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, 2007
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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
(State of incorporation)
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13-3912578
(I.R.S. Employer Identification No.) |
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50 Rockefeller Plaza |
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New York, New York
(Address of principal executive offices)
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10020
(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, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company)
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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, 2007, the aggregate market value of the registrants Listed Shares held by
non-affiliates was $867,710,563.
As of February 22, 2008, there are 39,314,671 Listed Shares of registrant outstanding.
The registrant incorporates by reference its definitive Proxy Statement with respect to its 2008
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 II 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, seek, plan 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 we, us and our include W. P. Carey &
Co. LLC, its consolidated subsidiaries and predecessors, unless otherwise indicated.
W. P. Carey 2007 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 provider of long-term net lease financing for companies worldwide. We invest primarily in
commercial properties that are each triple-net leased to single corporate tenants, domestically and
internationally, and earn revenue as the advisor to publicly owned, non-traded real estate
investment trusts (CPA® REITs) sponsored by us that invest in similar properties. We
are currently the advisor to the following CPA® REITs: Corporate Property Associates 14
Incorporated (CPA®:14), Corporate Property Associates 15 Incorporated
(CPA®:15), Corporate Property Associates 16 Global Incorporated (CPA®:16
Global) and Corporate Property Associates 17 Global Incorporated (CPA®:17
Global), and were the advisor to Corporate Property Associates 12 Incorporated
(CPA®:12) until its merger with CPA®:14 in 2006. We also hold ownership
interests in these CPA® REITs.
Our real estate investment portfolio, as well as those of the CPA® 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. As a result of electing to receive certain payments for services in shares, we also hold
ownership interests in 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
in 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 investment management 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, 2007, we employed 135 individuals through
our wholly-owned subsidiaries.
W. P. Carey 2007 10-K 2
Significant Developments During 2007
Managed Portfolio Update:
Acquisition / Disposition Activity We earn revenue from the acquisition and disposition of
properties on behalf of the CPA® REITs. The revenue we earn from the disposition of
assets is recognized upon liquidation of a CPA® REITs portfolio. During the year ended
December 31, 2007, we structured investments totaling approximately $1,095,000 on behalf of the
CPA® REITs. Approximately 55% of these investments were for international transactions.
During 2007, we sold several properties on behalf of the CPA® REITs for approximately
$145,000, net of selling costs.
CPA®:16 Global Performance Criterion In June 2007, CPA®:16 Global met
its performance criterion (a non-compounded cumulative distribution return of 6% per annum), as
defined in its advisory agreement, and as a result, we recognized previously deferred revenue
totaling $45,919 (consisting of asset-based revenue of $11,945, structuring revenue of $31,674 and
interest income on the previously deferred structuring revenue of $2,300). In addition, as a result
of CPA®:16 Global meeting its performance criterion, we recognized and paid to certain
employees incentive and commission compensation of $6,191 and interest thereon of $434 that had
previously been deferred.
We received the deferred asset-based revenue of $11,945 in July 2007 from CPA®:16
Global in the form of 1,194,549 shares of CPA®:16 Globals restricted common stock
while the deferred structuring revenue of $31,674 and interest thereon of $2,300 is due to us in
cash in annual installments beginning in January 2008. We received the first installment of $28,259
in January 2008 (including accrued interest). CPA®:16 Global will pay the remaining
deferred structuring revenue of $4,663 in January 2009 and $1,052 in January 2010. Interest will
accrue on amounts outstanding at the rate of 5% per annum.
CPA®:17 Global In February 2007, we formed CPA®:17 Global, an
affiliated REIT, 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. In November 2007, the SEC declared the registration statement to raise up to
$2,475,000 of common stock of CPA®:17 Global (including up to $475,000 under its
distribution reinvestment and stock purchase plan) effective. We commenced fundraising for
CPA®:17 Global in late December 2007. Through February 27, 2008, we have raised
$39,922 on CPA®:17 Globals behalf.
Company and Owned Portfolio Update:
SEC Investigation As we have previously disclosed, in 2004 the staff of the U.S. Securities and
Exchange Commission began investigating whether, in connection with a public offering of shares of
CPA®:15 in late 2002 and early 2003, Carey Financial, LLC (Carey Financial), our
wholly-owned broker-dealer subsidiary, sold such shares without an effective registration
statement, and whether that and other registration statements and prospectuses of REITs managed by
us contained material misrepresentations and omissions, including with respect to payments made by
certain of the REITs in the 2000-03 period to broker-dealers that distributed the REITs shares. We
and Carey Financial have now reached an agreement in principle with the staff of the SEC to settle
all matters relating to this investigation. See Item 3 Legal Proceedings for a discussion of this
investigation.
Acquisition Activity During 2007, we entered into an investment in Poland for $13,905. In
addition, we also acquired interests in two joint ventures that purchased properties in Germany.
Our contribution to these equity investments totaled $42,770. We account for our interests in the
joint ventures under the equity method of accounting.
During 2007, our subsidiary Carey Storage acquired seven domestic self-storage properties totaling
$35,000. These acquisitions were funded in part through borrowings totaling $20,080 under Carey
Storages secured credit facility.
Disposition Activity During 2007, we sold several properties for approximately $46,000, net of
selling costs and, in addition, received lease termination proceeds of $1,905. In connection with
these sales, we recorded a net gain of $15,827, exclusive of the recognition of an impairment
charge in 2007 of $2,317 to reduce a propertys carrying value to its estimated net sales proceeds
and impairment charges of $2,687 recognized in prior years.
Credit Facility In June 2007, we entered into an unsecured credit facility for a $250,000
revolving line of credit to replace our previous $175,000 line of credit that was due to expire in
July 2007. The credit facility, which matures in June 2011, can be increased to up to $300,000 upon
satisfaction of certain conditions. We used $28,000 of funds from this facility to repay our
previous credit facility.
Corporate Restructuring In October 2007, we completed our restructuring plan by transferring our
real estate assets from a wholly owned subsidiary into a newly formed wholly owned REIT subsidiary.
This restructuring is intended to simplify tax reporting for our
W. P. Carey 2007 10-K 3
shareholders and has no impact on
the presentation of financial results. The use of a REIT subsidiary should also provide beneficial
tax treatment to certain types of investors, including certain tax exempt investors and individuals
investing through tax deferred accounts such as IRAs.
Share Repurchase Program In June 2007, our Board of Directors approved a $20,000 share repurchase
program. In September 2007, our board approved the repurchase of up to an additional $20,000 of our
stock under this share repurchase program. Under this program, we may now repurchase up to $40,000
of our common stock in the open market through March 31, 2008 as conditions warrant. Through
December 31, 2007, we repurchased shares totaling $25,525 under this program.
Financing Activity In connection with our investment activity, one of the German joint ventures
obtained non-recourse mortgage financing at a rate and term of 5.5% and 10 years, respectively. Our
share of this financing is $14,247. In addition, in June 2007, one of our joint ventures refinanced
its mortgage obligation and distributed the proceeds to the venture partners. Our share of the new
financing, which carries a fixed annual interest rate of 6.2% and which matures in July 2017, is
$17,675.
Directors and Senior Management Trevor Bond was appointed to the Board of Directors in April 2007
and elected to the board at the annual shareholders meeting in June 2007 and is serving as an
independent director. Robert Mittelstaedt was elected to the Board of Directors in June 2007 at the
annual shareholders meeting and is serving as an independent director. In June 2007, Thomas
Ridings, an executive director, was appointed chief accounting officer.
(b) Financial Information About Segments
Refer to Note 16 in the accompanying consolidated financial statements for financial information
about segments.
(c) Narrative Description of Business
Business Objectives and Strategy
Our objective is to increase shareholder value and earnings through expansion of our investment
management 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, investment management and real estate ownership. These
segments are each described below.
Investment Management
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 Investment Management
operations are currently conducted primarily by taxable corporate subsidiaries.
We are currently exploring alternatives for expanding our Investment Management operations beyond
advising the CPA® REITs. Any such expansion could involve the purchase of properties or
other investments as principal, with the intention of transferring such investments to a newly
created fund, as well as the sponsorship of one or more funds to make investments other than
primarily net lease investments.
Asset Management Revenue
Generally, we earn asset management revenues based on a percentage of average invested assets for
each CPA® REIT, with additional revenues (performance revenue) being contingent upon
specific performance criteria for each CPA® REIT (generally, the payment of a specified
cumulative distribution return to shareholders). For CPA®:14, CPA®:15 and
CPA®:16 Global, asset management revenues and performance revenues total 1% per annum.
For CPA®:17 Global, asset management revenues will be 1/2 of 1% per annum of average
market value for long-term net leased properties and certain other assets and 1.5% to 1.75% of
average equity value
for certain types of real-estate related loans and marketable real estate securities. In addition,
through a subsidiary which intends to qualify as a REIT, we may receive up to 10% of distributions
of available cash made
by CPA®:17 Globals
operating partnership subsidiary which we would include in our investment management segment for financial reporting purposes. We seek
to increase our base asset management and performance revenue by increasing assets under
management, both as
W. P. Carey 2007 10-K 4
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. Real property 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. The advisory agreements allow us to elect to receive
restricted stock for any revenue due from a CPA® REIT.
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 long-term net lease 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. For CPA®:17 Global, total acquisition revenue for long-term net leased
investments is essentially the same. (For certain types of non-long term net lease investments made
by CPA®:17 Global, a lower acquisition revenue schedule may apply.) 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 for CPA®:14, CPA®:15 and
CPA®:16 Global, 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. CPA®:17 Global, upon certain terminations, has the
right, but not the obligation, beginning two years after the start of its operations, to repurchase
our interest in its operating partnership at its then fair market value. We will not receive a
termination payment in circumstances where we receive subordinated incentive revenue. In current
and past years we have earned substantial 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 initial 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. As CPA®:14 was substantially fully invested in 2000, we have begun
discussing liquidity alternatives with the Board of Directors of CPA®:14. However, no
decisions have been reached by that board and there can be no assurances that a liquidity event for
CPA®:14 will occur in the near 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. We are also
reimbursed by the CPA® REITs for many of our costs associated with the evaluation of
transactions on behalf of the CPA® REITs that are not completed. Marketing and personnel
costs are apportioned based on the assets of each entity. These reimbursements may be substantial.
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.
Equity Investments in CPA® REITs
As discussed above, we may elect to receive certain of our revenues from the CPA® REITs
in restricted shares of those entities. As of December 31, 2007, we owned 2.9% of the outstanding
shares of CPA®:16 Global, 4.5% of the outstanding shares of CPA®:15 and
6.6% of the outstanding shares of CPA®:14. As a result of our election to receive asset
management revenue for 2008 in restricted shares of these entities, we expect our ownership
percentages to increase in 2008. We account for these investments under the equity
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method of
accounting, pursuant to which we include in equity investments in real estate our proportionate
share of the net income of each of these entities. We also receive distributions on these shares
from the CPA® REITs, and include any distributions in excess of equity income in our
cash flows from investing activities.
Real Estate Ownership
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 did during 2006. We have also acquired
properties and interests in properties through tax-free exchanges and as part of joint ventures
with the CPA® REITs. We may also, in the future, seek to increase our portfolio by
making investments, including non-net lease investments and including investments in emerging
markets, that may not meet the investment criteria of the CPA® REITs, particularly
investments that are not current-income oriented. See Our Portfolio section below for an analysis
of our portfolio as of December 31, 2007.
The Investment Strategies, Financing Strategies, Asset Management, Competition and Environmental
Matters sections described below pertain to both our Investment Management and Real Estate
Ownership.
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 lease, 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. In evaluating net lease transactions, 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. We seek opportunities in which we believe the tenant may have
a stable or improving credit profile or credit potential that has not been recognized by the
market. 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 seek to reduce the adverse effect of a single
under-performing investment or a downturn in any particular industry or geographic region. Because
of the emphasis we have placed on property acquisitions on behalf of the CPA® REITs, we
have not endeavored to maintain any particular standard of diversity in our own portfolio.
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
W. P. Carey 2007 10-K 6
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 lease 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 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 tenant 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.
As other opportunities arise, we may also seek to expand the CPA® REIT portfolios to
include other types of real estate-related investments, such as the following:
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equity investments in real properties that are not long-term net leased to a single
tenant and may include partially leased properties, multi-tenanted properties, vacant or
undeveloped properties and properties subject to short-term net leases, among others; |
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mortgage loans secured by commercial real properties; |
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subordinated interests in first mortgage real estate loans, or B Notes; |
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mezzanine loans related to commercial real estate that is senior to the borrowers
equity position but subordinated to other third-party financing; |
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commercial mortgage-backed securities, or CMBS; and |
|
|
|
|
equity and debt securities (including preferred equity and other higher-yielding
structured debt and equity investments) issued by companies that are engaged in real-estate
related businesses including other REITs. |
To date, our investments on behalf of the CPA® REITs have not included significant
amounts of these types of investments.
Investment Committee We have an investment committee that provides services to the
CPA® REITs and may provide services to us. Our investment department, under the
oversight of our Chief Investment Officer, is primarily responsible for evaluating, negotiating and
structuring potential investment opportunities. Before a property is acquired by a CPA®
REIT, the transaction is reviewed by the investment committee. 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, subject
to limited exceptions, 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 and
investments that are not current income oriented) may be acceptable to us. For transactions that
meet the investment criteria of more than one CPA® REIT, the chief
W. P. Carey 2007 10-K 7
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.
The following people currently serve on the investment committee:
|
|
|
Nathaniel S. Coolidge Former senior vice president and head of the bond and corporate
finance department of John Hancock Mutual Life Insurance (currently known as John Hancock
Life Insurance Company). Mr. Coolidges responsibilities included overseeing its entire
portfolio of fixed income investments. |
|
|
|
|
Trevor P. Bond Co-founder of Credit Suisses real estate equity group. Currently
managing member of private investment vehicle, Maidstone Investment Co., LLC. |
|
|
|
|
Frank J. Hoenemeyer Former vice chairman and chief investment officer of the
Prudential Insurance Company of America. As chief investment officer, he was responsible
for all of Prudential Insurance Company of Americas investments including stocks, bonds
and real estate. |
|
|
|
|
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 deputy
chairman of the supervisory board of Corealcredit Bank AG. |
Each of these individuals, other than Mr. Hoenemeyer, also serves as a member of our Board of
Directors.
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
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. In December 2006, Carey Storage began acquiring domestic self-storage properties
using a portion of the proceeds from our contribution and loan along with borrowings under its
$105,000 secured credit facility. We are evaluating raising third party capital in connection with
these investments. See Real Estate Ownership for further discussion of our self-storage
investments.
