$ |
5,593,102 |
|
Liabilities (primarily mortgage notes payable) |
|
|
(3,695,811 |
) |
|
|
(2,992,146 |
) |
|
|
|
|
|
|
|
Owners equity |
|
|
3,153,970 |
|
|
|
2,600,956 |
|
|
|
|
|
|
|
|
Companys share of equity investees net assets |
|
|
166,147 |
|
|
|
134,567 |
|
|
|
|
|
|
|
|
W. P. Carey 2006 10-K 64
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Revenue (primarily rental income and interest income from
direct financing leases) |
|
$ |
524,886 |
|
|
$ |
440,245 |
|
|
$ |
319,758 |
|
Expenses (primarily depreciation and property expenses) |
|
|
(274,784 |
) |
|
|
(182,972 |
) |
|
|
(132,718 |
) |
Other interest income |
|
|
23,677 |
|
|
|
13,597 |
|
|
|
7,928 |
|
Income from equity investments in real estate |
|
|
50,353 |
|
|
|
48,857 |
|
|
|
38,438 |
|
Minority interest in income |
|
|
(22,834 |
) |
|
|
(16,316 |
) |
|
|
(10,282 |
) |
Gain (loss) on sales of real estate, derivatives and foreign
currency transactions, net |
|
|
29,651 |
|
|
|
(1,105 |
) |
|
|
7,453 |
|
Interest expense |
|
|
(210,134 |
) |
|
|
(165,590 |
) |
|
|
(120,094 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
120,815 |
|
|
|
136,716 |
|
|
|
110,483 |
|
(Loss) income from discontinued operations |
|
|
(17,912 |
) |
|
|
5,949 |
|
|
|
6,109 |
|
Minority interest in income of discontinued properties |
|
|
|
|
|
|
(2,899 |
) |
|
|
(2,704 |
) |
Impairment charge on properties held for sale |
|
|
(6,700 |
) |
|
|
(4,505 |
) |
|
|
(5,150 |
) |
Gain on sale of real estate, net |
|
|
100,168 |
|
|
|
825 |
|
|
|
2,232 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
196,371 |
|
|
$ |
136,086 |
|
|
$ |
110,970 |
|
|
|
|
|
|
|
|
|
|
|
Companys share of net income from equity investments in real estate |
|
$ |
7,608 |
|
|
$ |
5,182 |
|
|
$ |
5,308 |
|
|
|
|
|
|
|
|
|
|
|
Note 7. Assets Held for Sale and Discontinued Operations
Tenants from time to time may vacate space due to lease buy-outs, elections not to renew, company
insolvencies or lease rejections in the bankruptcy process. In such cases, the Company assesses
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 entered into a contract to sell its property in Travelers Rest, South
Carolina to a third party for $2,500. The Company currently expects to complete this transaction
during 2007. Impairment charges totaling $2,507 were recognized in prior years to write down the
property value to the estimated net sales proceeds.
Discontinued Operations
During 2006, the Company sold several domestic properties to third parties for combined sales
proceeds of $32,038, net of closing costs and recognized a combined net gain on sale of $3,452,
exclusive of combined impairment charges of $3,357 recognized during the current year. The Company
previously recognized combined impairment charges of $18,662 related to these properties.
During 2005, the Company sold several domestic properties to third parties for combined sales
proceeds of $45,404, net of closing costs and recognized a combined net gain on sale of $10,474. In
2005, impairment charges of $5,241 were recorded against these properties. Prior to 2005,
impairment charges totaling $4,621 were recorded against these properties to reduce their property
values to the estimated net sales proceeds.
During 2004, the Company sold several domestic properties to third parties for combined sales
proceeds of $6,547 and recognized a net gain of $89. Prior to 2004, impairment charges of $9,225
were recorded against these properties.
Other Information
In accordance with SFAS 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Revenues (primarily rental revenues and other operating income): |
|
|
1,191 |
|
|
|
8,926 |
|
|
|
12,286 |
|
Expenses (primarily interest on mortgages, depreciation and property
expenses): |
|
|
(2,537 |
) |
|
|
(1,975 |
) |
|
|
(2,927 |
) |
Gain on sales of real estate, net |
|
|
3,452 |
|
|
|
10,474 |
|
|
|
89 |
|
Impairment charges on assets held for sale |
|
|
(3,357 |
) |
|
|
(16,066 |
) |
|
|
(9,199 |
) |
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations |
|
$ |
(1,251 |
) |
|
$ |
1,359 |
|
|
$ |
249 |
|
|
|
|
|
|
|
|
|
|
|
W. P. Carey 2006 10-K 65
Notes to Consolidated Financial Statements
Note 8. Intangibles
In connection with its acquisition of properties, the Company has recorded net lease intangibles of
$34,826. These intangibles are being amortized over periods ranging from 19 months to 31 years.
Amortization of below-market and above-market rent intangibles are recorded as an adjustment to
revenue.
Intangibles are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Amortized Intangibles: |
|
|
|
|
|
|
|
|
Management contracts |
|
$ |
32,765 |
|
|
$ |
46,348 |
|
Less: accumulated amortization |
|
|
(17,943 |
) |
|
|
(25,206 |
) |
|
|
|
|
|
|
|
|
|
|
14,822 |
|
|
|
21,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Intangibles: |
|
|
|
|
|
|
|
|
In-place lease |
|
|
18,345 |
|
|
|
13,630 |
|
Tenant relationship |
|
|
8,783 |
|
|
|
4,863 |
|
Above-market rent |
|
|
9,707 |
|
|
|
3,828 |
|
Less: accumulated amortization |
|
|
(11,890 |
) |
|
|
(6,738 |
) |
|
|
|
|
|
|
|
|
|
|
24,945 |
|
|
|
15,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized Goodwill and Indefinite-Lived Intangible Assets: |
|
|
|
|
|
|
|
|
Goodwill |
|
|
63,607 |
|
|
|
63,607 |
|
Trade name |
|
|
3,975 |
|
|
|
3,975 |
|
|
|
|
|
|
|
|
|
|
|
67,582 |
|
|
|
67,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below-market rent |
|
|
(2,009 |
) |
|
|
(2,009 |
) |
Less: accumulated amortization |
|
|
325 |
|
|
|
197 |
|
|
|
|
|
|
|
|
|
|
|
(1,684 |
) |
|
|
(1,812 |
) |
|
|
|
|
|
|
|
Net amortization of intangibles was $11,344, $9,649 and $10,304 for the years ended December 31,
2006, 2005 and 2004, respectively. The amortization of the remaining unamortized management
contract for
CPA®:12
of $3,547 was accelerated as a result of its merger with CPA®:14
in 2006. The amortization of the remaining unamortized management contract for CIP®
was accelerated as a result of its merger with CPA®:15 in 2004.
Based on the intangible assets as of December 31, 2006, annual net amortization of intangibles for
each of the next five years is as follows: 2007 $7,993; 2008 $6,644; 2009 $6,617; 2010
$5,716 and 2011 $2,696.
Note 9. Disclosures About Fair Value of Financial Instruments
The Company estimates that the fair value of mortgage notes payable and other notes payable was
$274,625 and $245,187 at December 31, 2006 and 2005, respectively. The fair value of fixed rate
debt instruments was evaluated using a discounted cash flow model with rates that take into account
the credit of the tenants and interest rate risk. The carrying value of the combined debt was
$278,653 and $246,113 at December 31, 2006 and 2005, respectively. The fair value of the notes
payable from the secured and unsecured credit facilities approximates their carrying value as each
is a variable rate obligation with an interest rate indexed to market rates.
Marketable
securities had a carrying value of $545 and $3,716 as of December 31, 2006 and 2005,
respectively, and a fair value of $602 and $7,723 as of December 31, 2006 and 2005, respectively.
The Companys other assets and liabilities had fair values that approximated their carrying values
at December 31, 2006 and 2005, respectively.
W. P. Carey 2006 10-K 66
Notes to Consolidated Financial Statements
Note 10. Mortgage Notes Payable and Credit Facilities
Mortgage notes payable, substantially all of which are limited recourse obligations, are
collateralized by the assignment of various leases and by real property with a carrying value of
$388,287 at December 31, 2006. In addition, self storage real estate assets with a carrying value
of $25,084 have been used to collateralize the secured credit facility.