Carey Storage has an investment committee that evaluates and approves 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 ownership segment to our investment management
segment. We currently expect that we would then seek to liquidate the self-storage investments as a
whole within five to seven years thereafter.
W. P. Carey 2007 10-K 8
Our Portfolio
As of December 31, 2007, we own and manage over 850 commercial properties domestically and
internationally including our own portfolio. Our owned portfolio is comprised of our full or
partial ownership interest in 176 commercial properties net leased to 98 tenants and totaling
approximately 17 million square feet (on a pro rata basis) with an occupancy rate of 97%. We also
own 13 domestic self-storage properties totaling approximately 0.9 million square feet.
Our portfolio has the following property and lease characteristics:
Geographic Diversification
Information regarding the geographic diversification of our properties as of December 31, 2007 is
set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Investments |
|
|
Equity Investments in Real Estate(b) |
|
|
|
Annualized |
|
|
% of Annualized |
|
|
Annualized |
|
|
% of Annualized |
|
|
|
Contractual Lease |
|
|
Contractual |
|
|
Contractual Lease |
|
|
Contractual |
|
Region |
|
Revenue(a) |
|
|
Lease Revenue |
|
|
Revenue(a) |
|
|
Lease Revenue |
|
United States |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South |
|
$ |
28,919 |
|
|
|
35 |
% |
|
$ |
2,915 |
|
|
|
12 |
% |
West |
|
|
20,146 |
|
|
|
25 |
|
|
|
1,941 |
|
|
|
8 |
|
Midwest |
|
|
15,527 |
|
|
|
19 |
|
|
|
2,355 |
|
|
|
9 |
|
East |
|
|
9,669 |
|
|
|
12 |
|
|
|
2,141 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. |
|
|
74,261 |
|
|
|
91 |
|
|
|
9,352 |
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe |
|
|
7,001 |
|
|
|
9 |
|
|
|
15,407 |
|
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
81,262 |
|
|
|
100 |
% |
|
$ |
24,759 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects annualized contractual minimum base rent for the fourth quarter of 2007. |
|
(b) |
|
Reflects our pro rata share of annualized contractual minimum base rent for the fourth
quarter of 2007 from equity investments in real estate. |
Property Diversification
Information regarding our property diversification as of December 31, 2007 is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Investments |
|
|
Equity Investments in Real Estate(b) |
|
|
|
Annualized |
|
|
% of Annualized |
|
|
Annualized |
|
|
% of Annualized |
|
|
|
Contractual Lease |
|
|
Contractual |
|
|
Contractual Lease |
|
|
Contractual |
|
Property Type |
|
Revenue(a) |
|
|
Lease Revenue |
|
|
Revenue(a) |
|
|
Lease Revenue |
|
Industrial |
|
$ |
31,222 |
|
|
|
38 |
% |
|
$ |
5,254 |
|
|
|
21 |
% |
Office |
|
|
27,865 |
|
|
|
34 |
|
|
|
5,544 |
|
|
|
23 |
|
Warehouse/Distribution |
|
|
11,810 |
|
|
|
15 |
|
|
|
10,236 |
|
|
|
41 |
|
Retail |
|
|
6,239 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
Other Properties |
|
|
4,126 |
|
|
|
5 |
|
|
|
3,725 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
81,262 |
|
|
|
100 |
% |
|
$ |
24,759 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects annualized contractual minimum base rent for the fourth quarter of 2007. |
|
(b) |
|
Reflects our pro rata share of annualized contractual minimum base rent for the fourth
quarter of 2007 from equity investments in real estate. |
W. P. Carey 2007 10-K 9
Tenant Diversification
Information regarding our tenant diversification as of December 31, 2007 is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Investments |
|
|
Equity Investments in Real Estate(b) |
|
|
|
Annualized |
|
|
% of Annualized |
|
|
Annualized |
|
|
% of Annualized |
|
|
|
Contractual Lease |
|
|
Contractual |
|
|
Contractual Lease |
|
|
Contractual |
|
Tenant Industry(c) |
|
Revenue(a) |
|
|
Lease Revenue |
|
|
Revenue(a) |
|
|
Lease Revenue |
|
Telecommunications |
|
$ |
11,947 |
|
|
|
15 |
% |
|
$ |
|
|
|
|
|
% |
Business and Commercial Services |
|
|
11,466 |
|
|
|
14 |
|
|
|
1,863 |
|
|
|
8 |
|
Retail Stores |
|
|
6,855 |
|
|
|
8 |
|
|
|
9,796 |
|
|
|
39 |
|
Electronics |
|
|
5,677 |
|
|
|
7 |
|
|
|
1,194 |
|
|
|
5 |
|
Automobile |
|
|
5,284 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
Aerospace and Defense |
|
|
4,892 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
Beverages, Food and Tobacco |
|
|
4,747 |
|
|
|
6 |
|
|
|
383 |
|
|
|
1 |
|
Forest Products and Paper |
|
|
4,414 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
Transportation Personal |
|
|
3,962 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
Healthcare, Education and Childcare |
|
|
3,854 |
|
|
|
5 |
|
|
|
5,397 |
|
|
|
22 |
|
Consumer Non-Durable Goods |
|
|
3,620 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
Consumer and Durable Goods |
|
|
2,176 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
Media: Printing and Publishing |
|
|
1,941 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
Chemicals, Plastics, Rubber and Glass |
|
|
1,750 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
Machinery |
|
|
771 |
|
|
|
1 |
|
|
|
2,401 |
|
|
|
10 |
|
Transportation Cargo |
|
|
307 |
|
|
|
|
|
|
|
2,777 |
|
|
|
11 |
|
Other (d) |
|
|
7,599 |
|
|
|
9 |
|
|
|
948 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
81,262 |
|
|
|
100 |
% |
|
$ |
24,759 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects annualized contractual minimum base rent for the fourth quarter of 2007. |
|
(b) |
|
Reflects our pro rata share of annualized contractual minimum base rent for the fourth
quarter of 2007 from equity investments in real estate. |
|
(c) |
|
Based on the Moodys classification system and information provided by the tenant. |
|
(d) |
|
Includes revenue from tenants in banking, construction, governmental, grocery, hotels,
leisure, mining and textiles industries. |
Lease Expirations
As of December 31, 2007, lease expirations of our properties are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Investments |
|
|
Equity Investments in Real Estate(b) |
|
|
|
Annualized |
|
|
% of Annualized |
|
|
Annualized |
|
|
% of Annualized |
|
|
|
Contractual Lease |
|
|
Contractual |
|
|
Contractual Lease |
|
|
Contractual |
|
Year of Lease Expiration |
|
Revenue(a) |
|
|
Lease Revenue |
|
|
Revenue(a) |
|
|
Lease Revenue |
|
2008 |
|
$ |
4,949 |
|
|
|
6 |
% |
|
$ |
|
|
|
|
|
% |
2009 |
|
|
10,901 |
|
|
|
13 |
|
|
|
383 |
|
|
|
2 |
|
2010 |
|
|
14,770 |
|
|
|
18 |
|
|
|
3,209 |
|
|
|
13 |
|
2011 |
|
|
9,370 |
|
|
|
12 |
|
|
|
8,483 |
|
|
|
34 |
|
2012 |
|
|
5,523 |
|
|
|
7 |
|
|
|
1,314 |
|
|
|
5 |
|
2013 |
|
|
6,224 |
|
|
|
8 |
|
|
|
1,863 |
|
|
|
8 |
|
2014 |
|
|
10,249 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
2015 |
|
|
5,800 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
2016 |
|
|
1,149 |
|
|
|
1 |
|
|
|
516 |
|
|
|
2 |
|
2017 |
|
|
2,403 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
2018 - 2022 |
|
|
8,875 |
|
|
|
11 |
|
|
|
5,642 |
|
|
|
23 |
|
2023 - 2027 |
|
|
1,049 |
|
|
|
1 |
|
|
|
3,349 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
81,262 |
|
|
|
100 |
% |
|
$ |
24,759 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
W. P. Carey 2007 10-K 10
|
|
|
(a) |
|
Reflects annualized contractual minimum base rent for the fourth quarter of 2007. |
|
(b) |
|
Reflects our pro rata share of annualized contractual minimum base rent for the fourth
quarter of 2007 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 non-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 non-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 non-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 non-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 and other expenses
relating to the properties it occupies and confirming that appropriate insurance coverage is being
maintained by the tenant. For international compliance, we often rely on third party asset
managers. 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 have two operating segments, investment management and real estate ownership. The investment
management segment derives substantially all of its revenues from the affiliated CPA®
REITs. While no tenant at any of our consolidated investments represented more than 7% of our total
lease revenues from our real estate ownership during 2007, a joint venture that leases property to
Carrefour France, S.A. earned lease revenue of $19,061. We have a 46% interest in this joint
venture.
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 active competition for investment opportunities in commercial properties net leased to
major corporations both domestically and internationally 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. However, 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.
W. P. Carey 2007 10-K 11
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 engage third parties to 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.
(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.
Our business, results of operations, financial condition or our ability to pay distributions at the
current rate could be materially adversely affected by the conditions below. 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 below in our previous filings with the
SEC.
W. P. Carey 2007 10-K 12
Future results may be affected by risks and uncertainties including the following:
The agreement in principle with the SEC is subject to certain contingencies.
As we have previously disclosed, in
2004 the staff of the U.S. Securities and Exchange Commission began investigating whether, in
connection with a public offering of shares of CPA®:15 in late 2002 and early 2003, Carey
Financial sold such shares without an effective registration statement, and whether that and other
registration statements and prospectuses of REITs managed by us contained material
misrepresentations and omissions, including with respect to payments made by certain of the REITs
in the 2000-2003 period to broker-dealers that distributed the REITs shares. We and Carey
Financial have now reached an agreement in principle with the staff of the SEC to settle all
matters relating to this investigation. See Item 3 - Legal Proceedings for a discussion of this
investigation.
The agreement in principle is subject
to approval by the Commission and also to the satisfactory completion of settlement papers, and
accordingly, the agreement in principle could fail to be implemented or be implemented in a
different form, either of which could result in consequences materially adverse to us. If the
settlement is implemented in its current form, we will be required to make cash payments of
approximately $30,000, which will materially affect our cash flow from operations. Also,
in connection with implementing the settlement, we would be subject to a federal court injunction
enjoining us from violating a number of provisions of the federal securities laws. Any further
violation of these laws could result in civil remedies, including sanctions, fines and penalties,
which may be more severe than if the violation had occurred without the injunction being in place.
Additionally, if we breach the terms of the injunction, the SEC may petition the court to vacate
the settlement and restore the SECs original action to the active docket for all purposes.
The settlement would not be binding on
other regulatory authorities, including FINRA, which regulates Carey Financial, state securities
regulators, or other regulatory organizations, which may seek to commence proceedings or take
action against us or our affiliates on the basis of the settlement or otherwise. As reported in
Item 3, the Maryland Securities Commission has sought information from Carey Financial and CPA®:15
relating to matters that were also the subject of the SEC 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. (In the case of
CPA®:17 Global, that entity has the right, but not the obligation, upon certain
terminations to repurchase our interests in its operating partnership at fair market value. If such
right is not exercised, we would remain as a limited partner of the operating partnership.)
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 2008, 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 have been 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 investment management operations expose us to more volatility in earnings than our real estate
investment business.
Growth in revenue from our investment management 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 investment management operations as compared to revenue from
our real estate operations, 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 otherwise) of CPA® REIT properties. In
addition, revenue from our investment management 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
sixteen 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 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
W. P. Carey 2007 10-K 13
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 investment management operations income is likely to be
significantly higher in those years in which such events occur.
We face active 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 investment management operations.
We also face competition for the acquisition of office and industrial properties net leased to
major corporations both domestically and internationally 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 investment
management operations.
The failure of Carey REIT II, our real estate subsidiary, to qualify as a REIT would adversely
affect our operations and ability to make distributions.
If Carey REIT II, our wholly owned REIT subsidiary formed in 2007 (Note 2), fails to qualify as a
REIT in any taxable year, we would be subject to U.S. federal income tax on our net taxable income
in our real estate subsidiary at corporate rates. In addition, we would generally be disqualified
from treatment of Carey REIT II as a REIT for the four taxable years following the year Carey REIT
II lost its REIT qualification. Losing the REIT qualification would reduce our net earnings
available for investment or distribution to shareholders because of the additional tax liability,
and we would no longer be required to make distributions from the real estate subsidiary. We might
be required to borrow funds or liquidate some investments in order to pay the applicable tax.
Qualification as a REIT involves the application of highly technical and complex Internal Revenue
Code provisions for which there are only limited judicial and administrative interpretations. The
determination of various factual matters and circumstances not entirely within our control may
affect our ability to qualify our real estate subsidiary as a REIT. In order to qualify as a REIT,
we must satisfy a number of requirements regarding the composition of our assets and the sources of
our gross income. Also, our real estate subsidiary must make distributions to its shareholders
(primarily us) aggregating annually at least 90% of its net taxable income, excluding net capital
gains. In addition, legislation, new
regulations, administrative interpretations or court decisions may adversely affect our investors,
our ability to qualify our real estate subsidiary as a REIT for U.S. federal income tax purposes or
the desirability of an investment in a REIT relative to other investments.
The Internal Revenue Service may take the position that specific sale-leaseback transactions we
will treat as true leases are not true leases for U.S. federal income tax purposes but are,
instead, financing arrangements or loans. If a sale-leaseback transaction were so recharacterized,
we might fail to satisfy the qualification requirements applicable to REITs.
Possible legislative or other actions affecting REITs could adversely affect our stockholders and
us.
The rules dealing with U.S. federal income taxation are constantly under review by persons involved
in the legislative process and by the Internal Revenue Service and the U.S. Treasury Department.
Changes to tax laws (which changes may have retroactive application) could adversely affect our
stockholders or us. It cannot be predicted whether, when, in what forms, or with what effective
dates, the tax laws applicable to our stockholders or us will be changed.
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
W. P. Carey 2007 10-K 14
lease payments as
well as an increase in the costs incurred to carry the property. We have had tenants file for
bankruptcy protection. 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 30% of total
lease revenues in 2007 and 31% in both 2006 and 2005. 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 56% 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.
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 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 investments 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 invested capital or profits earned from activities
within the country to the United States; |
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Expropriation; |
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Legal systems under which the ability to enforce contractual rights and remedies may be
more limited than would be the case under U.S. law; |
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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; |
W. P. Carey 2007 10-K 15
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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.