The interest rates on the variable rate debt as of December 31, 2006 ranged from 3.86% to 7.57% and
mature from 2007 to 2040. The interest rates on the fixed rate debt as of December 31, 2006 ranged
from 4.87% to 10.13% and mature from 2007 to 2032.
Scheduled principal payments for the mortgage notes and notes payable during each of the next five
years following December 31, 2006 and thereafter are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
Total Debt |
|
|
Fixed
Rate Debt |
|
|
Variable
Rate Debt |
|
2007 (a) |
|
$ |
28,274 |
|
|
$ |
23,340 |
|
|
$ |
4,934 |
|
2008 (b) |
|
|
32,133 |
|
|
|
8,390 |
|
|
|
23,743 |
|
2009 |
|
|
38,928 |
|
|
|
35,473 |
|
|
|
3,455 |
|
2010 |
|
|
16,728 |
|
|
|
13,175 |
|
|
|
3,553 |
|
2011 |
|
|
29,424 |
|
|
|
25,712 |
|
|
|
3,711 |
|
Thereafter through 2017 |
|
|
133,166 |
|
|
|
102,575 |
|
|
|
30,592 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
278,653 |
|
|
$ |
208,665 |
|
|
$ |
69,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes maturity of unsecured credit facility in May 2007. |
|
(b) |
|
Includes maturity of secured credit facility in December 2008. |
Unsecured credit facility
The Company has an unsecured credit facility for a $175,000 line of credit with JP Morgan Chase
Bank and eight other banks. As of December 31, 2006, the Company had $2,000 drawn from the credit
facility. The line of credit matures in May 2007. The Company is currently negotiating a renewal or
replacement of this facility.
Advances from the line of credit bear interest at an annual rate indexed to either (i) the one,
two, three or six-month London Inter-Bank Offered Rate, as defined, 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. Advances are prepayable at any time. The revolving
credit agreement has financial covenants that require, among other things, the Company to (i)
maintain minimum equity value of not less than $550,000 plus 85% of fair market value, as defined,
of amounts received by the Company as proceeds from the issuance of equity interests and (ii) meet
or exceed certain operating and coverage ratios. The Company is in compliance with these covenants
as of December 31, 2006.
At December 31, 2006, the average interest rate on advances on the line of credit was 6.475%. At
December 31, 2005, the average interest rate on advances on the line of credit was 4.975%. In
addition, the Company pays a fee (a) ranging between 0.15% and 0.20% per annum of the unused
portion of the credit facility, depending on the Companys leverage ratio, if no minimum credit
rating for the Company is in effect or (b) ranging between 0.15% and 0.25% of the total commitment
amount, depending on the Companys credit rating.
Secured credit facility
In December 2006, Carey Storage, a wholly owned subsidiary, entered into a credit facility for up
to $105,000 with Morgan Stanley Mortgage Capital Inc. that matures in December 2008. The facility
is collateralized by any self-storage real estate assets acquired with proceeds from the facility.
Advances from this facility bear interest at an annual rate of the one-month LIBOR, plus a spread
that ranges from 1.75% to 2.35% depending on the aggregate debt yield for the collateralized asset
pool. Advances can be prepaid at any time, however advances prepaid prior to March 8, 2008 are
subject to a prepayment penalty of 1.25% of the principal amount of the loan being prepaid. This
facility has financial covenants requiring Carey Storage, among other things, to meet or exceed
certain operating and coverage ratios. For 2006, Carey Storage has received a covenant compliance
waiver from the lender due to its limited operating history as of December 31, 2006. At December
31, 2006 the average interest rate on advances on the secured line of credit was 7.6%.
W. P. Carey 2006 10-K 67
Notes to Consolidated Financial Statements
Note 11. Commitments and Contingencies
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.
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
Carey Financial, the Company 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.
W. P. Carey 2006 10-K 68
Notes to Consolidated Financial Statements
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 and
CPA®:15 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 and proceedings will have a material effect on it incremental
to that caused by any SEC action.
In October 2006, a revised complaint was filed in the Los Angeles Superior Court in an action that
had named a wholly-owned indirect subsidiary, and other unrelated parties, in a state court action
by a private plaintiff alleging various claims under the California False Claims Act that focus on
alleged conduct by the Los Angeles Unified School District in connection with its direct
application and invoicing for school development and construction funding for a new high school,
for which the Companys subsidiary acted as the development manager. The Company and another of its
subsidiaries were named for the first time in the revised complaint, by virtue of an alleged
relationship to the subsidiary that was a party to the development agreement, but were not served.
In February 2007, the judge dismissed the action against the Companys wholly-owned indirect subsidiary, as well as
other defendants, following various substantive and procedural motions. However, the plaintiff may
appeal the dismissal and may still seek to serve the Company and its other subsidiary in this
action. Although no assurance can be given that the dismissal will be sustained if appealed, or
that the claims alleged by plaintiff against the Company and its subsidiaries, if proven, would not
have a material effect on the Company, the Company believes, based on the information currently
available to it, that itself and its subsidiaries have meritorious defences to such claims.
The Company has provided indemnification in connection with divestitures. These indemnities address
a variety of matters including environmental liabilities. The Companys maximum obligations under
such indemnification cannot be reasonably estimated. The Company is not aware of any claims or
other information that would give rise to material payments under such indemnifications.
Note 12. Impairment Charges and Loan Losses
The Company recorded impairment charges of $4,504, $21,770 and $22,098 for the years ended December
31, 2006, 2005 and 2004, respectively, of which $3,357, $16,066 and $9,199 are included in
discontinued operations for each respective year.
Impairment Charges on Direct Finance Leases
In connection with the Companys annual review of the estimated residual values on its properties
classified as net investments in direct financing leases, the Company determined that an other than
temporary decline in estimated residual value had occurred at several properties due to market
conditions, and the accounting for the direct financing leases was revised using the changed
estimates. The changes in estimates resulted in the recognition of impairment charges totaling
$1,147, $2,774 and $5,248 in 2006, 2005 and 2004, respectively.
Impairment Charges on Operating Assets
In connection with entering into a commitment to sell a property in Livonia, Michigan, the Company
recognized impairment charges of $1,130 during 2005 as the propertys estimated fair value was
lower than its carrying value. 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. The Company had previously recorded an impairment charge of $7,500 during
2004 as the result of an impairment valuation, which revealed that the property had experienced an
other than temporary decline in value.
During the years ended December 31, 2005 and 2004, the Company recognized impairment charges on
other properties, totaling $1,800 and $1,250, respectively. The 2005 impairment charges were
primarily related to a decline in property values and the 2004 impairment charge resulted from a
loan loss on the sale of a property.
Impairment Charges on Assets Held for Sale
During the years ended December 31, 2006, 2005 and 2004, the Company recognized impairment charges
on properties classified as held for sale or sold totaling $3,357, $16,066 and $9,199,
respectively. These impairment charges, which are included in discontinued operations, were
primarily the result of reducing these properties carrying values to their estimated fair values
(see Note 7).
W. P. Carey 2006 10-K 69
Notes to Consolidated Financial Statements
Note 13. Risk Management and Use of Financial Instruments
Risk Management
In the normal course of its on-going business operations, the Company encounters economic risk.
There are three main components of economic risk: interest rate risk, credit risk and market risk.
The Company is subject to interest rate risk on its interest-bearing liabilities. Credit risk is
the risk of default on the Companys operations and tenants inability or unwillingness to make
contractually required payments. Market risk includes changes in the value of the properties and
related loans held by the Company due to changes in interest rates or other market factors. In
addition, the Company transacts business in France and is also subject to the risks associated with
changing exchange rates.
Use of Derivative Financial Instruments
The Company does not generally use derivative financial instruments to manage interest rate risk or
foreign exchange rate risk exposure and does not use derivative instruments to hedge credit/market
risks or for speculative purposes.
The Company is exposed to the impact of interest rate changes primarily through its borrowing
activities. The Company attempts to obtain mortgage financing on a long-term, fixed-rate basis to
mitigate this exposure. The Company is also exposed to foreign exchange rate movements in the Euro.
The Company manages foreign exchange rate movements by generally placing both its debt obligation
to the lender and the tenants rental obligation to the Company in the local currency.
Concentration of Credit Risk
Concentrations of credit risk arise when a number of tenants are engaged in similar business
activities, or conduct business in the same geographic region, or have similar economic features
that would cause their ability to meet contractual obligations, including those to the Company, to
be similarly affected by changes in economic conditions. The Company regularly monitors its
portfolio to assess potential concentrations of credit risk. The Company believes its portfolio is
reasonably well diversified and does not contain any unusual concentration of credit risks.