Also, we may rely on third-party asset managers in international jurisdictions to monitor
compliance with legal requirements and lending agreements with respect to properties we own or
manage on behalf of the CPA® REITs. Failure to comply with applicable requirements may
expose us or our operating subsidiaries to additional liabilities.
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 above for
scheduled lease expirations.
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. |
W. P. Carey 2007 10-K 16
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 non-
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 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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2008 |
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$ |
40,581 |
(a) |
2009 |
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26,755 |
(b) |
2010 |
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6,612 |
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2011 |
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85,025 |
(b)(c) |
2012 |
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28,260 |
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(a) |
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Includes $35,581 outstanding under our secured credit facility that matures in December 2008. |
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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. |
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Includes amounts that will be due upon maturity of our unsecured credit facility in June
2011. Such amounts are prepayable at any time. As of December 31, 2007, we had drawn $62,700
from this line of credit. |
Deterioration in the credit markets could adversely affect our ability to finance or refinance investments and
the ability of our tenants to meet their obligations, which could affect our ability to make
distributions.
Industry concerns over asset quality have increased in recent quarters due in large part to issues
related to subprime residential mortgage lending, declining real estate activity and general
economic concerns. This has led to deterioration in credit markets domestically and
internationally. This deterioration has been severe in the real estate lending sector, where
available liquidity, including through collateralized debt obligations (CDOs) and other
securitizations, significantly declined during the second half of 2007 and remains depressed as of
the date of this filing.
While our investment portfolio does not include investments in residential mortgage loans or in
CDOs backed by residential mortgage loans, the general reduction in available financing for
real-estate related investments may impact our financial condition by increasing our cost of
borrowing, reducing our overall leverage (which may reduce our returns on investment) and making it
more difficult for us to obtain financing on future acquisitions or to refinance existing debt. These effects could in turn
adversely affect our ability to make distributions.
In addition, the creditworthiness of our tenants may be adversely affected if their assets include
investments in CDOs and residential mortgage loans, or if they have difficulty obtaining financing
to fund their business operations. Any such effects could adversely impact our tenants ability to
meet their ongoing lease obligations to us, which could in turn adversely affect our ability to
make distributions.
W. P. Carey 2007 10-K 17
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 a definitive agreement. 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 investment management 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 investment
management operations, it also restricts the potential growth of revenues from our real estate
ownership.
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 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
W. P. Carey 2007 10-K 18
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.
Wm. Polk Carey, Chairman, is the beneficial owner of approximately 28% 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.
Proposed legislation may prevent us from qualifying for treatment as a partnership for U.S. federal
income tax purposes, which may significantly increase our tax liability and may affect the market
value of our shares.
Members of the United States Congress have introduced legislation that would, if enacted, preclude
us from qualifying for treatment as a partnership for U.S. federal income tax purposes under the
publicly traded partnership rules. If this or any similar legislation or regulation were to be
enacted and to apply to us, we would incur a material increase in our tax liability and the market
value of our shares could decline materially.
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.
SEC Investigation
In 2004, following a broker-dealer examination of Carey Financial, our wholly-owned broker-dealer
subsidiary, the staff of the SEC 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. The matters investigated by the staff of the SEC
principally included whether, 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, whether the delivery of the investor funds into escrow after
completion of the first phase of the offering, completed in the fourth quarter of 2002, but before
a registration statement with respect to the second phase of the offering became effective in the
first quarter of 2003, constituted sales of securities in violation of Section 5 of the Securities
Act of 1933.
W. P. Carey 2007 10-K 19
The investigation was later expanded to include matters relating to compensation arrangements with
broker-dealers in connection with the CPA® REITs managed by us, including principally certain
payments, aggregating in excess of $9,600, made to a broker-dealer which distributed shares of the
REITs, the disclosure of such arrangements and compliance with applicable Financial Industry
Regulatory Authority, Inc. (FINRA) requirements. The costs 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.
We have now reached an agreement in
principle with the staff of the SEC to settle all matters relating to the above-described
investigations. The agreement in principle is subject to approval by the Commission and also to
the satisfactory completion of settlement papers, and accordingly the agreement in principle could
fail to be implemented or be implemented in a different form. Pursuant to the agreement in
principle with the SEC staff, and assuming approval by the Commission, the SEC would file a
complaint in federal court alleging violations of certain provisions of the federal securities
laws, and seeking to enjoin us from violating those laws in the future. In its complaint the SEC
would allege violations of Section 5 of the Securities Act of 1933, in connection with the
offering of shares of CPA®:15, and Section 17(a) of the Securities Act of 1933 and Sections 10(b),
13(a), 13(b)(2)(A) and 14(a) of the Securities Exchange Act of 1934, and Rules 10b-5, 12b-20,
13a-1, 13a-13 and 14a-9 thereunder, among others, in connection with the above-described payments
to broker-dealers and related disclosures. With respect to Carey Financial, the complaint would
allege violations of, and seek to enjoin Carey Financial from violating, Section 5 of the
Securities Act of 1933. Without admitting or denying the allegations in the SECs complaint, we
would consent to the entry of the injunction, which would be subject to court approval. As part
of the agreement in principle with the SEC staff, and assuming approval by the Commission, we
would expect to make disgorgement payments of $19,979, including interest, with the payments
being made to certain of our managed REITs, and we would also pay a $10,000 civil penalty.
In connection with the agreement in principle, we have taken a charge of approximately $29,979 in
the fourth quarter of 2007, and recognized an offsetting $8,967 tax benefit in the same period.
We expect that the SECs complaint
would also allege violations of certain provisions of the federal securities laws by our officers
John Park, who was formerly our Chief Financial Officer, and Claude Fernandez, who was formerly
our Chief Accounting Officer, and it is our understanding that Messrs. Park and Fernandez have
separately reached agreements in principle to settle the charges against them, the terms of which
are subject to approval by the Commission. The terms of such settlement agreements, if approved,
are not expected to have a material effect on us.
Other
The Maryland Securities Commission has sought information from Carey Financial and
CPA®:15 relating to the matters described above. While it 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 the SEC
agreement in principle described above.
As of December 31, 2007, we were not involved in any material litigation.
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 has filed
a notice of appeal 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 defenses to such claims.
We have provided indemnification in connection with divestitures. These indemnities address a
variety of matters including environmental liabilities. Our maximum obligations under such
indemnification cannot be reasonably estimated. We are not aware of any claims or other information
that would give rise to material payments under such indemnifications.
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, 2007.
W. P. Carey 2007 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, 2007 there were 27,060 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:
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2007 |
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2006 |
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|
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Cash |
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Cash |
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Distributions |
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Distributions |
Period |
|
High |
|
Low |
|
Declared |
|
High |
|
Low |
|
Declared |
First quarter |
|
$ |
34.75 |
|
|
$ |
29.84 |
|
|
$ |
0.462 |
|
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$ |
27.59 |
|
|
$ |
25.29 |
|
|
$ |
0.452 |
|
Second quarter |
|
|
35.50 |
|
|
|
29.71 |
|
|
|
0.467 |
|
|
|
28.18 |
|
|
|
24.60 |
|
|
|
0.454 |
|
Third quarter |
|
|
33.14 |
|
|
|
27.67 |
|
|
|
0.472 |
|
|
|
27.98 |
|
|
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24.10 |
|
|
|
0.456 |
|
Fourth quarter |
|
|
36.86 |
|
|
|
31.02 |
|
|
|
0.477 |
(a) |
|
|
31.00 |
|
|
|
27.50 |
|
|
|
0.458 |
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|
|
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(a) |
|
Excludes a special distribution of $0.27 per share that was paid in January 2008 to
shareholders of record as of December 31, 2007. The special distribution was approved by our
Board of Directors in connection with our corporate restructuring. |
Issuer Purchases of Equity Securities
(In thousands except share and per share amounts)
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Maximum number (or |
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Total number of shares |
|
approximate dollar value) |
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purchased as part of |
|
of shares that may yet be |
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Total number of |
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Average price |
|
publicly announced |
|
purchased under the |
2007 Period |
|
shares purchased(a) |
|
paid per share |
|
plans or programs(a) |
|
plans or programs(a) |
October |
|
|
139,517 |
|
|
$ |
31.69 |
|
|
|
139,517 |
|
|
$ |
14,475 |
|
November |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,475 |
|
December |
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|
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14,475 |
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Total |
|
|
139,517 |
|
|
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(a) |
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In June 2007, our Board of Directors approved a $20,000 share repurchase program. In
September 2007, our board approved the repurchase of up to an additional $20,000 of our stock
under this share repurchase program. Under this program, we may now repurchase up to $40,000
of our common stock in the open market through March 31, 2008 as conditions warrant. Through
December 31, 2007, we repurchased shares totaling $25,525 under this program. |
W. P. Carey 2007 10-K 21
Item 6. Selected Financial Data.
(In thousands except per share amounts)
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Years ended December 31, |
|
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
Operating Data (a) |
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|
|
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Revenues from continuing operations (b) |
|
$ |
263,129 |
|
|
$ |
267,487 |
|
|
$ |
163,240 |
|
|
$ |
214,156 |
|
|
$ |
146,610 |
|
Income from continuing operations |
|
|
68,603 |
|
|
|
85,567 |
|
|
|
44,868 |
|
|
|
63,493 |
|
|
|
54,176 |
|
Basic earnings from continuing operations per share |
|
|
1.80 |
|
|
|
2.27 |
|
|
|
1.19 |
|
|
|
1.70 |
|
|
|
1.48 |
|
Diluted earnings from continuing operations per share |
|
|
1.78 |
|
|
|
2.20 |
|
|
|
1.15 |
|
|
|
1.63 |
|
|
|
1.43 |
|
Net income |
|
|
79,252 |
|
|
|
86,303 |
|
|
|
48,604 |
|
|
|
65,841 |
|
|
|
62,878 |
|
Basic earnings per share |
|
|
2.08 |
|
|
|
2.29 |
|
|
|
1.29 |
|
|
|
1.76 |
|
|
|
1.72 |
|
Diluted earnings per share |
|
|
2.05 |
|
|
|
2.22 |
|
|
|
1.25 |
|
|
|
1.69 |
|
|
|
1.64 |
|
Cash provided by operating activities |
|
|
47,471 |
|
|
|
119,940 |
|
|
|
52,707 |
|
|
|
98,849 |
|
|
|
67,295 |
|
Cash distributions paid |
|
|
71,608 |
|
|
|
68,615 |
|
|
|
67,004 |
|
|
|
65,073 |
|
|
|
62,978 |
|
Cash distributions declared per share |
|
|
1.88 |
(c) |
|
|
1.82 |
|
|
|
1.79 |
|
|
|
1.76 |
|
|
|
1.73 |
|
Payment of mortgage principal (d) |
|
|
16,072 |
|
|
|
11,742 |
|
|
|
9,229 |
|
|
|
9,428 |
|
|
|
8,548 |
|
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Balance Sheet Data |
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|
Real estate, net (e) |
|
$ |
586,594 |
|
|
$ |
574,110 |
|
|
$ |
462,343 |
|
|
$ |
485,505 |
|
|
$ |
421,543 |
|
Net investment in direct financing leases |
|
|
89,463 |
|
|
|
108,581 |
|
|
|
131,975 |
|
|
|
190,644 |
|
|
|
182,452 |
|
Total assets |
|
|
1,153,284 |
|
|
|
1,093,010 |
|
|
|
983,262 |
|
|
|
1,013,539 |
|
|
|
906,505 |
|
Long-term obligations (f) |
|
|
316,751 |
|
|
|
279,314 |
|
|
|
247,298 |
|
|
|
294,629 |
|
|
|
211,426 |
|
|
|
|
(a) |
|
Certain prior year amounts have been reclassified from continuing operations to discontinued
operations. |
|
(b) |
|
Includes revenue earned in connection with CPA®:16 Global meeting its
performance criterion in 2007 as well as the CPA® REIT merger transactions in 2006
and 2004. |
|
(c) |
|
Excludes a special distribution of $0.27 per share that was paid in January 2008 to
shareholders of record as of December 31, 2007. |
|
(d) |
|
Represents scheduled mortgage principal paid. |
|
(e) |
|
Includes real estate accounted for under operating leases, operating real estate and real
estate under construction, net of accumulated depreciation. |
|
(f) |
|
Represents mortgage and note obligations and deferred acquisition revenue installments. |
W. P. Carey 2007 10-K 22
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 on Form 10-K, we are a publicly traded
limited liability company. Our stock is listed on the New York Stock Exchange. We operate in two
operating segments, investment management and real estate ownership. Within our investment
management segment, 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),
Corporate Property Associates 16 Global Incorporated (CPA®:16 Global) and
Corporate Property Associates 17 Global Incorporated (CPA®:17 Global) and were the
advisor to Corporate Property Associates 12 Incorporated (CPA®:12) until its merger
with CPA®:14 in 2006 (collectively, the CPA® REITs).
Current Developments and Trends
Significant business developments that occurred during 2007 are detailed in the Significant
Developments During 2007 section of Item 1 of this annual report.
Current trends include:
Credit and real estate financing markets have experienced significant deterioration beginning in
the second half of 2007, both domestically and internationally. We expect this trend may continue
in 2008 and market turbulence could increase.
As a result of this deterioration, we believe mortgage financing will continue to be difficult to
obtain, which may affect our ability to finance or complete certain transactions. While we continue
to obtain domestic financing on satisfactory terms for the investments we make on behalf of the
CPA® REITs, we have experienced greater challenges to our ability to secure such
financing in both the U.S. and European markets. In addition, certain of our sale-leaseback transaction opportunities
arise in connection with corporate merger and acquisition activity. To the extent that the
deterioration in the credit markets may hinder the ability of third parties to obtain financing for
other aspects of their transactions, these opportunities may be less available or the timing of our
investments may be delayed. However, in times when financing is more difficult to obtain, we
believe sale-leaseback transactions are often a more attractive financing alternative, which may
result in increased investment opportunities for us. In addition, long-term U.S. Treasury rates
remain near historical lows, which we anticipate will continue to drive investor demand for
yield-based investments such as the CPA® REITs.