The majority of the Companys real estate properties and related loans are located in the United
States, with Texas (14%) and California (11%) representing the only significant geographic
concentration (greater than 10% of annualized lease revenue). The Companys real estate properties
in France accounted for 10% of annualized lease revenue in 2006. No individual tenant accounted for
more than 7% of annualized lease revenue for the year ended December 31, 2006. The Companys real
estate properties contain significant concentrations in the following asset types as of December
31, 2006: industrial (38%), office (36%) and warehouse/distribution (14%) and the following tenant
industries as of December 31, 2006: business and commercial
services (13%) and telecommunications (13%).
Note 14. Members Equity and Stock Based and Other Compensation
Distributions Payable
The Company declared a quarterly distribution of $.458 per share in December 2006, which was paid
in January 2007 to shareholders of record as of December 31, 2006.
Accumulated Other Comprehensive Income
As of December 31, 2006 and 2005, accumulated other comprehensive income reflected in the members
equity, net of tax, is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Unrealized gains on marketable securities |
|
$ |
60 |
|
|
$ |
4,007 |
|
Foreign currency translation adjustment |
|
|
(36 |
) |
|
|
(835 |
) |
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
24 |
|
|
$ |
3,172 |
|
|
|
|
|
|
|
|
Stock Based Compensation
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123(R)
using the modified prospective application method and therefore has not restated prior periods
results. Under this transition method, stock-based compensation expense for the year ended December
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
W. P. Carey 2006 10-K 70
Notes to Consolidated Financial Statements
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 was $248
higher and net income was $2 lower for the year ended December 31, 2006, than if the Company had
continued to account for stock-based compensation awards under APB 25. There was no impact on
either basic or diluted earnings per share for the year ended December 31, 2006 as a result of the
adoption of SFAS 123(R). In addition, prior to the adoption of SFAS 123(R), the Company presented
the tax benefit of stock option exercises and the vesting of restricted stock 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 $626 for the year ended December 31,
2006 are classified as financing cash flow inflows with a corresponding decrease included within
operating cash flows.
The pro forma table below reflects net income and basic and diluted earnings per share for the
years ended December 31, 2005 and 2004, had the Company applied the fair value recognition
provisions of SFAS 123, as follows:
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
Net income as reported |
|
$ |
48,604 |
|
|
$ |
65,841 |
|
Add: Stock based compensation included in net income as reported, net of related tax effects |
|
|
2,727 |
|
|
|
2,264 |
|
Less: Stock based compensation determined under fair value based methods for all awards, net
of related tax effects |
|
|
(3,166 |
) |
|
|
(2,853 |
) |
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
48,165 |
|
|
$ |
65,252 |
|
|
|
|
|
|
|
|
Earnings per share as reported: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.29 |
|
|
$ |
1.76 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
1.25 |
|
|
$ |
1.69 |
|
|
|
|
|
|
|
|
Pro forma earnings per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.28 |
|
|
$ |
1.74 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
1.23 |
|
|
$ |
1.67 |
|
|
|
|
|
|
|
|
At December 31, 2006, the Company had the following stock-based
compensation plans as described
below. The total compensation expense (net of forfeitures) for these plans was $3,453, $3,368 and $3,936 for the years
ended December 31, 2006, 2005 and 2004, respectively. The tax benefit recognized in the years ended
December 31, 2006, 2005 and 2004 related to stock-based
compensation plans totaled $1,640, $1,671
and $1,858, 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, of which 4,574,455
have been issued or are currently reserved for issuance upon exercise
of outstanding options as of
December 31, 2006. 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, of which 100,072 have been granted as of December 31, 2006.
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
W. P. Carey 2006 10-K 71
Notes to Consolidated Financial Statements
the Companys results of operations. Compensation
expense under this plan for the year ended December 31, 2006 was $164. There was no corresponding
compensation expense for the years ended December 31, 2005 and 2004.
Carey Management Warrants
In January 1998, the predecessor of Carey Management was granted warrants to purchase 2,284,800
shares of the Companys common stock 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. As of December 31, 2006, warrants totaling
100,000 have been exercised at $21 per share. There have been no exercises of the $23 warrants. The
warrants are exercisable until January 2009. These warrants and shares were fully vested prior to
January 1, 2006.
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). Compensation expense under this plan
for the years ended December 31, 2006, 2005 and 2004 was $1,979, $2,412 and $2,826, respectively.
Profit-Sharing Plan
The Company sponsors a qualified profit-sharing plan and trust covering substantially all of its
full-time employees who have attained age 21, worked a minimum of 1,000 hours and completed one
year of service. The Company is under no obligation to contribute to the plan and the amount of any
contribution is determined by and at the discretion of the Board of Directors. The Board of
Directors can authorize contributions to a maximum of 15% of an eligible participants
compensation, limited to $33 annually per participant. For the years ended December 31, 2006, 2005
and 2004, amounts expensed by the Company for contributions to the trust were $2,440, $2,108 and
$1,988, respectively. The profit-sharing 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.
Company Options and Grants
Option and warrant activity as of December 31, 2006 and changes during the year ended December 31,
2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Aggregate Intrinsic |
|
|
|
|
|
|
|
Weighted Average |
|
|
Contractual Term |
|
|
Value |
|
|
|
Shares |
|
|
Exercise Price |
|
|
(in Years) |
|
|
(in 000s) |
|
Outstanding at beginning of year |
|
|
5,360,967 |
|
|
$ |
22.64 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
621,828 |
|
|
|
26.76 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(319,988 |
) |
|
|
20.57 |
|
|
|
|
|
|
|
|
|
Forfeited / Expired |
|
|
(62,738 |
) |
|
|
28.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year |
|
|
5,600,069 |
|
|
$ |
23.14 |
|
|
|
4.23 |
|
|
$ |
39,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at end of year |
|
|
5,534,790 |
|
|
$ |
23.08 |
|
|
|
4.18 |
|
|
$ |
39,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year |
|
|
4,133,782 |
|
|
$ |
21.08 |
|
|
|
2.81 |
|
|
$ |
36,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
W. P. Carey 2006 10-K 72
Notes to Consolidated Financial Statements
Option and warrant activity for 2005 and 2004 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
Weighted |
|
|
Contractual |
|
|
|
|
|
|
Weighted |
|
|
Contractual |
|
|
|
|
|
|
|
Average |
|
|
Term |
|
|
|
|
|
|
Average |
|
|
Term |
|
|
|
Shares |
|
|
Exercise Price |
|
|
(in Years) |
|
|
Shares |
|
|
Exercise Price |
|
|
(in Years) |
|
Outstanding at beginning of year |
|
|
5,165,617 |
|
|
$ |
22.05 |
|
|
|
|
|
|
|
4,812,902 |
|
|
$ |
20.95 |
|
|
|
|
|
Granted |
|
|
365,277 |
|
|
|
31.79 |
|
|
|
|
|
|
|
525,171 |
|
|
|
29.68 |
|
|
|
|
|
Exercised |
|
|
(86,558 |
) |
|
|
18.26 |
|
|
|
|
|
|
|
(146,121 |
) |
|
|
21.09 |
|
|
|
|
|
Forfeited / Expired |
|
|
(83,369 |
) |
|
|
25.24 |
|
|
|
|
|
|
|
(26,335 |
) |
|
|
24.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year |
|
|
5,360,967 |
|
|
$ |
22.68 |
|
|
|
4.62 |
|
|
|
5,165,617 |
|
|
$ |
22.05 |
|
|
|
5.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year |
|
|
4,394,887 |
|
|
$ |
21.15 |
|
|
|
|
|
|
|
4,287,999 |
|
|
$ |
20.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted during the years ended December 31,
2006, 2005 and 2004 was $2.15, $1.94 and $2.01, respectively. The total intrinsic value of options
exercised during the years ended December 31, 2006, 2005 and 2004 was $2,066, $888 and $1,619,
respectively.