Over the last several years, commercial real estate values have risen significantly as a result of
the relatively low long-term interest rate environment and aggresive credit conditions. As a result, we have benefited from
increases in the valuations of the CPA® REIT portfolios through our ownership of shares
in the CPA® REITs and increased management revenue. Although long-term interest rates
remain relatively low by historical standards, there has been a significant increase in the credit
spreads across the credit spectrum. Increases in credit spreads or deterioration in individual
tenant credit may lower the appraised values of properties owned by the CPA® REITs we
manage and thereby reduce our asset management revenues and the investment performance of the
CPA® REITs. We generally enter into long term leases with our tenants to mitigate the
impact that fluctuations in interest rates have on the values of our portfolios we manage. In
addition, corporate defaults may increase in 2008, which will require more intensive management of
the assets we own and manage. We believe that our emphasis on ownership of assets that are
critically important to a tenants operations mitigates the risk of a tenant defaulting on its
lease upon filing for bankruptcy protection. However, even where defaults do not occur, a tenants
credit profile may deteriorate, which in turn could affect the value of the lease and require us to
incur impairment charges on properties we own, even where the tenant is continuing to make the
required lease payments.
Despite slow economic growth rates in recent periods, inflation rates in the United States have
continued to rise. Increases in inflation are sometimes associated with rising long-term interest
rates, which may have a negative impact on the value of the portfolios we own and manage. To
mitigate this risk, our leases generally have rent increases based on formulas indexed to increases
in the Consumer Price Index (CPI) or other indices for the jurisdiction in which the property is
located. To the extent that the CPI increases, additional rental income streams may be generated
for these leases and thereby mitigate the impact of inflation.
Although there has been deterioration in the real estate and credit markets, we believe there is
still active competition for the investments we make domestically and internationally. We believe
competition is driven in part by investor demand for yield-based investments including triple net
lease real estate. We believe that we have competitive strengths that will enable us to continue to
find
attractive investment opportunities, both domestically and internationally, despite active
competition levels. We currently believe that
W. P. Carey 2007 10-K 23
several factors may also provide us with continued
investment opportunities, including the merger and acquisition market, which may provide additional
sale-leaseback opportunities as a source of financing (notwithstanding the issues that could affect
this market, as discussed above), a continued desire of corporations to divest themselves of real
estate holdings both in the U.S. and internationally 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, 2007, international investments accounted for 55% of total
investments made on behalf of the CPA® REITs. For the year ended December 31, 2006,
international investments accounted for 48% 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.
How We Earn Revenue
As described in more detail in Item 1 of this annual report on Form 10-K, our investment management
segment earns revenue by providing services to the CPA® REITs in connection with
structuring and negotiating investment and debt placement transactions (structuring revenue) and
providing on-going management of their portfolios (asset-based management and performance
revenues). Asset-based management and performance revenues for the CPA® REITs are
generally determined based on real estate related assets under management. As funds available to
the CPA® REITs are invested, the asset base for which we earn revenue increases. We may
elect to receive revenue in cash or restricted shares of the CPA® REITs. We may also
earn incentive and disposition revenue and receive termination payments in connection with
providing liquidity alternatives to CPA® REIT shareholders.
As described in more detail in Item 1 of this annual report on Form 10-K, our real estate ownership
segment earns revenue primarily from our ownership and investment in commercial properties on a
global basis that are then leased to companies, primarily on a triple net leased basis. We also
invest in other properties on an opportunistic basis.
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 investment management segment and
seeking to increase value in our real estate ownership segment. 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 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 and certain non-GAAP performance metrics 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 ownership. 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 and CPA® REITs 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 and CPA® REITs that are sourced from sales of
equity investees assets or refinancing of debt are excluded because they are deemed to be returns
of 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
W. P. Carey 2007 10-K 24
funding of
capital expenditures with respect to real properties. 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
A summary of comparative results of these business segments is as follows:
Investment Management
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|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
2006 |
|
|
2005 |
|
|
Change |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset management revenue |
|
$ |
83,051 |
|
|
$ |
57,633 |
|
|
$ |
25,418 |
|
|
$ |
57,633 |
|
|
$ |
52,332 |
|
|
$ |
5,301 |
|
Structuring revenue |
|
|
78,175 |
|
|
|
22,506 |
|
|
|
55,669 |
|
|
|
22,506 |
|
|
|
28,197 |
|
|
|
(5,691 |
) |
Incentive, termination and subordinated disposition revenue
from merger |
|
|
|
|
|
|
46,018 |
|
|
|
(46,018 |
) |
|
|
46,018 |
|
|
|
|
|
|
|
46,018 |
|
Reimbursed costs from affiliates |
|
|
13,782 |
|
|
|
63,630 |
|
|
|
(49,848 |
) |
|
|
63,630 |
|
|
|
9,962 |
|
|
|
53,668 |
|
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
372 |
|
|
|
(372 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,008 |
|
|
|
189,787 |
|
|
|
(14,779 |
) |
|
|
189,787 |
|
|
|
90,863 |
|
|
|
98,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
(54,565 |
) |
|
|
(35,742 |
) |
|
|
(18,823 |
) |
|
|
(35,742 |
) |
|
|
(39,458 |
) |
|
|
3,716 |
|
Provision for settlement |
|
|
(29,979 |
) |
|
|
|
|
|
|
(29,979 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Reimbursable costs |
|
|
(13,782 |
) |
|
|
(63,630 |
) |
|
|
49,848 |
|
|
|
(63,630 |
) |
|
|
(9,962 |
) |
|
|
(53,668 |
) |
Depreciation and amortization |
|
|
(4,179 |
) |
|
|
(7,643 |
) |
|
|
3,464 |
|
|
|
(7,643 |
) |
|
|
(5,602 |
) |
|
|
(2,041 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(102,505 |
) |
|
|
(107,015 |
) |
|
|
4,510 |
|
|
|
(107,015 |
) |
|
|
(55,022 |
) |
|
|
(51,993 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other interest income |
|
|
6,031 |
|
|
|
2,853 |
|
|
|
3,178 |
|
|
|
2,853 |
|
|
|
3,176 |
|
|
|
(323 |
) |
Income from equity investments in CPA® REITs |
|
|
11,166 |
|
|
|
5,002 |
|
|
|
6,164 |
|
|
|
5,002 |
|
|
|
2,092 |
|
|
|
2,910 |
|
Minority interest in (income) loss |
|
|
(2,734 |
) |
|
|
892 |
|
|
|
(3,626 |
) |
|
|
892 |
|
|
|
235 |
|
|
|
657 |
|
Gain on sale of securities, foreign currency transactions
and other, net |
|
|
|
|
|
|
6,521 |
|
|
|
(6,521 |
) |
|
|
6,521 |
|
|
|
2,000 |
|
|
|
4,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,463 |
|
|
|
15,268 |
|
|
|
(805 |
) |
|
|
15,268 |
|
|
|
7,503 |
|
|
|
7,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
86,966 |
|
|
|
98,040 |
|
|
|
(11,074 |
) |
|
|
98,040 |
|
|
|
43,344 |
|
|
|
54,696 |
|
Provision for income taxes |
|
|
(50,158 |
) |
|
|
(44,710 |
) |
|
|
(5,448 |
) |
|
|
(44,710 |
) |
|
|
(18,662 |
) |
|
|
(26,048 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from investment management |
|
$ |
36,808 |
|
|
$ |
53,330 |
|
|
$ |
(16,522 |
) |
|
$ |
53,330 |
|
|
$ |
24,682 |
|
|
$ |
28,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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; (iii) increases or decreases in the asset valuations of
CPA® REIT funds (which are not recorded for financial reporting purposes); and (iv)
whether the CPA® REITs are meeting their performance criteria. The availability of funds
for new investments is substantially dependent on our ability to raise funds for investment by the
CPA® REITs.
2007 vs. 2006 For the year ended December 31, 2007 as compared to 2006, asset management revenue
increased $25,418 primarily due to the recognition of $19,032 of performance revenue from
CPA®:16 Global as well as a net increase in our assets under management. In connection
with CPA®:16 Global meeting its performance criterion in June 2007, we recognized
$11,945 of previously deferred performance revenue and have subsequently earned performance revenue
of $7,087. We did not recognize performance revenue from CPA®:16 Global during 2006 as
CPA®:16 Global had not met its performance criterion. Revenue earned from assets under
management increased primarily as a result of recent investment activity of the CPA®
REITs and increases in the annual asset valuations of CPA®:14 and CPA®:15,
which were performed as of December 31, 2006. These increases were partially
offset by a reduction in revenue resulting from our acquisition of properties from
CPA®:12 (the CPA®:12 Acquisition) for $126,006 and the sale of properties
by CPA®:12 to third parties prior to its merger with CPA®:14 (the
CPA®:12/14 Merger) in December
W. P. Carey 2007 10-K 25
2006. The purchase of assets from CPA®:12
had a negative impact on asset management revenue of approximately $1,300 during 2007.
2006 vs. 2005 For the year ended December 31, 2006 as compared to 2005, asset management revenue
increased $5,301 primarily due to a net increase in our assets under management as a result of
investment activity by 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 CPA®:12 Acquisition had a minimal impact on our asset management
revenue for 2006.
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 been satisfied as of December 31,
2006, resulting in our deferral of $5,527 in performance revenue for the year ended December 31,
2006. As discussed above, CPA®:16 Global met its performance criterion in June 2007.
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.
2007 vs. 2006 For the year ended December 31, 2007 as compared to 2006, structuring revenue
increased $55,669 primarily due to the recognition of $42,435 of deferred structuring revenue from
CPA®:16 Global and an increase in investment volume. In connection with
CPA®:16 Global meeting its performance criterion in June 2007, we recognized $31,674
of previously deferred structuring revenue and have subsequently earned deferred structuring
revenue of $10,761. We did not recognize deferred structuring revenue from CPA®:16
Global during 2006 as CPA®:16 Global had not met its performance criterion. We
structured investments for the CPA® REITs totaling approximately $1,095,000 and $720,000
for the years ended December 31, 2007 and 2006, respectively.
2006 vs. 2005 For the year ended December 31, 2006 as compared to 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 had not achieved its performance
criterion, no deferred acquisition revenue was recorded for these investments resulting in our
deferral of $10,809 in structuring revenue in 2006. 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 was 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.
Incentive, Termination and Subordinated Disposition Revenue from Merger
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 events occurred in either 2007 or 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.
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
therefore has no impact on net income.
2007 vs. 2006 For the year ended December 31, 2007 as compared to 2006, reimbursed and
reimbursable costs decreased $49,848, primarily because we were not actively raising funds on
behalf of the CPA® REITs in 2007. During 2006, we were reimbursed for broker-dealer
commissions and marketing costs related to CPA®:16 Globals second public offering
which was completed in December 2006. Fund raising efforts for CPA®:17 Globals public
offering began in late December 2007 and are expected to continue throughout 2009.
2006 vs. 2005 For the year ended December 31, 2006 as compared to 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.
W. P. Carey 2007 10-K 26
General and Administrative
2007 vs. 2006 For the year ended December 31, 2007 as compared to 2006, general and
administrative expenses increased by $18,823, primarily due to increases in compensation related
costs of $15,465 and professional fees of $1,240. Compensation related costs increased primarily
due to CPA®:16 Global achieving its performance criterion in June 2007 and an increase
in investment volume over the prior year. As a result of CPA®:16 Global achieving its
performance criterion, we recognized $6,625 of previously deferred compensation costs and no longer
defer recognition of a portion of investment and senior officer compensation. Investments during
2007 totaled $1,095,000 versus $720,000 for the prior year. The increase in professional fees
includes costs incurred in studying various corporate restructuring alternatives and other legal
and consulting fees. We completed our corporate restructuring in October 2007 (Item 1 Significant
Developments During 2007).
2006 vs. 2005 For the year ended December 31, 2006 as compared to 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.
Provision for Settlement
In the fourth quarter of 2007, we incurred a charge of $29,979 in connection with reaching an
agreement in principle with the staff of the SEC to settle all matters relating to its
investigation. The charge is comprised of expected payments to certain of the CPA® REITs,
including interest, of $19,979 and a civil penalty of $10,000. See Item 3 Legal Proceedings for a
discussion of this investigation and the agreement in principle.
Depreciation and Amortization
2007 vs. 2006 For the year ended December 31, 2007 as compared to 2006, depreciation and
amortization expense decreased by $3,464 primarily due to accelerated amortization on intangible
assets during 2006 related to an advisory agreement with CPA®:12 that was terminated as
a result of the CPA®:12/14 Merger in December 2006.
2006 vs. 2005 For the year ended December 31, 2006 as compared to 2005, depreciation and
amortization expense increased by $2,041. The increase is primarily due to accelerated amortization
on intangible assets related to an advisory agreement with CPA®:12 that was terminated
as a result of the CPA®:12/14 Merger.
Other Interest Income
2007 vs. 2006 For the year ended December 31, 2007 as compared to 2006, other interest income
increased by $3,178 primarily due to the recognition of interest income on deferred structuring
revenue from CPA®:16 Global both as a result of the achievement of its performance
criterion and interest earned subsequently, as well as an increase in investment volume. As a
result of CPA®:16 Global meeting its performance criterion in June 2007, we recognized
interest income of $2,300 that had been previously deferred. No such income was recognized in 2006
as CPA®:16 Global had not met the criterion.
2006 vs. 2005 For the year ended December 31, 2006 as compared to 2005, other interest income
decreased by $323 primarily due to a decrease in interest income on deferred structuring revenue
from CPA®:15, which had invested a significant amount of the proceeds of its public
offerings prior to 2005.
Income from Equity Investments in CPA® REITs
Income from equity investments in CPA® REITs 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.
2007 vs. 2006 For the year ended December 31, 2007 as compared to 2006, income from equity
investments in CPA® REITs increased by $6,164 primarily due to the recognition of an out
of period adjustment in the third quarter of 2007 (Note 2) totaling approximately $3,500. In
addition, income from equity investments in the CPA® REITs increased due to the
recognition of our share of the overall increase in net income of CPA®:14 and
CPA®:15 as compared to 2006. These increases were partially offset by the
W. P. Carey 2007 10-K 27
impact of the
CPA®:12/14 Merger, in which we disposed of a significant portion of our interests in
CPA®:12 and exchanged the remainder for CPA®:14 shares.
2006 vs. 2005 For the year ended December 31, 2006 as compared to 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.
Minority Interest in (Income) Loss
We consolidate investments in which we are deemed to have a controlling interest. Minority interest
in income represents the proportionate share of net income (revenue less expenses) from such
investments that is attributable to the partner(s) holding the non-controlling interest.
2007 vs. 2006 For the year ended December 31, 2007, we recognized minority interest in income of
$2,734 as compared to minority interest in losses of $892 in 2006. Two employees own a minority
interest in our subsidiary W. P. Carey International LLC that had a significant increase in net
income as a result of the recognition of previously deferred asset management and structuring
revenue from CPA®:16 Global following CPA®:16 Globals achievement of its
performance criterion in June 2007, as well as an increase in investment volume.
2006 vs. 2005 For the year ended December 31, 2006 as compared to 2005, minority interest in
losses increased by $657 primarily due to the consolidation, beginning in 2006, of the results of
operations of a limited partnership, which leases our home office space. We participate in a
partnership agreement with certain affiliates, including the CPA® REITs, to share the
costs associated with leasing the home office space and as a result, reimbursements from affiliates
are reflected within minority interest. During 2005 (prior to consolidation) our share of costs
related to this agreement were included within general and administrative expenses but the share of
costs that were reimbursable by our affiliates was not reflected in general and administrative
expenses and therefore reimbursements were not reflected within minority interest.
Gain on Sale of Securities, Foreign Currency Transactions and Other, Net
2006 We recognized a gain of $6,521 during 2006, in accordance with SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS 140), 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.
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
2007 vs. 2006 For the year ended December 31, 2007 as compared to 2006, our provision for income
taxes increased $5,448 primarily as a result of asset management and structuring revenue recognized
from increases in investment volume as well as CPA®:16 Global achieving its
performance criterion in June 2007. These increases were partially offset by a reduction in
termination and subordinated disposition revenue and other gains earned from the
CPA®:12/14 Merger in 2006. We also recognized an $8,967 tax benefit in the fourth
quarter of 2007 in connection with incurring a charge related to an agreement in principle to
settle the SEC investigation (see Item 3 Legal Proceedings for a discussion of this investigation
and the agreement in principle). The effective tax rate for the years ended December 31, 2007 and
2006 for this segment of our business was 58% and 46%, respectively. The effective tax rate for
this segment increased primarily because performance and asset management revenues in respect of
CPA®:12s assets that had been paid directly to us under CPA®:12s advisory
agreements were, subsequent to the acquisition of those assets by CPA®:14 in the
CPA®:12/14 Merger, paid to a taxable, wholly owned subsidiary which is the advisor to
CPA®:14. Periodically, we distribute shares in the CPA® REITs received for
services rendered from our taxable subsidiaries to the LLC. While this generates current taxable
income on the current appreciation of those shares (which is eliminated for financial accounting
purposes), it reduces corporate level taxability of future dividends and future appreciation on
these distributed shares. In addition, investment management income presented above excludes income
that has been eliminated in consolidation but is subject to taxation. The adoption of FIN 48 did
not have a material impact on our income tax provision during 2007 (Note 15).
2006 vs. 2005 For the year ended December 31, 2006 as compared to 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.
W. P. Carey 2007 10-K 28
Net Income from Investment Management
2007 vs. 2006 For the year ended December 31, 2007 as compared to 2006, net income from
investment management decreased by $16,522 primarily due to revenue and other gains earned in 2006
from the CPA®:12/14 Merger totaling $52,539 and a $21,012 charge, net of tax, incurred
in the fourth quarter of 2007 in connection with an agreement in principle to settle the SEC
investigation. These decreases were partially offset by the net positive impact of
CPA®:16 Global achieving its performance criterion. We recognized revenue totaling
$61,467 during 2007 as a result of CPA®:16 Global achieving its performance criterion,
which was partially offset by corresponding increases in general and administrative expenses and
our provision for income taxes. Net income also benefited from the recognition of an out of period
adjustment in the third quarter of 2007 as described in Note 2. These variances are described
above.
2006 vs. 2005 For the year ended December 31, 2006 as compared to 2005, net income from
investment management 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
addition, 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.
Real Estate Ownership
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
2006 |
|
|
2005 |
|
|
Change |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease revenues |
|
$ |
75,403 |
|
|
$ |
69,197 |
|
|
$ |
6,206 |
|
|
$ |
69,197 |
|
|
$ |
62,476 |
|
|
$ |
6,721 |
|
Other real estate income |
|
|
12,718 |
|
|
|
8,503 |
|
|
|
4,215 |
|
|
|
8,503 |
|
|
|
9,901 |
|
|
|
(1,398 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,121 |
|
|
|
77,700 |
|
|
|
10,421 |
|
|
|
77,700 |
|
|
|
72,377 |
|
|
|
5,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
(7,256 |
) |
|
|
(5,634 |
) |
|
|
(1,622 |
) |
|
|
(5,634 |
) |
|
|
(5,523 |
) |
|
|
(111 |
) |
Depreciation and amortization |
|
|
(21,364 |
) |
|
|
(17,494 |
) |
|
|
(3,870 |
) |
|
|
(17,494 |
) |
|
|
(14,449 |
) |
|
|
(3,045 |
) |
Property expenses |
|
|
(6,245 |
) |
|
|
(5,984 |
) |
|
|
(261 |
) |
|
|
(5,984 |
) |
|
|
(6,155 |
) |
|
|
171 |
|
Impairment charges |
|
|
(1,017 |
) |
|
|
(1,147 |
) |
|
|
130 |
|
|
|
(1,147 |
) |
|
|
(5,704 |
) |
|
|
4,557 |
|
Other real estate expenses |
|
|
(7,690 |
) |
|
|
(5,881 |
) |
|
|
(1,809 |
) |
|
|
(5,881 |
) |
|
|
(6,327 |
) |
|
|
446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43,572 |
) |
|
|
(36,140 |
) |
|
|
(7,432 |
) |
|
|
(36,140 |
) |
|
|
(38,158 |
) |
|
|
2,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other interest income |
|
|
811 |
|
|
|
452 |
|
|
|
359 |
|
|
|
452 |
|
|
|
331 |
|
|
|
121 |
|
Income from equity investments in real estate |
|
|
7,191 |
|
|
|
2,606 |
|
|
|
4,585 |
|
|
|
2,606 |
|
|
|
3,090 |
|
|
|
(484 |
) |
Minority interest in income |
|
|
(1,409 |
) |
|
|
(1,167 |
) |
|
|
(242 |
) |
|
|
(1,167 |
) |
|
|
(499 |
) |
|
|
(668 |
) |
Gain (loss) on sale of securities, foreign currency transactions
and other, net |
|
|
3,114 |
|
|
|
6,448 |
|
|
|
(3,334 |
) |
|
|
6,448 |
|
|
|
(641 |
) |
|
|
7,089 |
|
Interest expense |
|
|
(20,880 |
) |
|
|
(17,016 |
) |
|
|
(3,864 |
) |
|
|
(17,016 |
) |
|
|
(15,768 |
) |
|
|
(1,248 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,173 |
) |
|
|
(8,677 |
) |
|
|
(2,496 |
) |
|
|
(8,677 |
) |
|
|
(13,487 |
) |
|
|
4,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
33,376 |
|
|
|
32,883 |
|
|
|
493 |
|
|
|
32,883 |
|
|
|
20,732 |
|
|
|
12,151 |
|
Provision for income taxes |
|
|
(1,581 |
) |
|
|
(646 |
) |
|
|
(935 |
) |
|
|
(646 |
) |
|
|
(546 |
) |
|
|
(100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
31,795 |
|
|
|
32,237 |
|
|
|
(442 |
) |
|
|
32,237 |
|
|
|
20,186 |
|
|
|
12,051 |
|
Income from discontinued operations |
|
|
10,649 |
|
|
|
736 |
|
|
|
9,913 |
|
|
|
736 |
|
|
|
3,736 |
|
|
|
(3,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from real estate ownership |
|
$ |
42,444 |
|
|
$ |
32,973 |
|
|
$ |
9,471 |
|
|
$ |
32,973 |
|
|
$ |
23,922 |
|
|
$ |
9,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The presentation of results of operations for our real estate ownership segment 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.
W. P. Carey 2007 10-K 29
Our real estate ownership consists of the investment in and the leasing of commercial real estate.
Managements evaluation of the sources of lease revenues is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Rental income |
|
$ |
63,682 |
|
|
$ |
55,747 |
|
|
$ |
47,025 |
|
Interest income from direct financing leases |
|
|
11,721 |
|
|
|
13,450 |
|
|
|
15,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
75,403 |
|
|
$ |
69,197 |
|
|
$ |
62,476 |
|
|
|
|
|
|
|
|
|
|
|
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, |
|
Lessee |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Bouygues Telecom, S.A. (a) (b) (c) |
|
$ |
5,529 |
|
|
$ |
4,786 |
|
|
$ |
4,674 |
|
CheckFree Holdings Corporation Inc. (b) (d) |
|
|
4,711 |
|
|
|
4,604 |
|
|
|
|
|
Daimler Trucks North America LLC |
|
|
4,634 |
|
|
|
4,615 |
|
|
|
4,396 |
|
Dr Pepper Bottling Company of Texas |
|
|
4,501 |
|
|
|
4,444 |
|
|
|
4,382 |
|
Orbital Sciences Corporation |
|
|
3,023 |
|
|
|
3,023 |
|
|
|
3,023 |
|
Titan Corporation |
|
|
2,912 |
|
|
|
2,912 |
|
|
|
2,898 |
|
U. S. Airways Group |
|
|
2,838 |
|
|
|
2,838 |
|
|
|
2,838 |
|
AutoZone, Inc. (e) |
|
|
2,058 |
|
|
|
2,320 |
|
|
|
2,326 |
|
Quebecor Printing, Inc. (f) |
|
|
1,941 |
|
|
|
1,941 |
|
|
|
1,941 |
|
Lucent Technologies, Inc. (g) |
|
|
1,876 |
|
|
|
1,518 |
|
|
|
1,518 |
|
Sybron Dental Specialties Inc. |
|
|
1,770 |
|
|
|
1,770 |
|
|
|
1,770 |
|
Unisource Worldwide, Inc. |
|
|
1,686 |
|
|
|
1,694 |
|
|
|
1,609 |
|
Eagle Hardware & Garden, a
subsidiary of Lowes Companies |
|
|
1,680 |
|
|
|
1,543 |
|
|
|
1,549 |
|
Werner Corporation (h) |
|
|
1,627 |
|
|
|
|
|
|
|
|
|
BE Aerospace, Inc. |
|
|
1,580 |
|
|
|
1,575 |
|
|
|
1,580 |
|
CSS Industries, Inc. (i) |
|
|
1,570 |
|
|
|
1,570 |
|
|
|
1,380 |
|
Career Education Corporation (j) |
|
|
1,502 |
|
|
|
125 |
|
|
|
|
|
Sprint Spectrum, L.P. |
|
|
1,425 |
|
|
|
1,425 |
|
|
|
1,425 |
|
Enviro Works, Inc. |
|
|
1,350 |
|
|
|
1,326 |
|
|
|
1,254 |
|
PPD Development, Inc. (j) |
|
|
1,340 |
|
|
|
113 |
|
|
|
|
|
AT&T Corporation |
|
|
1,259 |
|
|
|
1,259 |
|
|
|
1,259 |
|
Omnicom Group Inc. |
|
|
1,251 |
|
|
|
1,168 |
|
|
|
1,140 |
|
BellSouth Telecommunications, Inc. |
|
|
1,224 |
|
|
|
1,224 |
|
|
|
1,224 |
|
United States Postal Service |
|
|
1,179 |
|
|
|
1,231 |
|
|
|
1,233 |
|
Other (a) (j) |
|
|
20,937 |
|
|
|
20,173 |
|
|
|
19,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
75,403 |
|
|
$ |
69,197 |
|
|
$ |
62,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
$3,355, $3,181 and $3,112 for the years ended December 31, 2007, 2006 and 2005, respectively. |
|
(c) |
|
Increase is due to CPI-based (or equivalent) rent increase in 2007. |
|
(d) |
|
Property is consolidated beginning January 1, 2006 as a result of implementation of EITF
04-05. |
|
(e) |
|
Decrease is due to change in estimate of unguaranteed residual value. |
|
(f) |
|
Tenant filed for bankruptcy protection in January 2008. |
|
(g) |
|
Increase is due to above-market lease intangible becoming fully amortized during 2007. |
|
(h) |
|
New tenant at existing property. In 2006 and 2005, we recorded $1,547 and $308, respectively,
in lease revenues from a previous tenant at this property. |
|
(i) |
|
Property reclassified as an operating lease from a direct financing lease in January 2006. |
|
(j) |
|
Includes the CPA®:12 real estate interests acquired in December 2006. |
W. P. Carey 2007 10-K 30
We recognize income from equity investments in real estate of which lease revenues are a
significant component. Net lease revenues from these ventures (for the entire venture, not our
proportionate share) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership |
|
|
|
|
|
|
Interest at |
|
|
Years ended December 31, |
|
Lessee |
|
December 31, 2007 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Carrefour France, S.A. (a) (b) (c) |
|
|
46 |
% |
|
$ |
19,061 |
|
|
$ |
16,303 |
|
|
$ |
15,973 |
|
Federal Express Corporation |
|
|
40 |
% |
|
|
6,892 |
|
|
|
6,817 |
|
|
|
6,742 |
|
Medica France, S.A. (a) (d) (e) |
|
|
46 |
% |
|
|
6,348 |
|
|
|
493 |
|
|
|
|
|
Information Resources, Inc. (c) |
|
|
33 |
% |
|
|
4,972 |
|
|
|
4,972 |
|
|
|
4,479 |
|
Sicor, Inc. |
|
|
50 |
% |
|
|
3,343 |
|
|
|
3,343 |
|
|
|
3,343 |
|
Hologic, Inc. |
|
|
36 |
% |
|
|
3,212 |
|
|
|
3,169 |
|
|
|
3,156 |
|
Consolidated Systems, Inc. (d) |
|
|
60 |
% |
|
|
1,810 |
|
|
|
478 |
|
|
|
|
|
Childtime Childcare, Inc. |
|
|
34 |
% |
|
|
1,280 |
|
|
|
1,297 |
|
|
|
1,203 |
|
The Retail Distribution Group (d) |
|
|
40 |
% |
|
|
808 |
|
|
|
67 |
|
|
|
|
|
Schuler A.G. (a) (f) |
|
|
33 |
% |
|
|
582 |
|
|
|
|
|
|
|
|
|
CheckFree Holdings Corporation Inc. (g) |
|
|
50 |
% |
|
|
|
|
|
|
|
|
|
|
4,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
48,308 |
|
|
$ |
36,939 |
|
|
$ |
39,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Revenue amounts are subject to fluctuations in foreign currency exchange rates. |
|
(b) |
|
In December 2006, we increased our interest to 50% from 22% as a result of the
CPA®:12 Acquisition. Our interest was subsequently reduced to 46% in September 2007
as a result of a restructuring of ownership interests with an affiliate. |
|
(c) |
|
Increase is due to CPI-based (or equivalent) rent increase in 2006. |
|
(d) |
|
We acquired our interests in these ventures in 2006 which includes the CPA®:12
real estate interests acquired in December 2006. |
|
(e) |
|
Our interest was increased to 46% from 35% in September 2007 as a result of a restructuring
of ownership interests with an affiliate. |
|
(f) |
|
We acquired our interest in this venture in 2007. |
|
(g) |
|
Property is consolidated beginning January 1, 2006 as a result of implementation of EITF
04-05. |
The above table does not reflect our share of interest income from our 5% interest in a venture
which acquired a note receivable in 2007. The venture recognized interest income of $19,508 in
2007.