Nonvested restricted stock awards as of December 31, 2006 and changes during the year ended
December 31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
Grant Date |
|
|
|
Shares |
|
|
Fair Value |
|
Nonvested at January 1, 2006 |
|
|
253,587 |
|
|
$ |
29.75 |
|
Granted |
|
|
159,704 |
|
|
|
27.25 |
|
Vested |
|
|
(83,667 |
) |
|
|
28.16 |
|
Forfeited |
|
|
(26,263 |
) |
|
|
26.02 |
|
|
|
|
|
|
|
|
Nonvested at December 31, 2006 |
|
|
303,361 |
|
|
$ |
29.20 |
|
|
|
|
|
|
|
|
The total fair value of shares vested during the years ended December 31, 2006, 2005 and 2004 was
$2,356, $1,960 and $5,716, 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 curve in effect at the time of
grant. The dividend yield is based upon the trailing quarterly distribution for the four quarters
prior to December 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
years ended December 31, 2006, 2005 and 2004, the following assumptions and weighted average fair
values were used:
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
Risk-free interest rates |
|
4.61 - 5.07% |
|
3.94 - 4.56% |
|
3.63 - 3.92% |
Dividend yields |
|
6.27 - 7.08% |
|
7.7 - 7.8% |
|
7.79 - 8.19% |
Expected volatility |
|
17 - 17.5% |
|
20% |
|
20.66 - 21.56% |
Expected term in years |
|
6.22 - 8.5 |
|
10 |
|
7 - 7.13 |
W. P. Carey 2006 10-K 73
Notes to Consolidated Financial Statements
As of
December 31, 2006, approximately $9,000 of total unrecognized compensation expense related to
nonvested stock-based compensation awards is expected to be recognized over a weighted-average
period of approximately 3.7 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 year ended December 31, 2006 was $7,181.
Earnings Per Share
Basic and diluted earnings per share were calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Net income basic |
|
$ |
86,303 |
|
|
$ |
48,604 |
|
|
$ |
65,841 |
|
Income effect of dilutive securities, net of taxes |
|
|
574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income diluted |
|
$ |
86,877 |
|
|
$ |
48,604 |
|
|
$ |
65,841 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic |
|
|
37,668,920 |
|
|
|
37,688,835 |
|
|
|
37,417,918 |
|
Effect of dilutive securities: stock options and warrants |
|
|
1,424,977 |
|
|
|
1,331,966 |
|
|
|
1,543,830 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares diluted |
|
|
39,093,897 |
|
|
|
39,020,801 |
|
|
|
38,961,748 |
|
|
|
|
|
|
|
|
|
|
|
Securities
totaling 261,691 for the year ended December 31, 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 years ended December 31, 2005
and 2004.
Share Repurchase Program
In December 2005, the board of directors approved a $20,000 share repurchase program. Under this
program, the Company could repurchase up to $20,000 of its common stock in the open market during
the twelve-month period beginning December 16, 2005 as conditions warranted. During the term of
this program, which ended December 15, 2006, the Company repurchased and retired 166,800 shares
totaling $4,138.
Other
During 2006, the Company recognized severance costs totaling approximately $2,100 related to
several former employees. Such costs are included in general and administrative expenses in the
accompanying consolidated financial statements.
Note 15. Income Taxes
The components of the Companys provision for income taxes for the years ended December 31, 2006,
2005 and 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
ended December 31, |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Federal: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
29,029 |
|
|
$ |
11,761 |
|
|
$ |
26,330 |
|
Deferred |
|
|
1,079 |
|
|
|
1,222 |
|
|
|
6,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,108 |
|
|
|
12,983 |
|
|
|
32,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State, local and foreign: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
14,842 |
|
|
|
6,080 |
|
|
|
15,826 |
|
Deferred |
|
|
541 |
|
|
|
327 |
|
|
|
2,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,383 |
|
|
|
6,407 |
|
|
|
18,535 |
|
|
|
|
|
|
|
|
|
|
|
Total provision |
|
$ |
45,491 |
|
|
$ |
19,390 |
|
|
$ |
50,983 |
|
|
|
|
|
|
|
|
|
|
|
W. P. Carey 2006 10-K 74
Notes to Consolidated Financial Statements
Deferred income taxes as of December 31, 2006 and 2005 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December
31, |
|
|
2006 |
|
|
2005 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Unearned and deferred compensation |
|
$ |
4,955 |
|
|
$ |
4,479 |
|
Other |
|
|
136 |
|
|
|
649 |
|
|
|
|
|
|
|
|
|
|
|
5,091 |
|
|
|
5,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Receivables from affiliates |
|
|
15,925 |
|
|
|
24,658 |
|
Investments |
|
|
30,474 |
|
|
|
20,378 |
|
Other |
|
|
219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,618 |
|
|
|
45,036 |
|
|
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
41,527 |
|
|
$ |
39,908 |
|
|
|
|
|
|
|
|
The difference between the tax provision and the tax benefit recorded at the statutory rate at
December 31, 2006, 2005 and 2004 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
ended December 31, |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Pre-tax income from taxable subsidiaries |
|
$ |
90,303 |
|
|
$ |
38,680 |
|
|
$ |
98,707 |
|
Federal provision at statutory tax rate (35%) |
|
|
31,606 |
|
|
|
13,538 |
|
|
|
34,547 |
|
State and local taxes, net of federal benefit |
|
|
8,949 |
|
|
|
3,566 |
|
|
|
11,695 |
|
Amortization of intangible assets |
|
|
1,629 |
|
|
|
1,245 |
|
|
|
2,210 |
|
Other |
|
|
2,494 |
|
|
|
313 |
|
|
|
1,225 |
|
|
|
|
|
|
|
|
|
|
|
Tax provision taxable subsidiaries |
|
|
44,678 |
|
|
|
18,662 |
|
|
|
49,677 |
|
Other state, local and foreign taxes |
|
|
813 |
|
|
|
728 |
|
|
|
1,306 |
|
|
|
|
|
|
|
|
|
|
|
Total tax provision |
|
$ |
45,491 |
|
|
$ |
19,390 |
|
|
$ |
50,983 |
|
|
|
|
|
|
|
|
|
|
|
Note 16. Segment Reporting
The Company evaluates its results from operations by its two major business segments as follows:
Management Services Operations
This business segment includes management services operations 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 payments due under the
advisory agreements. In connection with maintaining the Companys status as a publicly traded
partnership, this business segment is carried out largely by corporate subsidiaries that 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 leases, properties
under direct financing leases, real estate under construction and development, operating real
estate, assets held for sale and equity investments in real estate in ventures accounted for under
the equity method which are engaged in these activities. Because of the Companys legal structure,
these operations are generally not subject to federal income taxes; however, they may be subject to
certain state, local and foreign taxes.