Lease Revenues
2007 vs. 2006 For the year ended December 31, 2007 as compared to 2006, lease revenues (rental
income and interest income from direct financing leases) increased by $6,206 primarily due to lease
revenues earned on properties acquired in the CPA®:12 Acquisition in December 2006,
which contributed $3,258, rent increases and rent from new tenants at existing properties, which
contributed $1,892. Lease revenue also benefited from the favorable impact of fluctuations in
foreign currency exchange rates. These increases were partially offset by the impact of recent
lease expirations.
2006 vs. 2005 For the year ended December 31, 2006 as compared to 2005, lease revenues increased
by $6,721 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
$2,302 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.
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 Carey Storage, a subsidiary that
invests in domestic self-storage properties and Livho, a subsidiary that operates a Radisson hotel
franchise in Livonia, Michigan. Other real estate income also includes lease termination payments
and other non-rent related revenues from real estate ownership 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 settlements cannot always be estimated.
W. P. Carey 2007 10-K 31
2007 vs. 2006 For the year ended December 31, 2007 as compared to 2006, other real estate income
increased by $4,215 primarily due to income from Carey Storage which commenced operations in
December 2006 and recognized income of $5,733 in 2007. Other real estate income also increased by
$1,000 as a result of increases in reimbursable tenant costs, which are recorded as both revenue
and expense and therefore have no impact on net income. These increases were partially offset by a
reduction in income from Livho, whose operations have been impacted by renovation work at the
hotel.
2006 vs. 2005 For the year ended December 31, 2006 as compared to 2005, other operating income
decreased by $1,398, primarily due to the receipt of bankruptcy proceeds of $1,169 during the year
ended December 31, 2005.
General and Administrative
2007 vs. 2006 For the year ended December 31, 2007 as compared to 2006, general and
administrative expenses increased by $1,622 primarily due to increases in compensation related
costs and professional fees. During 2007, compensation costs increased by $902 primarily due to
increased investment volume and the achievement by CPA®:16 Global of its performance
criterion in June 2007.
2006 vs. 2005 For the year ended December 31, 2006 as compared to 2005, general and
administrative expenses remained relatively unchanged at $5,634 and $5,523, respectively.
Depreciation and Amortization
2007 vs. 2006 For the year ended December 31, 2007 as compared to 2006, depreciation and
amortization expense increased by $3,870 primarily due to recent investment activity, which
includes the CPA®:12 Acquisition in December 2006 and our self-storage acquisitions,
which contributed $2,748 of the increase, as well as the acceleration of depreciation on certain
Livho assets.
2006 vs. 2005 For the year ended December 31, 2006 as compared to 2005, depreciation and
amortization expense increased by $3,045 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. The CPA®:12 Acquisition had a minimal impact on our depreciation and
amortization expense for 2006.
Impairment Charges
For the years ended December 31, 2007, 2006 and 2005, we recorded impairment charges related to our
continuing real estate ownership operations totaling $1,017, $1,147 and $5,704, respectively. The
table below summarizes the impairment charges recorded for the past three fiscal years for both
continuing and discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
Reason |
West Mifflin, Pennsylvania |
|
$ |
|
|
|
$ |
817 |
|
|
$ |
2,684 |
|
|
Decline in unguaranteed residual value of property |
Livonia, Michigan |
|
|
|
|
|
|
|
|
|
|
1,130 |
|
|
Decline in asset value |
Various properties |
|
|
1,017 |
|
|
|
330 |
|
|
|
1,890 |
|
|
Decline in unguaranteed residual value of properties or decline in asset value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charges from
continuing operations |
|
$ |
1,017 |
|
|
$ |
1,147 |
|
|
$ |
5,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Walbridge, Ohio |
|
$ |
2,317 |
|
|
$ |
|
|
|
$ |
|
|
|
Property sold for less than carrying value |
Amberly Village, Ohio |
|
|
|
|
|
|
3,200 |
|
|
|
9,450 |
|
|
Property sold for less than carrying value |
Berea, Kentucky |
|
|
|
|
|
|
|
|
|
|
5,241 |
|
|
Property sold for less than carrying value |
Various properties |
|
|
|
|
|
|
157 |
|
|
|
1,375 |
|
|
Property sold sold for less than carrying value or property value has declined |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charges from
discontinued operations |
|
$ |
2,317 |
|
|
$ |
3,357 |
|
|
$ |
16,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Real Estate Expenses
2007 vs. 2006 For the year ended December 31, 2007 as compared to 2006, other real estate
expenses increased by $1,809 primarily due to operating expenses of our self-storage properties,
which we began acquiring in December 2006. This increase was partially offset by reductions in
operating expenses of our Livho subsidiary, whose operations have been impacted by renovation work
at the hotel.
2006 vs. 2005 For the year ended December 31, 2006 as compared to 2005, other real estate
expenses decreased by $446 primarily due to reductions in operating expenses of our Livho
subsidiary which experienced a downturn in room occupancy rates during 2006.
W. P. Carey 2007 10-K 32
Income from Equity Investments in Real Estate
Income from equity investments in real estate represents our proportionate share of net income
(revenue less expenses) from investments entered into with affiliates or third parties in which we
have a non-controlling interest but exercise significant influence.
2007 vs. 2006 For the year ended December 31, 2007 as compared to 2006, income from equity
investments in real estate increased by $4,585 primarily due to recent investment activity,
including investments acquired in the CPA®:12 Acquisition and the recognition of an out
of period adjustment in the third quarter of 2007 as described in Note 2.
2006 vs. 2005 For the year ended December 31, 2006 as compared to 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 property that 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.
Minority Interest in Income
We consolidate investments in which we are deemed to have a controlling interest. Minority interest
in income represents the proportionate share of net income (revenue less expenses) from such
investments that is attributable to the partner(s) holding the non-controlling interest.
2007 vs. 2006 For the year ended December 31, 2007 as compared to 2006, minority interest in
income increased by $242 primarily due to an increase in the net income from our French
investments. The increase in net income is mainly attributable to rent increases and an increase in
foreign exchange translation gains over the prior year resulting from the weakening of the U.S.
dollar against the Euro. During the fourth quarter of 2007, we sold our interest in four of our
French investments.
2006 vs. 2005 For the year ended December 31, 2007 as compared to 2006, minority interest in
income increased by $668. This increase is primarily due to increases in income generated by our
French investments resulting from an increase in foreign exchange translation gains over the prior
year resulting from the weakening of the U.S. dollar against the Euro.
Gain (Loss) on Sale of Securities, Foreign Currency Transactions and Other Gains, net
2007 vs. 2006 For the year ended December 31, 2007 as compared to 2006, gain on sale of
securities, foreign currency transactions and other gains, net decreased by $3,334 primarily due to
the recognition in 2006 of a gain of $4,800 from the sale of our common stock holdings in Meristar
Hospitality Corp. Impairment charges totaling $11,345 were recognized in prior periods to write
down the value of this investment to its estimated fair value. This decrease was partially offset
by foreign currency translation gains. Our results of foreign operations benefit from a weaker U.S.
dollar and are adversely affected by a stronger U.S. dollar relative to foreign currencies. During
2007, the average rate for the U.S. dollar in relation to the Euro was considerably weaker than
during the prior year, and as a result, we experienced a positive impact on our results of foreign
operations for the current year as compared to 2006.
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, net of $6,448 as compared with a net
loss of $641 for 2005. The net gain for 2006 is comprised primarily of the $4,800 gain from the
sale of our Meristar Hospitality Corp. stock as described above, 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.
Interest Expense
2007 vs. 2006 For the year ended December 31, 2007 as compared to 2006, interest expense
increased $3,864 primarily due to additional borrowings under our credit facilities which were used
for investments and other recurring operating activities as well as the impact of new mortgage
financing obtained in 2007 and 2006, including the mortgage obligations assumed in connection with
the CPA®:12 Acquisition in December 2006. Interest expense on our secured credit
facility increased by $2,341, primarily due to storage property acquisitions during 2007 and a full
years interest expense on storage properties acquired during 2006. Interest expense on the
unsecured credit facility increased $1,474, primarily from a $36,000 higher average outstanding
balance during 2007 versus the comparable year. The average annual interest rate on this facility
remained relatively unchanged year over year.
2006 vs. 2005 For the year ended December 31, 2006 as compared to 2005, interest expense
increased $1,248, 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 expense of $2,640 related to our credit facility and a reduction in interest expense 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
W. P. Carey 2007 10-K 33
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 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.
Income from Continuing Operations
2007 vs. 2006 For the year ended December 31, 2007 as compared to 2006, income from continuing
operations decreased $442, primarily due to the recognition in the second quarter of 2006 of a
$4,800 gain on sale of our common stock holdings of Meristar Hospitality Corp. and an increase in
interest expense of $3,864 as a result of increases in the amounts outstanding under our credit
facilities. These decreases were primarily offset by increases in property level operating results,
which benefited from recent investments including the CPA®:12 Acquisition and
self-storage properties, rent increases at existing properties and foreign currency transaction
gains, and the recognition of an out of period adjustment in the third quarter of 2007 as described
in Note 2. These variances are described above.
2006 vs. 2005 For the year ended December 31, 2006 as compared to 2005, income from continuing
operations increased $12,051, 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 $2,302, primarily from rent increases and rent from new tenants at
existing properties. These variances are described above.
Discontinued Operations
2007 For the year ended December 31, 2007, we earned income from discontinued operations of
$10,649. During 2007, we sold several properties and recognized a net gain of $15,486 and lease
termination revenue of $1,905 in connection with these transactions. Income generated from these
transactions were partially offset by the minority interest partners share of income totaling
$5,394 and the recognition of an impairment charge on one of these properties of $2,317.
2006 For the year ended December 31, 2006, we earned income from discontinued operations of $736
primarily due to gains on sales of properties totaling $3,452 and income of $1,178 from the
operations of discontinued properties. This income was partially 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
$3,736 primarily from gains on sales of several properties totaling $10,474 and income of $9,328
from the operations of discontinued properties, which were largely offset by impairment charges
totaling $16,066 on several of these properties.
Impairment charges for 2007, 2006 and 2005 are described in Impairment Charges above.
The effect of suspending depreciation expense as a result of the classification of properties as
held for sale was $44, $238 and $235 for the years ended December 31, 2007, 2006 and 2005,
respectively.
Financial Condition
Uses of Cash during the Year
Our cash flows fluctuate on an annual basis due to a number of factors which include the nature and
timing of receipts of transaction-related revenue, the performance of the CPA® REITs
relative to their performance criteria, the timing of purchases and sales of real estate, purchases
under our share repurchase plan, the timing of certain payments and the receipt of the annual
installment of deferred acquisition revenue and interest thereon in the first quarter.
Although our cash flows may fluctuate from year to year, we believe that we will generate
sufficient cash from operations and, if necessary, from the proceeds of non-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. There has been no material change in our financial
condition since December 31, 2006. Our use of cash during the year is described below.
Operating Activities
During 2007, we used our cash flows from operations along with existing cash resources and
borrowings under our unsecured credit facility to fund distributions to shareholders and make
purchases of common stock under our share repurchase program. Cash flows
from operations were impacted in 2007 by the timing of receipt of revenue earned and commissions
paid in connection with CPA®:16 Global meeting its performance criterion and the
payment in the first quarter of 2007 of taxes totaling $21,000 on revenue earned in
W. P. Carey 2007 10-K 34
the fourth quarter of 2006 in connection with the CPA®:12/14 Merger. In connection with
CPA®:16 Global meeting its performance criterion in June 2007, we paid previously
deferred compensation totaling $6,625 and recognized previously deferred asset-based and
structuring revenue totaling $45,919, however we did not receive payment for any of this revenue in
cash until 2008. We received previously deferred asset-based revenue of $11,945 in July 2007 in the
form of restricted common stock of CPA®:16 Global. Previously deferred structuring
revenues of $28,259 were paid in January 2008 as part of the annual installment of deferred
acquisition revenue totaling $47,099 from the CPA® REITs while the remainder of the
deferred structuring revenue due from CPA®:16 Global is payable in January 2009
($4,663) and January 2010 ($1,052).
During 2007, we received revenue of $27,517 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 $27,654 in connection with structuring investments on
behalf of the CPA® REITs. In January 2007, we received $16,701 related to the annual
installment of deferred acquisition revenue from CPA®:14 and CPA®:15, both of
which have met their performance criteria, including interest. The next installment of deferred
acquisition revenue was received in January 2008 as described above.
In 2007, 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. For 2008, we have elected to continue to receive all performance revenue from the
CPA® REITs in restricted shares rather than cash. However, for 2008 we have elected to
receive the base asset management revenue from CPA®:16 Global in cash (rather than in
stock, as in the prior year), which we anticipate will benefit operating cash flows by
approximately $10,300. We expect that the election to receive restricted shares will continue to
have a negative impact on cash flows during 2008, as this election is annual.
During 2007, our real estate ownership provided cash flows (contractual lease revenues, net of
property-level debt service) of approximately $50,500. The properties we acquired from
CPA®:12 provided cash flow, inclusive of minority interest, of approximately $4,011 and
equity income of $972. This additional cash flow was partially offset by lower asset management
revenue of approximately $1,300 as a result of CPA®:12 selling several properties to us
and third parties in connection with the CPA®:12/14 Merger.
Investing Activities
Our investing activities are generally comprised of real estate transactions (purchases and sales)
and capitalized property related costs. During 2007, we used $80,491 to enter into several domestic
and international investments, used $15,987 to make capital improvements to existing properties and
used $3,596 to fund capital contributions to existing equity investments. Cash inflows during this
period included distributions from equity investments in real estate and CPA® REITs in
excess of equity income of $17,441 and net proceeds of $42,214 from the sale of several properties.