W. P. Carey 2006 10-K 75
Notes to Consolidated Financial Statements
A summary of comparative results of these business segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Management Services |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
189,787 |
|
|
$ |
90,863 |
|
|
$ |
147,154 |
|
Operating expenses |
|
|
(107,015 |
) |
|
|
(55,022 |
) |
|
|
(54,861 |
) |
Other, net (1) |
|
|
15,268 |
|
|
|
7,503 |
|
|
|
3,455 |
|
Provision for income taxes |
|
|
(44,710 |
) |
|
|
(18,662 |
) |
|
|
(49,546 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
53,330 |
|
|
$ |
24,682 |
|
|
$ |
46,202 |
|
|
|
|
|
|
|
|
|
|
|
Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
83,471 |
|
|
|
77,921 |
|
|
|
72,398 |
|
Operating expenses |
|
|
(38,231 |
) |
|
|
(40,074 |
) |
|
|
(41,786 |
) |
Interest expense |
|
|
(18,139 |
) |
|
|
(16,787 |
) |
|
|
(14,453 |
) |
Other, net (1) |
|
|
7,904 |
|
|
|
2,231 |
|
|
|
4,668 |
|
Provision for income taxes |
|
|
(781 |
) |
|
|
(728 |
) |
|
|
(1,437 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
34,224 |
|
|
$ |
22,563 |
|
|
$ |
19,390 |
|
|
|
|
|
|
|
|
|
|
|
Total Company |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
273,258 |
|
|
|
168,784 |
|
|
|
219,552 |
|
Operating expenses |
|
|
(145,246 |
) |
|
|
(95,096 |
) |
|
|
(96,647 |
) |
Interest expense |
|
|
(18,139 |
) |
|
|
(16,787 |
) |
|
|
(14,453 |
) |
Other, net (1) |
|
|
23,172 |
|
|
|
9,734 |
|
|
|
8,123 |
|
Provision for income taxes |
|
|
(45,491 |
) |
|
|
(19,390 |
) |
|
|
(50,983 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
87,554 |
|
|
$ |
47,245 |
|
|
$ |
65,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Investments in Real Estate |
|
|
Total Long-Lived Assets (2) |
|
|
Total Assets |
|
|
|
As of December 31, |
|
|
As of December 31, |
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Management Services |
|
$ |
107,391 |
|
|
$ |
90,411 |
|
|
$ |
122,828 |
|
|
$ |
109,204 |
|
|
$ |
299,036 |
|
|
$ |
288,926 |
|
Real Estate |
|
|
58,756 |
|
|
|
44,156 |
|
|
|
765,777 |
|
|
|
656,406 |
|
|
|
793,974 |
|
|
|
694,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company |
|
$ |
166,147 |
|
|
$ |
134,567 |
|
|
$ |
888,605 |
|
|
$ |
765,610 |
|
|
$ |
1,093,010 |
|
|
$ |
983,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes interest income, minority interest, income from equity investments in real estate
and gains and losses on sales and foreign currency transactions. |
|
(2) |
|
Includes real estate, net investment in direct financing leases, equity investments in real
estate, operating real estate and intangible assets related to management contracts. |
W. P. Carey 2006 10-K 76
Notes to Consolidated Financial Statements
Geographic information for the real estate operations segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
Domestic |
|
|
Foreign (1) |
|
|
Total Company |
|
Revenues |
|
$ |
75,149 |
|
|
$ |
8,322 |
|
|
$ |
83,471 |
|
Operating expenses |
|
|
(34,688 |
) |
|
|
(3,543 |
) |
|
|
(38,231 |
) |
Interest expense |
|
|
(15,179 |
) |
|
|
(2,960 |
) |
|
|
(18,139 |
) |
Other, net (2) |
|
|
5,417 |
|
|
|
2,487 |
|
|
|
7,904 |
|
Provision for income taxes |
|
|
(580 |
) |
|
|
(201 |
) |
|
|
(781 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
30,119 |
|
|
$ |
4,105 |
|
|
$ |
34,224 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
729,649 |
|
|
|
64,325 |
|
|
|
793,974 |
|
Total long-lived assets |
|
|
705,662 |
|
|
|
60,115 |
|
|
|
765,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
Domestic |
|
|
Foreign (1) |
|
|
Total Company |
|
Revenues |
|
$ |
69,865 |
|
|
$ |
8,056 |
|
|
$ |
77,921 |
|
Operating expenses |
|
|
(36,779 |
) |
|
|
(3,295 |
) |
|
|
(40,074 |
) |
Interest expense |
|
|
(13,567 |
) |
|
|
(3,220 |
) |
|
|
(16,787 |
) |
Other, net (2) |
|
|
1,605 |
|
|
|
626 |
|
|
|
2,231 |
|
Provision for income taxes |
|
|
(520 |
) |
|
|
(208 |
) |
|
|
(728 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
20,604 |
|
|
$ |
1,959 |
|
|
$ |
22,563 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
638,130 |
|
|
|
56,206 |
|
|
|
694,336 |
|
Total long-lived assets |
|
|
601,193 |
|
|
|
55,213 |
|
|
|
656,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
Domestic |
|
|
Foreign (1) |
|
|
Total Company |
|
Revenues |
|
$ |
64,717 |
|
|
$ |
7,681 |
|
|
$ |
72,398 |
|
Operating expenses |
|
|
(38,802 |
) |
|
|
(2,984 |
) |
|
|
(41,786 |
) |
Interest expense |
|
|
(10,886 |
) |
|
|
(3,567 |
) |
|
|
(14,453 |
) |
Other, net (2) |
|
|
2,324 |
|
|
|
2,344 |
|
|
|
4,668 |
|
Provision for income taxes |
|
|
(806 |
) |
|
|
(631 |
) |
|
|
(1,437 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
16,547 |
|
|
$ |
2,843 |
|
|
$ |
19,390 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
705,444 |
|
|
|
70,206 |
|
|
|
775,650 |
|
Total long-lived assets |
|
|
685,332 |
|
|
|
64,703 |
|
|
|
750,035 |
|
|
|
|
(1) |
|
The companys international operations consist of investments in France. |
|
(2) |
|
Includes interest income, minority interest, income from equity investments in real estate
and gains and losses on sales and foreign currency transactions. |
Note 17. Selected Quarterly Financial Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
March 31, 2006 |
|
June 30, 2006 |
|
September 30, 2006 |
|
December 31, 2006 |
Revenues (1) |
|
$ |
47,878 |
|
|
$ |
57,660 |
|
|
$ |
52,603 |
|
|
$ |
115,117 |
|
Expenses (1) |
|
|
23,387 |
|
|
|
38,609 |
|
|
|
32,267 |
|
|
|
50,983 |
|
Net income |
|
|
11,065 |
|
|
|
17,304 |
|
|
|
14,305 |
|
|
|
43,629 |
|
Earnings per share - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
0.30 |
|
|
|
0.46 |
|
|
|
0.38 |
|
|
|
1.15 |
|
Diluted |
|
|
0.29 |
|
|
|
0.44 |
|
|
|
0.37 |
|
|
|
1.12 |
|
Distributions declared per share |
|
|
0.452 |
|
|
|
0.454 |
|
|
|
0.456 |
|
|
|
0.458 |
|
W. P. Carey 2006 10-K 77
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
March 31, 2005 |
|
June 30, 2005 |
|
September 30, 2005 |
|
December 31, 2005 |
Revenues (1) |
|
$ |
45,162 |
|
|
$ |
43,948 |
|
|
$ |
41,448 |
|
|
$ |
38,226 |
|
Expenses (1) |
|
|
(23,105 |
) |
|
|
(22,759 |
) |
|
|
(20,702 |
) |
|
|
(28,530 |
) |
Net income |
|
|
5,855 |
|
|
|
16,933 |
|
|
|
14,328 |
|
|
|
11,488 |
|
Earnings per share - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
0.16 |
|
|
|
0.45 |
|
|
|
0.38 |
|
|
|
0.30 |
|
Diluted |
|
|
0.15 |
|
|
|
0.43 |
|
|
|
0.37 |
|
|
|
0.30 |
|
Distributions declared per share |
|
|
0.444 |
|
|
|
0.446 |
|
|
|
0.448 |
|
|
|
0.450 |
|
|
|
|
(1) |
|
Certain amounts from previous quarters have been reclassified to discontinued operations (see
Note 7). |
Note 18. Subsequent Events
In January and February 2007, Carey Storage acquired three domestic self-storage properties for
approximately $19,600. In connection with these acquisitions, Carey Storage drew down $11,580 from
its secured credit facility. Carey Storage incurs a fixed annual interest rate equal to the
one-month LIBOR plus a spread which ranges from 1.75% to 2.35% on all borrowings under this
facility. All amounts drawn under this facility are due in December 2008.
The Company formed Corporate Property Associates 17 Global Incorporated (CPA®:17) in
February 2007 for the purpose of investing in a diversified portfolio of income-producing
commercial properties and other real estate related assets, both domestically and outside the
United States. The Company filed a registration statement on Form S-11 with the SEC during February
2007 to raise up to $2,500,000 of common stock of CPA®:17 (including amounts under its
dividend reinvestment plans) and expects to commence fundraising during 2007.
W. P. Carey 2006 10-K 78
SCHEDULE III REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2006
(not in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life on which |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Latest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs Capitalized |
|
|
Increase |
|
|
Gross Amount at which Carried |
|
|
|
|
|
|
|
|
|
|
Statement of |
|
|
|
|
|
|
|
Initial Cost to Company |
|
|
Subsequent to |
|
|
(Decrease) in Net |
|
|
at Close of Period (e) |
|
|
Accumulated |
|
|
Date |
|
|
Income is |
|
Description |
|
Encumbrances |
|
|
Land |
|
|
Buildings |
|
|
Acquisition (a) |
|
|
Investments (b) |
|
|
Land |
|
|
Buildings |
|
|
Total |
|
|
Depreciation (e) |
|
|
Acquired |
|
|
Computed |
|
Real Estate Under Operating Leases: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office facilities in Broomfield, Colorado |
|
$ |
|
|
|
$ |
247,993 |
|
|
$ |
2,538,263 |
|
|
$ |
4,779,536 |
|
|
$ |
(1,785,343 |
) |
|
$ |
2,927,530 |
|
|
$ |
2,852,919 |
|
|
$ |
5,780,449 |
|
|
$ |
780,889 |
|
|
|
1/1/1998 |
|
|
40 yrs. |
Distribution facilities and warehouses in Erlanger, Kentucky |
|
|
10,541,887 |
|
|
|
1,525,593 |
|
|
|
21,427,148 |
|
|
|
1,571,411 |
|
|
|
141,238 |
|
|
|
1,525,593 |
|
|
|
23,139,797 |
|
|
|
24,665,390 |
|
|
|
5,027,084 |
|
|
|
1/1/1998 |
|
|
40 yrs. |
Retail stores in Montgomery and Brewton, Alabama |
|
|
|
|
|
|
855,196 |
|
|
|
6,762,374 |
|
|
|
|
|
|
|
(4,802,316 |
) |
|
|
406,674 |
|
|
|
2,408,580 |
|
|
|
2,815,254 |
|
|
|
556,892 |
|
|
|
1/1/1998 |
|
|
40 yrs. |
Industrial facility in Walbridge, Ohio |
|
|
|
|
|
|
324,046 |
|
|
|
8,408,833 |
|
|
|
|
|
|
|
|
|
|
|
324,046 |
|
|
|
8,408,833 |
|
|
|
8,732,879 |
|
|
|
1,891,988 |
|
|
|
1/1/1998 |
|
|
40 yrs. |
Land in Anchorage, Alaska |
|
|
|
|
|
|
4,573,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,573,360 |
|
|
|
|
|
|
|
4,573,360 |
|
|
|
|
|
|
|
1/1/1998 |
|
|
N/A |
Office facility in Beaumont, Texas |
|
|
|
|
|
|
164,113 |
|
|
|
2,343,849 |
|
|
|
595,445 |
|
|
|
|
|
|
|
164,113 |
|
|
|
2,939,294 |
|
|
|
3,103,407 |
|
|
|
726,765 |
|
|
|
1/1/1998 |
|
|
40 yrs. |
Office and industrial facilities in Bridgeton, Missouri |
|
|
|
|
|
|
269,700 |
|
|
|
5,099,964 |
|
|
|
4,165,742 |
|
|
|
683 |
|
|
|
269,700 |
|
|
|
9,266,389 |
|
|
|
9,536,089 |
|
|
|
1,203,865 |
|
|
|
1/1/1998 |
|
|
40 yrs. |
Office facility in College Station, Texas |
|
|
|
|
|
|
1,389,951 |
|
|
|
5,337,002 |
|
|
|
92,326 |
|
|
|
(1,039,757 |
) |
|
|
1,107,855 |
|
|
|
4,671,667 |
|
|
|
5,779,522 |
|
|
|
1,023,684 |
|
|
|
1/1/1998 |
|
|
40 yrs. |
Partially vacant industrial/office and distribution facilities
in Salisbury, North Carolina |
|
|
|
|
|
|
246,949 |
|
|
|
5,034,911 |
|
|
|
2,186,716 |
|
|
|
|
|
|
|
246,949 |
|
|
|
7,221,627 |
|
|
|
7,468,576 |
|
|
|
1,629,964 |
|
|
|
1/1/1998 |
|
|
40 yrs. |
Land in Raleigh, North Carolina |
|
|
|
|
|
|
1,638,012 |
|
|
|
|
|
|
|
155,229 |
|
|
|
289,997 |
|
|
|
828,277 |
|
|
|
1,254,961 |
|
|
|
2,083,238 |
|
|
|
17,627 |
|
|
|
1/1/1998 |
|
|
N/A |
Office facility in King of Prussia, Pennsylvania |
|
|
|
|
|
|
1,218,860 |
|
|
|
6,283,475 |
|
|
|
539,706 |
|
|
|
|
|
|
|
1,218,860 |
|
|
|
6,823,181 |
|
|
|
8,042,041 |
|
|
|
1,525,863 |
|
|
|
1/1/1998 |
|
|
40 yrs. |
Warehouse and distribution facilities in Fort Lauderdale, Florida |
|
|
|
|
|
|
1,173,108 |
|
|
|
3,368,141 |
|
|
|
242,885 |
|
|
|
98,916 |
|
|
|
1,173,108 |
|
|
|
3,709,942 |
|
|
|
4,883,050 |
|
|
|
812,260 |
|
|
|
1/1/1998 |
|
|
40 yrs. |
Industrial facility in Lemont, Illinois |
|
|
|
|
|
|
345,323 |
|
|
|
3,913,657 |
|
|
|
186,165 |
|
|
|
60,394 |
|
|
|
345,323 |
|
|
|
4,160,216 |
|
|
|
4,505,539 |
|
|
|
903,451 |
|
|
|
1/1/1998 |
|
|
40 yrs. |
Industrial facilities in Pinconning, Mississippi |
|
|
|
|
|
|
31,725 |
|
|
|
1,691,580 |
|
|
|
|
|
|
|
|
|
|
|
31,725 |
|
|
|
1,691,580 |
|
|
|
1,723,305 |
|
|
|
380,607 |
|
|
|
1/1/1998 |
|
|
40 yrs. |
Industrial facilities in San Fernando, California |
|
|
9,087,095 |
|
|
|
2,051,769 |
|
|
|
5,321,776 |
|
|
|
|
|
|
|
152,368 |
|
|
|
2,051,769 |
|
|
|
5,474,144 |
|
|
|
7,525,913 |
|
|
|
1,221,708 |
|
|
|
1/1/1998 |
|
|
40 yrs. |
Land leased in several cities in the followings states: Alabama,
Florida, Georgia, Illinois, Louisiana, Missouri, New Mexico,
North Carolina, South Carolina and Texas |
|
|
3,135,539 |
|
|
|
9,382,198 |
|
|
|
|
|
|
|
|
|
|
|
(171,949 |
) |
|
|
9,210,249 |
|
|
|
|
|
|
|
9,210,249 |
|
|
|
|
|
|
|
1/1/1998 |
|
|
N/A |
Industrial facility in Milton, Vermont |
|
|
|
|
|
|
219,548 |
|
|
|
1,578,592 |
|
|
|
|
|
|
|
|
|
|
|
219,548 |
|
|
|
1,578,592 |
|
|
|
1,798,140 |
|
|
|
355,183 |
|
|
|
1/1/1998 |
|
|
40 yrs. |
Land in Glendora, California |
|
|
|
|
|
|
1,135,003 |
|
|
|
|
|
|
|
|
|
|
|
17,286 |
|
|
|
1,152,289 |
|
|
|
|
|
|
|
1,152,289 |
|
|
|
|
|
|
|
1/1/1998 |
|
|
N/A |
Office facilities in Bloomingdale, Illinois |
|
|
|
|
|
|
1,074,640 |
|
|
|
11,452,967 |
|
|
|
723,690 |
|
|
|
|
|
|
|
1,090,462 |
|
|
|
12,160,835 |
|
|
|
13,251,297 |
|
|
|
2,626,706 |
|
|
|
1/1/1998 |
|
|
40 yrs. |
Industrial facility in Manassas, Virginia |
|
|
|
|
|
|
459,593 |
|
|
|
1,351,737 |
|
|
|
|
|
|
|
|
|
|
|
459,593 |
|
|
|
1,351,737 |
|
|
|
1,811,330 |
|
|
|
304,141 |
|
|
|
1/1/1998 |
|
|
40 yrs. |
Industrial facility in Doraville, Georgia |
|
|
6,171,815 |
|
|
|
3,287,857 |
|
|
|
9,863,570 |
|
|
|
|
|
|
|
275,133 |
|
|
|
3,287,857 |
|
|
|
10,138,703 |
|
|
|
13,426,560 |
|
|
|
2,263,362 |
|
|
|
1/1/1998 |
|
|
40 yrs. |
Office facilities in Collierville, Tennessee |
|
|
|
|
|
|
335,189 |
|
|
|
1,839,331 |
|
|
|
|
|
|
|
|
|
|
|
335,189 |
|
|
|
1,839,331 |
|
|
|
2,174,520 |
|
|
|
413,849 |
|
|
|
1/1/1998 |
|
|
40 yrs. |
Land in Irving and Houston, Texas |
|
|
9,131,508 |
|
|
|
9,795,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,795,193 |
|
|
|
|
|
|
|
9,795,193 |
|
|
|
|
|
|
|
1/1/1998 |
|
|
N/A |
Industrial facility in Detroit, Michigan |
|
|
8,635,848 |
|
|
|
5,967,620 |
|
|
|
31,730,547 |
|
|
|
|
|
|
|
775,099 |
|
|
|
5,967,620 |
|
|
|
32,505,646 |
|
|
|
38,473,266 |
|
|
|
7,262,992 |
|
|
|
1/1/1998 |
|
|
40 yrs. |
Industrial facility in Chandler, Arizona |
|
|
12,911,674 |
|
|
|
5,034,749 |
|
|
|
18,956,971 |
|
|
|
2,185,077 |
|
|
|
541,325 |
|
|
|
5,034,749 |
|
|
|
21,683,373 |
|
|
|
26,718,122 |
|
|
|
4,768,174 |
|
|
|
1/1/1998 |
|
|
40 yrs. |
Warehouse and distribution facilities in Houston, Texas |
|
|
|
|
|
|
166,745 |
|
|
|
884,772 |
|
|
|
53,175 |
|
|
|
|
|
|
|
166,745 |
|
|
|
937,947 |
|
|
|
1,104,692 |
|
|
|
201,677 |
|
|
|
1/1/1998 |
|
|
40 yrs. |
Industrial facility in Prophetstown, Illinois |
|
|
|
|
|
|
70,317 |
|
|
|
1,476,657 |
|
|
|
|
|
|
|
(427,917 |
) |
|
|
70,317 |
|
|
|
1,048,740 |
|
|
|
1,119,057 |
|
|
|
19,310 |
|
|
|
1/1/1998 |
|
|
40 yrs. |
W. P. Carey 2006 10-K 79
SCHEDULE III REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2006
(not in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life on which |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Latest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs Capitalized |
|
|
Increase |
|
|
Gross Amount at which Carried |
|
|
|
|
|
|
|
|
|
|
Statement of |
|
|
|
|
|
|
|