Distributions from equity investments in real estate and CPA® REITs are primarily
comprised of our share of the proceeds from a non-recourse mortgage obtained by a venture in which
we have a 50% interest and distributions from the CPA® REITs. During 2007, proceeds of $19,515 from the sale of properties were placed into
escrow in connection with a 1031 exchange transaction, of which $19,410 was released and used to
purchase additional properties. Investing activity also included lending $8,676 to an affiliate in
connection with a mortgage defeasance. These funds were repaid by the affiliate during the year.
Based on current distribution rates and our current investment in the CPA® REITs, our
annual distributions from the CPA® REITs for 2008 are projected to be approximately
$10,700.
Financing Activities
During 2007, we paid distributions to shareholders of $71,608 and made scheduled mortgage principal
payments totaling $16,072. We incurred gross borrowings of $162,700 and $20,080 on our unsecured
and secured credit facilities, respectively, and obtained $6,603 of mortgage financing, which were
used for several purposes in the normal course of business, including the acquisition of real
estate investments. During 2007, we made repayments of $102,000 on our unsecured credit facility
which has increased overall by $60,700 since December 31, 2006 and made prepayments of mortgage
principal totaling $13,090. Included in the gross borrowings and repayments above is $28,000
borrowed under our new $250,000 unsecured credit facility which was used to repay our previous
credit facility. In 2007, we raised $20,682 from the issuance of shares, primarily as a result of
the exercise of Carey Management warrants in December 2007 (Note
14) and to a lesser extent as a result of purchases under our distribution reinvestment program. In connection with our
current share repurchase program, we repurchased shares totaling $25,525.
W. P. Carey 2007 10-K 35
Summary of Financing
The table below summarizes our mortgage notes payable and credit facilities as of December 31, 2007
and 2006, respectively.
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Balance |
|
|
|
|
|
|
|
|
Fixed rate |
|
$ |
183,180 |
|
|
$ |
208,665 |
|
Variable rate (a) |
|
|
133,571 |
|
|
|
69,988 |
|
|
|
|
|
|
|
|
|
|
$ |
316,751 |
|
|
$ |
278,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of total debt |
|
|
|
|
|
|
|
|
Fixed rate |
|
|
58 |
% |
|
|
75 |
% |
Variable rate (a) |
|
|
42 |
% |
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average interest rate at end of year |
|
|
|
|
|
|
|
|
Fixed rate |
|
|
6.3 |
% |
|
|
6.5 |
% |
Variable rate (a) |
|
|
5.9 |
% |
|
|
5.5 |
% |
|
|
|
(a) |
|
Included in variable rate debt as of December 31, 2007 is (i) $35,581 outstanding under our
secured credit facility, (ii) $62,700 outstanding under our unsecured credit facility, and
(iii) $30,291 in mortgage obligations which are currently fixed rate but which have interest
rate reset features which may change the interest rates to then prevailing market fixed rates
(subject to specified caps) at certain points in their term. There are no interest rate resets
scheduled during 2008. |
Cash Resources
At December 31, 2007, our cash resources consisted of the following:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents totaling $12,137. Of this amount $4,203, at current exchange
rates, was held in foreign bank accounts and we could be subject to significant costs
should we decide to repatriate these amounts; |
|
|
|
|
|
|
|
|
|
Unsecured credit facility with unused capacity of up to $183,241, which may also be used
to loan funds to our affiliates. Our lender has issued letters of credit totaling $4,029 on
our behalf in connection with certain contractual obligations; and |
|
|
|
|
|
|
|
|
|
We can also borrow against our currently unleveraged properties which have a carrying
value of $263,435. |
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
non-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, 2007 |
|
|
December 31, 2006 |
|
|
|
Outstanding |
|
|
Maximum |
|
|
Outstanding |
|
|
Maximum |
|
|
|
Balance |
|
|
Available |
|
|
Balance |
|
|
Available |
|
Unsecured credit facility |
|
$ |
62,700 |
|
|
$ |
250,000 |
|
|
$ |
2,000 |
|
|
$ |
175,000 |
|
Secured credit facility |
|
|
35,581 |
|
|
|
105,000 |
|
|
|
15,501 |
|
|
|
105,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
98,281 |
|
|
$ |
355,000 |
|
|
$ |
17,501 |
|
|
$ |
280,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured credit facility
In June 2007, we entered into an unsecured credit facility for a $250,000 revolving line of credit
to replace our previous $175,000 line of credit that was due to expire in July 2007. The credit
facility, which matures in June 2011, can be increased up to $300,000 upon satisfaction of certain
conditions and provides for a one-year extension option subject to the satisfaction of certain
conditions and the payment of an extension fee equal to 0.125% of the total commitments under the
facility at that time. However, such expansion is at the discretion of the lenders.
The credit facility has an annual interest rate of either (i) LIBOR plus a spread which ranges from
75 to 120 basis points depending on our leverage or (ii) the greater of the lenders prime rate and
the Federal Funds Effective Rate plus 50 basis points. At December 31, 2007, the average interest
rate on advances on the credit facility was 5.7%. In addition, we pay an annual fee ranging between
12.5 and 20 basis points of the unused portion of the credit facility, depending on our leverage
ratio. Based on our leverage ratio at December 31, 2007, we pay interest at LIBOR plus 75 basis points and pay 12.5 basis points on the
unused portion of the credit
W. P. Carey 2007 10-K 36
facility. The credit facility has financial covenants that among other
things require us to maintain a minimum equity value and meet or exceed certain operating and
coverage ratios. We are in compliance with these covenants as of December 31, 2007.
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 provides for advances through March 8,
2008 and matures in December 2008. The credit facility is collateralized by any self-storage real
estate assets acquired by Carey Storage with proceeds from the facility. Advances from this
facility bear interest at an annual fixed rate of 7.6% for the first month of borrowing and at an
annual variable rate equal to the one-month LIBOR plus a spread which ranges from 175 to 235 basis
points thereafter depending on the aggregate debt yield for the collateralized asset pool. At
December 31, 2007, our interest rate was based on the one-month LIBOR plus 225 basis points.
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. Carey Storage is in compliance with these covenants as of December
31, 2007.
Cash Requirements
During 2008, cash requirements will include paying distributions to shareholders, repaying our
secured credit facility (which had a balance of $35,581 at December 31, 2007) in December 2008,
making scheduled mortgage principal payments, including a mortgage balloon payment of $5,000 due in
December 2008, and making distributions to minority partners, as well as other normal recurring
operating expenses. We also expect to make payments totaling $29,979 to certain
CPA® REITs and to pay a civil penalty in connection with an agreement in principle to
settle the SEC investigation (see Item 3 Legal Proceedings for a discussion of this investigation
and the agreement in principle). 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 $7,600 at various properties during
2008. 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 non-recourse mortgages through use of our cash
reserves or unused amounts on our unsecured credit facility.
Off-Balance Sheet Arrangements and Contractual Obligations
The table below summarizes our off-balance sheet arrangements and contractual obligations as of
December 31, 2007 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 |
|
Non-recourse debt Principal |
|
$ |
254,051 |
|
|
$ |
50,209 |
|
|
$ |
51,282 |
|
|
$ |
61,220 |
|
|
$ |
91,340 |
|
Unsecured credit facility Principal |
|
|
62,700 |
|
|
|
|
|
|
|
|
|
|
|
62,700 |
|
|
|
|
|
Deferred acquisition compensation due to
affiliates Principal |
|
|
137 |
|
|
|
137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on borrowings and deferred
acquisition compensation (a) |
|
|
78,952 |
|
|
|
19,549 |
|
|
|
27,936 |
|
|
|
16,085 |
|
|
|
15,382 |
|
Operating leases (b) |
|
|
26,562 |
|
|
|
2,876 |
|
|
|
5,674 |
|
|
|
5,850 |
|
|
|
12,162 |
|
Property improvements (c) |
|
|
7,600 |
|
|
|
7,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other commitments(d) |
|
|
707 |
|
|
|
707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
SEC settlement(e) |
|
|
29,979 |
|
|
|
29,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
460,688 |
|
|
$ |
111,057 |
|
|
$ |
84,892 |
|
|
$ |
145,855 |
|
|
$ |
118,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Interest on variable rate debt obligations was calculated using the variable interest rates
and balances outstanding as of December 31, 2007. |
|
(b) |
|
Operating and other lease commitments 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. The table above excludes the
rental obligation under a ground lease of a venture in which we own a 46% interest. This
obligation totals approximately $2,985 over the lease term. |
|
(c) |
|
Represents remaining commitments to fund certain property improvements. |
W. P. Carey 2007 10-K 37
|
|
|
(d) |
|
Includes estimates for accrued interest and penalties related to uncertain tax positions and
a commitment to contribute capital to an investment in India. |
|
(e) |
|
Represents charge incurred in fourth quarter of 2007 in connection with reaching an agreement
in principle with the staff of the SEC to settle all matters relating to its investigation.
The charge is comprised of expected payments to certain of the CPA® REITs, including
interest, of $19,979 and a civil penalty of $10,000. See Item 3 Legal Proceedings for a
discussion of this investigation and the agreement in principle. |
Amounts related to our foreign operations are based on the exchange rate of the Euro as of December
31, 2007.
We have employment contracts with certain senior executives. These contracts provide for severance
payments in the event of termination under certain conditions including a change of control.
As of December 31, 2007, we have no material capital lease obligations for which we are the lessee,
either individually or in the aggregate.
We have investments in unconsolidated joint ventures that own single-tenant properties net leased
to corporations. All of the underlying investments are owned with affiliates. Summarized financial
information for these ventures (for the entire venture, not our proportionate share) at December
31, 2007 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest at |
|
|
|
|
|
|
Total Third Party |
|
|
|
|
Lessee |
|
December 31, 2007 |
|
|
Total Assets |
|
|
Debt |
|
|
Maturity Date |
|
The Retail Distribution Group |
|
|
40 |
% |
|
$ |
11,802 |
|
|
$ |
5,556 |
|
|
|
9/2009 |
|
Federal Express Corporation |
|
|
40 |
% |
|
|
50,042 |
|
|
|
41,381 |
|
|
|
1/2011 |
|
Information Resources, Inc. |
|
|
33 |
% |
|
|
49,607 |
|
|
|
22,891 |
|
|
|
1/2011 |
|
Childtime Childcare, Inc. |
|
|
34 |
% |
|
|
10,410 |
|
|
|
6,697 |
|
|
|
1/2011 |
|
Carrefour France, S.A. (a) (b) |
|
|
46 |
% |
|
|
173,768 |
|
|
|
130,150 |
|
|
|
12/2014 |
|
Consolidated Systems, Inc. (c) |
|
|
60 |
% |
|
|
17,467 |
|
|
|
11,846 |
|
|
|
11/2016 |
|
Sicor, Inc. (d) |
|
|
50 |
% |
|
|
17,354 |
|
|
|
35,350 |
|
|
|
7/2017 |
|
Medica France, S.A. (a) (e) |
|
|
46 |
% |
|
|
58,323 |
|
|
|
45,061 |
|
|
|
10/2017 |
|
Hologic, Inc. |
|
|
36 |
% |
|
|
28,900 |
|
|
|
16,158 |
|
|
|
5/2023 |
|
Schuler A.G. (a) (f) |
|
|
33 |
% |
|
|
76,894 |
|
|
|
|
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
494,567 |
|
|
$ |
315,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Amounts shown are based on the exchange rate of the Euro as of December 31, 2007. |
|
(b) |
|
We reduced our interest in this venture to 46% from 50% in September 2007 as a result of a
restructuring of ownership interests with an affiliate. |
|
(c) |
|
In October 2006, we, together with an affiliate, through a venture in which we own 60%
tenancy-in-common interests, acquired property in South Carolina for approximately $17,881. In
connection with this acquisition, the venture obtained non-recourse mortgage financing of
$12,000 at a fixed annual interest rate of 5.9% for a 10-year term. Our proportionate share of
cost in this investment and financing obtained is approximately $10,530 and $7,200,
respectively. |
|
(d) |
|
In June 2007, this venture completed the refinancing of an existing $2,483 non-recourse
mortgage with new non-recourse financing of $35,350 based on the appraised value of the
underlying real estate of the venture and distributed the proceeds to the venture partners. |
|
(e) |
|
We increased our interest in this venture to 46% from 35% in September 2007 as a result of a
restructuring of ownership interests with an affiliate. |
|
(f) |
|
In December 2007, we acquired a 33% interest in this venture from an affiliate at a total
cost of $25,971 based on the exchange rate of the Euro at the date of acquisition. |
The table above does not reflect our acquisition in April 2007 of a 5% interest in a venture, which
made a loan (the note receivable) to the holder of a 75% interest in a limited partnership owning
37 properties throughout Germany at a total cost of $335,981. In connection with this transaction,
the venture obtained non-recourse financing of $284,932 having a fixed annual interest rate of 5.5%
and a term of 10 years. All amounts are based on the exchange rate of the Euro at the date of
acquisition. Under the terms of the note receivable, the venture will receive interest that
approximates 75% of all income earned by the limited partnership, less adjustments.
W. P. Carey 2007 10-K 38
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.
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 at the inception of a
lease or when significant lease items are amended as either real estate leased under operating
leases or net investment in direct financing leases. 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.
W. P. Carey 2007 10-K 39
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 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 consolidated financial statements include all our accounts and 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 Financial Accounting Standards Board (FASB) Interpretation No. 46R,
Consolidation of Variable Interest Entities (FIN 46R). 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 46R. 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 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 include the accounts of 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 registration costs.
The consolidated financial statements also include the accounts of CPA®:17 Global, an
affiliated REIT formed in 2007. As of December 31, 2007, we own all of CPA®:17
Globals outstanding common stock. Beginning in 2008, we will account for our investment in
CPA®:17 Global under the equity method of accounting.
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 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. Estimates
and judgments are used when evaluating whether these assets are impaired.
W. P. Carey 2007 10-K 40
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. 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
(investment management segment) with our carrying amount, including goodwill. We calculate the
estimated fair value of the investment management segment by applying a multiple, based on
comparable companies, to earnings. If the fair value of the investment management segment exceeds
its carrying amount, goodwill is considered not impaired and no further analysis is required. If
the carrying amount of the investment management segment 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 investment management segment to its assets and
liabilities. The excess of the estimated fair value of the investment management 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 investment management 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 CPA® REITs 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 and CPA® REITs may be impaired and whether 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 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 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.