Initial Cost to Company |
|
|
Subsequent to |
|
|
(Decrease) in Net |
|
|
at Close of Period (e) |
|
|
Accumulated |
|
|
Date |
|
|
Income is |
|
Description |
|
Encumbrances |
|
|
Land |
|
|
Buildings |
|
|
Acquisition (a) |
|
|
Investments (b) |
|
|
Land |
|
|
Buildings |
|
|
Total |
|
|
Depreciation (e) |
|
|
Acquired |
|
|
Computed |
|
Real Estate
Under Operating Leases (Continued): |
Office facilities in Bridgeton, Missouri |
|
|
6,000,000 |
|
|
|
842,233 |
|
|
|
4,762,302 |
|
|
|
|
|
|
|
71,065 |
|
|
|
842,233 |
|
|
|
4,833,367 |
|
|
|
5,675,600 |
|
|
|
|
|
|
|
1/1/1998 |
|
|
40 yrs. |
Industrial facility in Industry, California |
|
|
|
|
|
|
3,789,019 |
|
|
|
13,163,763 |
|
|
|
1,103,550 |
|
|
|
317,638 |
|
|
|
3,789,019 |
|
|
|
14,584,951 |
|
|
|
18,373,970 |
|
|
|
1,907,247 |
|
|
|
1/1/1998 |
|
|
40 yrs. |
Warehouse and distribution facilities in Memphis, Tennessee |
|
|
|
|
|
|
1,051,005 |
|
|
|
14,036,912 |
|
|
|
510,000 |
|
|
|
(2,570,900 |
) |
|
|
1,051,005 |
|
|
|
11,976,012 |
|
|
|
13,027,017 |
|
|
|
1,711,906 |
|
|
|
1/1/1998 |
|
|
7 yrs. |
Retail store in Bellevue, Washington |
|
|
9,674,847 |
|
|
|
4,125,000 |
|
|
|
11,811,641 |
|
|
|
393,206 |
|
|
|
|
|
|
|
4,493,534 |
|
|
|
11,836,313 |
|
|
|
16,329,847 |
|
|
|
2,575,956 |
|
|
|
4/23/1998 |
|
|
40 yrs. |
Office facilities in Paris, France |
|
|
11,290,748 |
|
|
|
2,674,914 |
|
|
|
8,113,120 |
|
|
|
57,096 |
|
|
|
1,816,715 |
|
|
|
1,545,859 |
|
|
|
11,115,986 |
|
|
|
12,661,845 |
|
|
|
2,229,243 |
|
|
|
5/27/1998 |
|
|
40 yrs. |
Office facility in Rouen, France |
|
|
3,336,190 |
|
|
|
542,968 |
|
|
|
5,286,915 |
|
|
|
|
|
|
|
793,163 |
|
|
|
641,716 |
|
|
|
5,981,330 |
|
|
|
6,623,046 |
|
|
|
1,195,480 |
|
|
|
6/10/1998 |
|
|
40 yrs. |
Office facility in Houston, Texas |
|
|
5,000,005 |
|
|
|
3,260,000 |
|
|
|
22,574,073 |
|
|
|
404,918 |
|
|
|
|
|
|
|
3,260,000 |
|
|
|
22,978,991 |
|
|
|
26,238,991 |
|
|
|
4,947,709 |
|
|
|
6/15/1998 |
|
|
40 yrs. |
Office facility in Tempe, Arizona |
|
|
16,080,135 |
|
|
|
2,274,782 |
|
|
|
26,701,663 |
|
|
|
|
|
|
|
|
|
|
|
2,274,782 |
|
|
|
26,701,663 |
|
|
|
28,976,445 |
|
|
|
5,115,911 |
|
|
|
6/30/1998 |
|
|
40 yrs. |
Office facility in Rio Rancho, New Mexico |
|
|
8,318,515 |
|
|
|
1,190,000 |
|
|
|
9,352,965 |
|
|
|
1,315,694 |
|
|
|
|
|
|
|
1,466,884 |
|
|
|
10,391,775 |
|
|
|
11,858,659 |
|
|
|
2,033,696 |
|
|
|
7/1/1998 |
|
|
40 yrs. |
Office facility in Rouen, France |
|
|
1,227,799 |
|
|
|
303,061 |
|
|
|
2,109,731 |
|
|
|
357,187 |
|
|
|
217,109 |
|
|
|
249,585 |
|
|
|
2,737,503 |
|
|
|
2,987,088 |
|
|
|
464,492 |
|
|
|
11/16/1998 |
|
|
40 yrs. |
Vacant office facility in Moorestown, New Jersey |
|
|
5,636,940 |
|
|
|
351,445 |
|
|
|
5,980,736 |
|
|
|
1,103,154 |
|
|
|
42,916 |
|
|
|
351,445 |
|
|
|
7,126,806 |
|
|
|
7,478,251 |
|
|
|
1,389,589 |
|
|
|
2/19/1999 |
|
|
40 yrs. |
Warehouse and distribution facilities in Phalempin and Joue Les
Tours, France |
|
|
3,042,243 |
|
|
|
451,168 |
|
|
|
4,478,891 |
|
|
|
|
|
|
|
919,893 |
|
|
|
562,807 |
|
|
|
5,287,145 |
|
|
|
5,849,952 |
|
|
|
970,842 |
|
|
|
5/5/1999 |
|
|
40 yrs. |
Office facility in Norcross, Georgia |
|
|
30,000,000 |
|
|
|
5,200,000 |
|
|
|
25,585,340 |
|
|
|
|
|
|
|
11,821,184 |
|
|
|
5,200,000 |
|
|
|
37,406,524 |
|
|
|
42,606,524 |
|
|
|
6,715,434 |
|
|
|
6/3/1999 |
|
|
40 yrs. |
Office facility in Lafayette, Louisiana |
|
|
3,943,049 |
|
|
|
720,000 |
|
|
|
7,708,458 |
|
|
|
119,092 |
|
|
|
41 |
|
|
|
720,000 |
|
|
|
7,827,591 |
|
|
|
8,547,591 |
|
|
|
1,376,727 |
|
|
|
12/22/1999 |
|
|
40 yrs. |
Office facility in Tours, France |
|
|
8,695,229 |
|
|
|
1,033,532 |
|
|
|
9,737,359 |
|
|
|
|
|
|
|
4,156,724 |
|
|
|
1,449,205 |
|
|
|
13,478,410 |
|
|
|
14,927,615 |
|
|
|
2,037,944 |
|
|
|
9/1/2000 |
|
|
40 yrs. |
Office facility in Illkirch, France |
|
|
19,894,863 |
|
|
|
|
|
|
|
18,520,178 |
|
|
|
|
|
|
|
9,084,278 |
|
|
|
|
|
|
|
27,604,456 |
|
|
|
27,604,456 |
|
|
|
3,640,573 |
|
|
|
12/3/2001 |
|
|
40 yrs. |
Industrial, warehouse and distribution facilities in Lenexa,
Kansas; Winston-Salem, North Carolina and Dallas, Texas |
|
|
8,738,516 |
|
|
|
1,860,000 |
|
|
|
12,538,600 |
|
|
|
|
|
|
|
5,890 |
|
|
|
1,860,000 |
|
|
|
12,544,490 |
|
|
|
14,404,490 |
|
|
|
1,380,369 |
|
|
|
9/12/2002 |
|
|
40 yrs. |
Office buildings in Venice, California (c) |
|
|
|
|
|
|
2,032,029 |
|
|
|
10,151,780 |
|
|
|
|
|
|
|
1,071 |
|
|
|
2,032,029 |
|
|
|
10,152,851 |
|
|
|
12,184,880 |
|
|
|
581,675 |
|
|
|
9/1/2004 |
|
|
40 yrs. |
W. P. Carey
2006 10-K 80
SCHEDULE III REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life on which |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Latest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs Capitalized |
|
|
Increase |
|
|
Gross Amount at which Carried |
|
|
|
|
|
|
|
|
|
|
Statement of |
|
|
|
|
|
|
|
Initial Cost to Company |
|
|
Subsequent to |
|
|
(Decrease) in Net |
|
|
at Close of Period (e) |
|
|
Accumulated |
|
|
Date |
|
|
Income is |
|
Description |
|
Encumbrances |
|
|
Land |
|
|
Buildings |
|
|
Acquisition (a) |
|
|
Investments (b) |
|
|
Land |
|
|
Buildings |
|
|
Total |
|
|
Depreciation (e) |
|
|
Acquired |
|
|
Computed |
|
Real Estate Under Operating Leases (Continued): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail stores in Drayton Plains, Michigan and Citrus Heights,
California (c) |
|
|
|
|
|
|
1,039,313 |
|
|
|
4,788,318 |
|
|
|
|
|
|
|
192,937 |
|
|
|
1,039,313 |
|
|
|
4,981,255 |
|
|
|
6,020,568 |
|
|
|
282,593 |
|
|
|
9/1/2004 |
|
|
40 yrs. |
Office facility in San Diego, California (c) |
|
|
|
|
|
|
4,646,946 |
|
|
|
19,711,863 |
|
|
|
7,744 |
|
|
|
40,835 |
|
|
|
4,646,946 |
|
|
|
19,760,442 |
|
|
|
24,407,388 |
|
|
|
1,131,730 |
|
|
|
9/1/2004 |
|
|
40 yrs. |
Warehouse and distribution facilities in Birmingham, Alabama (c) |
|
|
4,722,475 |
|
|
|
1,255,668 |
|
|
|
7,703,604 |
|
|
|
|
|
|
|
|
|
|
|
1,255,668 |
|
|
|
7,703,604 |
|
|
|
8,959,272 |
|
|
|
441,352 |
|
|
|
9/1/2004 |
|
|
40 yrs. |
Industrial facility in Scottsdale, Arizona (c) |
|
|
1,513,396 |
|
|
|
586,369 |
|
|
|
45,954 |
|
|
|
|
|
|
|
476 |
|
|
|
586,369 |
|
|
|
46,430 |
|
|
|
632,799 |
|
|
|
2,661 |
|
|
|
9/1/2004 |
|
|
40 yrs. |
Retail stores in Hope, Little Rock and Hot Springs, Arizona (c) |
|
|
|
|
|
|
850,212 |
|
|
|
2,938,815 |
|
|
|
|
|
|
|
|
|
|
|
850,212 |
|
|
|
2,938,815 |
|
|
|
3,789,027 |
|
|
|
168,370 |
|
|
|
9/1/2004 |
|
|
40 yrs. |
Industrial facilities in Apopka, Florida (c) |
|
|
2,621,398 |
|
|
|
362,004 |
|
|
|
10,854,781 |
|
|
|
|
|
|
|
|
|
|
|
362,004 |
|
|
|
10,854,781 |
|
|
|
11,216,785 |
|
|
|
621,889 |
|
|
|
9/1/2004 |
|
|
40 yrs. |
Retail facility in Jacksonville, Florida |
|
|
|
|
|
|
974,500 |
|
|
|
6,979,507 |
|
|
|
|
|
|
|
|
|
|
|
974,500 |
|
|
|
6,979,507 |
|
|
|
7,954,007 |
|
|
|
399,868 |
|
|
|
9/1/2004 |
|
|
40 yrs. |
Retail facilities in Charlotte, North Carolina (c) |
|
|
|
|
|
|
1,639,057 |
|
|
|
10,607,869 |
|
|
|
|
|
|
|
24,528 |
|
|
|
1,639,057 |
|
|
|
10,632,397 |
|
|
|
12,271,454 |
|
|
|
608,535 |
|
|
|
9/1/2004 |
|
|
40 yrs. |
Industrial and office facilities in Austin, Texas (d) |
|
|
|
|
|
|
1,238,128 |
|
|
|
10,983,459 |
|
|
|
|
|
|
|
|
|
|
|
1,238,128 |
|
|
|
10,983,459 |
|
|
|
12,221,587 |
|
|
|
31,653 |
|
|
|
12/1/2006 |
|
|
28.9 yrs. |
Industrial facility in Chattanooga, Tennessee (d) |
|
|
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|
|
|
1,381,511 |
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4,021,419 |
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1,381,511 |
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4,021,419 |
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5,402,930 |
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24,671 |
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12/1/2006 |
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13.6 yrs. |
Land in San Leandro, California (d) |
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1,531,750 |
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1,531,750 |
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1,531,750 |
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12/1/2006 |
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N/A |
Warehouse and distribution facility in Greenfield, Indiana (d) |
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967,274 |
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3,799,882 |
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967,274 |
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3,799,882 |
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4,767,156 |
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11,242 |
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12/1/2006 |
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28.2 yrs. |
Educational facility in Mendota Heights, Minnesota (d) |
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7,010,996 |
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2,483,556 |
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9,078,252 |
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2,483,556 |
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9,078,252 |
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11,561,808 |
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24,470 |
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|
12/1/2006 |
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|
30.9 yrs. |
Industrial facility in Sunnyvale, California (d) |
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1,662,913 |
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3,570,538 |
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1,662,913 |
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|
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3,570,538 |
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5,233,451 |
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11,020 |
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|
|
12/1/2006 |
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|
27 yrs. |
Fitness and recreational sports center in Austin, Texas (d) |
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3,014,502 |
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1,725,423 |
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5,167,916 |
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1,725,423 |
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5,167,916 |
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6,893,339 |
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15,112 |
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12/1/2006 |
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|
28.5 yrs. |
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$ |
219,377,212 |
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|
$ |
107,030,130 |
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$ |
469,532,721 |
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$ |
22,848,744 |
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$ |
21,060,720 |
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$ |
108,119,420 |
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|
$ |
512,352,895 |
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$ |
620,472,315 |
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$ |
79,968,000 |
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W. P. Carey
2006 10-K 81
SCHEDULE III REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2006
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Gross Amount at |
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Costs Capitalized |
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Increase |
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which Carried |
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Initial Cost to Company |
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Subsequent to |
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(Decrease) in Net |
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at Close of |
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Date |
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Description |
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Encumbrances |
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Land |
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Buildings |
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Acquisition (a) |
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Investments (b) |
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Period Total |
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Acquired |
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Direct Financing Method: |
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Warehouse and distribution facilities in Anchorage, Alaska |
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$ |
|
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|
$ |
331,910 |
|
|
$ |
12,281,102 |
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|
$ |
|
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|
$ |
(502,429 |
) |
|
$ |
12,110,583 |
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|
1/1/1998 |
|
Industrial facility in Williamsport, Pennsylvania |
|
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|
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445,383 |
|
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11,323,899 |
|
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(6,601,630 |
) |
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5,167,652 |
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1/1/1998 |
|
Office facility in Toledo, Ohio |
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|
2,618,429 |
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223,585 |
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2,684,424 |
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(276,580 |
) |
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2,631,429 |
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1/1/1998 |
|
Industrial facility in Goshen, Indiana |
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238,532 |
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3,339,449 |
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& |