W. P. Carey 2007 10-K 41
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 ownership
segment has a limited number of lessees (24 lessees represented approximately 72% of annual rental
income during 2007), 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 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
We have elected to be treated as a partnership for U.S. federal income tax purposes. Prior to
September 30, 2007, our real estate ownership operations were conducted through partnership or
limited liability companies electing to be treated as partnerships for U.S federal income tax
purposes. As partnerships, we and our 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. Subsequent to September 30, 2007, our real estate
operations have been conducted through a subsidiary REIT. In order to maintain its qualification as
a REIT, the subsidiary 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, the subsidiary is not subject to U.S. federal
income tax to the extent it distributes its net taxable income annually to its shareholders.
Accordingly, as a REIT, no provision for U.S. federal income taxes is included in the accompanying
consolidated financial statements. We have and intend to continue to operate so that the subsidiary
meets the requirements for taxation as a REIT. Many of these requirements, however, are highly
technical and complex. If we were to fail to meet these requirements, the subsidiary would be
subject to U.S. federal income tax. These operations are subject to certain state, local and
foreign taxes and a provision for such taxes is included in the consolidated financial statements.
We conduct our investment management operations though a wholly owned taxable corporation. These
operations are subject to federal, state, local and foreign taxes as applicable. Our financial
statements are prepared on a consolidated basis including this taxable subsidiary and include a
provision for current and deferred taxes on these operations.
Our consolidated effective income tax rate is influenced by tax planning opportunities available to
us in the various jurisdictions in which we operate. Significant judgment is required in
determining our effective tax rate and in evaluating our tax positions. We establish tax reserves
in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109 (FIN 48), which we adopted at the beginning of 2007.
FIN 48 is based on a benefit recognition model, which we believe could result in a greater amount
of benefit (and a lower amount of reserve) being initially recognized in certain circumstances.
Provided that the tax position is deemed more likely than not of being sustained, FIN 48 permits a
company to recognize the largest amount of tax benefit that is greater than 50 percent likely of
being ultimately realized upon settlement. The tax position must be derecognized when it is no
longer more likely than not of being sustained. Prior to the adoption of FIN 48, our policy was to
establish reserves that reflected the probable outcome of known tax contingencies. Favorable
resolution was recognized as a reduction to our effective tax rate in the period of resolution.
The initial application of FIN 48 resulted in a net decrease to our reserves for uncertain tax
positions of approximately $1,050, with an offsetting increase to retained earnings.
Adoption of New Accounting Pronouncements
SFAS 123R
FASB Statement No. 123R, Share-Based Payment (SFAS 123R) was issued to establish financial and
accounting standards for stock-based employee compensation plans. We adopted SFAS 123R 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 123R in 2006
is discussed in Note 14. Results for fiscal years 2005 and prior have not been restated.
W. P. Carey 2007 10-K 42
EITF 04-05
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 46R. 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 using a cumulative-effect-type adjustment. 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.
SFAS 155
FASB Statement No. 155, Accounting for Certain Hybrid Financial Instruments an Amendment of FASB
No. 133 and 140 (SFAS 155) was issued 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 adopted SFAS 155 as required on January 1, 2007 and the initial application of this
statement did not have a material impact on our financial position or results of operations.
FIN 48
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB
Statement No. 109 (FIN 48) clarifies the accounting for uncertainty in income tax positions.
This Interpretation requires that we 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 adopted FIN 48 as required on January 1, 2007 (Note 15).
Recent Accounting Pronouncements
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. SFAS 157 also provides for certain disclosure requirements, including, but not limited
to, the valuation techniques used to measure fair value and a discussion of changes in valuation
techniques, if any, during the period. This statement is effective for our 2008 fiscal year, except
for nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair
value on a recurring basis, for which the effective date is our 2009 fiscal year. We are currently
evaluating the potential impact of the adoption of this statement and believe that the adoption of
this statement will not have a material effect on our financial position and results of operations.
SFAS 159
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS 159), which gives entities the option to measure eligible
financial assets, financial liabilities and firm commitments at fair value on an
instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value
under other accounting standards. The election to use the fair value option is available when an
entity first recognizes a financial asset or financial liability or upon entering into a firm
commitment. Subsequent changes (i.e., unrealized gains and losses) in fair value must be recorded
in earnings. Additionally, SFAS 159 allows for a one-time election for existing positions upon
adoption, with the transition adjustment recorded to beginning retained earnings. This statement is
effective for our 2008 fiscal year. We are currently evaluating the potential impact of the
adoption of this statement and believe that the adoption of this statement will not have a material
effect on our financial position and results of operations.
SOP 07-1
In June 2007, the Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants (AICPA) issued Statement of Position 07-1, Clarification of the Scope of the
Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity
Method Investors for Investments in Investment Companies (SOP 07-1). SOP 07-1 addresses when the
accounting principles of the AICPA Audit and Accounting Guide Investment Companies must be
applied by an
W. P. Carey 2007 10-K 43
entity and whether investment company accounting must be retained by a parent company
in consolidation or by an investor in the application of the equity method of accounting. In
addition, SOP 07-1 includes certain disclosure requirements for parent companies and equity method
investors in investment companies that retain investment company accounting in the parent companys
consolidated financial statements or the financial statements of an equity method investor. In
February 2008, FSP SOP 07-1-1 was issued to delay indefinitely the effective date of SOP 07-1 and
prohibit adoption of SOP 07-1 for an entity that has not early adopted SOP 07-1 before issuance of
the final FSP. We are currently assessing the potential impact the adoption of this statement will
have on our financial position and results of operations.
SFAS 141R
In December 2007, the FASB issued Statement No. 141 (revised 2007), Business Combinations (SFAS
141R), which establishes principles and requirements for how the acquirer shall recognize and
measure in its financial statements the identifiable assets acquired, liabilities assumed, any
noncontrolling interest in the acquiree and goodwill acquired in a business combination. SFAS 141R
is effective for our 2009 fiscal year. We are currently assessing the potential impact that the
adoption of this statement will have on our financial position and results of operations.
SFAS 160
In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated
Financial Statements an Amendment of ARB No. 51 (SFAS 160), which establishes and expands
accounting and reporting standards for minority interests, which will be recharacterized as
noncontrolling interests, in a subsidiary and the deconsolidation of a subsidiary. SFAS 160 is
effective for our 2009 fiscal year. We are currently assessing the potential impact that the
adoption of this statement will have on our financial position and results of operations.
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 also exposed to market
risk as a result of concentrations in certain tenant industries.
We do not generally use derivative financial instruments to manage foreign currency exchange rate
risk exposure and do not use derivative instruments to hedge credit/market risks or for speculative
purposes. We account for our derivative instruments in accordance with SFAS No. 133 Accounting for
Derivative Instruments and Hedging Activities, as amended.
Interest Rate Risk
The value of our real estate and related fixed debt obligations is 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 profile of certain tenants.
We are exposed to the impact of interest rate changes primarily through our borrowing activities.
To limit this exposure, we attempt to obtain mortgage financing on a long-term, fixed-rate basis.
However, from time to time, we or our venture partners may obtain variable rate mortgage loans and
may enter into interest rate swap agreements with lenders, which effectively convert the variable
rate debt service obligations of the loan to a fixed rate. Our objective in using derivatives is to
limit our exposure to interest rate movements. Interest rate swaps are agreements in which a series
of interest rate flows are exchanged over a specific period. The notional amount on which the swaps
are based is not exchanged. Interest rate swaps may be designated as cash flow hedges, with
changes in fair value included as a component of other comprehensive income in shareholders
equity, or as fair value hedges, with changes in fair value reflected in earnings.
At December 31, 2007, a significant portion (approximately 67%) of our long-term debt either bears
interest at fixed rates or is currently at fixed rates but resets to the then prevailing market
fixed rates at certain future points in their term. The fair value of these instruments is affected
by changes in market interest rates. The annual interest rates on our fixed rate debt at December
31, 2007
W. P. Carey 2007 10-K 44
ranged from 4.9% to 8.1%. The annual interest rates on our variable rate debt at December
31, 2007 ranged from 3.9% to 7.3%. Our debt obligations are more fully described within the
Financial Condition section of Item 7 of this annual report. The following table presents principal
cash flows based upon expected maturity dates of our debt obligations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
Thereafter |
|
Total |
|
Fair value |
Fixed rate debt |
|
$ |
7,777 |
|
|
$ |
34,794 |
|
|
$ |
12,555 |
|
|
$ |
25,712 |
|
|
$ |
31,239 |
|
|
$ |
71,103 |
|
|
$ |
183,180 |
|
|
$ |
180,926 |
|
Variable rate debt |
|
$ |
42,432 |
|
|
$ |
1,936 |
|
|
$ |
1,997 |
|
|
$ |
64,834 |
|
|
$ |
2,135 |
|
|
$ |
20,237 |
|
|
$ |
133,571 |
|
|
$ |
133,571 |
|
A change in interest rates of 1% would increase or decrease the combined fair value of our fixed
rate debt by an aggregate of $6,801. Annual interest expense on our variable rate debt that does
not currently bear interest at fixed rates would increase or decrease by $1,033 for each 1% change
in annual interest rates. As more fully described in Summary of Financing above, a significant
portion of the debt classified as variable rate debt in the tables above currently bears interest
at fixed rates but has interest rate reset features which may change the interest rates to variable
rates at certain points in their term. Such debt is generally not subject to short-term
fluctuations in interest rates.
Foreign Currency Exchange Rate Risk
We have foreign operations and transact business in Europe and as a result are subject to risk from
the effects of exchange rate movements of the Euro, which may affect future costs and cash flows.
We manage foreign currency exchange rate movements by generally placing both our debt obligation to
the lender and the tenants rental obligation to us in the local currency. For the Euro, we are a
net receiver of the foreign currency (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. Net realized foreign currency translation gains were $1,332 for the
year ended December 31, 2007. Net unrealized foreign currency translation gains were $1,675 for the
year ended December 31, 2007. Such gains are included in the consolidated financial statements and
are primarily due to changes in the Euro on accrued interest receivable on notes receivable from
wholly-owned subsidiaries.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
Thereafter |
|
Total |
Future minimum rents (a) |
|
$ |
7,001 |
|
|
$ |
6,502 |
|
|
$ |
5,003 |
|
|
$ |
5,003 |
|
|
$ |
5,003 |
|
|
$ |
15,944 |
|
|
$ |
44,456 |
|
Mortgage notes payable (a) |
|
$ |
1,851 |
|
|
$ |
1,936 |
|
|
$ |
1,997 |
|
|
$ |
2,134 |
|
|
$ |
2,134 |
|
|
$ |
20,238 |
|
|
$ |
30,290 |
|
|
|
|
(a) |
|
Based on the December 31, 2007 exchange rate for the Euro. |
W. P. Carey 2007 10-K 45
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 2007 10-K 46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of W. P. Carey & Co. LLC:
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, 2007 and December 31, 2006, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2007 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. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is
responsible for these financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included under Item 9A. Our responsibility is to
express opinions on these financial statements, on the financial statement schedule, and on the
Companys internal control over financial reporting based on our integrated audits. We conducted
our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained in all material respects. Our
audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide 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 29, 2008
W. P. Carey 2007 10-K 47
W. P. CAREY & CO. LLC
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Assets |
|
|
|
|
|
|
|
|
Real estate, net |
|
$ |
513,405 |
|
|
$ |
540,504 |
|
Net investment in direct financing leases |
|
|
89,463 |
|
|
|
108,581 |
|
Equity investments in real estate and CPA® REITs |
|
|
242,677 |
|
|
|
166,147 |
|
Operating real estate, net |
|
|
73,189 |
|
|
|
33,606 |
|
Assets held for sale |
|
|
|
|
|
|
1,269 |
|
Cash and cash equivalents |
|
|
12,137 |
|
|
|
22,108 |
|
Due from affiliates |
|
|
88,329 |
|
|
|
88,884 |
|
Intangible assets and goodwill, net |
|
|
99,873 |
|
|
|
107,349 |
|
Other assets, net |
|
|
34,211 |
|
|
|
24,562 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,153,284 |
|
|
$ |
1,093,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Members Equity |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Non-recourse debt |
|
$ |
254,051 |
|
|
$ |
276,653 |
|
Unsecured credit facility |
|
|
62,700 |
|
|
|
2,000 |
|
Deferred revenue |
|
|
|
|
|
|
40,490 |
|
Accounts payable, accrued expenses and other liabilities |
|
|
71,819 |
|
|
|
53,174 |
|
Income taxes, net |
|
|
65,152 |
|
|
|
63,462 |
|
Distributions payable |
|
|
29,222 |
|
|
|
17,481 |
|
Settlement provision (Note 11) |
|
|
29,979 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
512,923 |
|
|
|
453,260 |
|
|
|
|
|
|
|
|
Minority interest in consolidated entities |
|
|
6,090 |
|
|
|
7,765 |
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 11) |
|
|
|
|
|
|
|
|
Members equity: |
|
|
|
|
|
|
|
|
Listed shares, no par value, 100,000,000 shares authorized; 39,216,493 and 38,262,157 shares issued
and outstanding, respectively |
|
|
748,584 |
|
|
|
745,969 |
|
Distributions in excess of accumulated earnings |
|
|
(117,051 |
) |
|
|
(114,008 |
) |
Accumulated other comprehensive income |
|
|
2,738 |
|
|
|
24 |
|
|
|
|
|
|
|
|
Total members equity |
|
|
634,271 |
|
|
|
631,985 |
|
|
|
|
|
|
|
|
Total liabilities and members equity |
|
$ |
1,153,284 |
|
|
$ |
1,093,010 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
W. P. Carey 2007 10-K 48
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Asset management revenue |
|
$ |
83,051 |
|
|
$ |
57,633 |
|
|
$ |
52,332 |
|
Structuring revenue |
|
|
78,175 |
|
|
|
22,506 |
|
|
|
28,197 |
|
Incentive, termination and subordinated disposition revenue from mergers |
|
|
|
|
|
|
46,018 |
|
|
|
|
|
Reimbursed costs from affiliates |
|
|
13,782 |
|
|
|
63,630 |
|
|
|
9,962 |
|
Lease revenues |
|
|
75,403 |
|
|
|
69,197 |
|
|
|
62,476 |
|
Other real estate income |
|
|
12,718 |
|
|
|
8,503 |
|
|
|
10,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
263,129 |
|
|
|
267,487 |
|
|
|
163,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
(61,821 |
) |
|
|
(41,376 |
) |
|
|
(44,981 |
) |
Provision for settlement (Note 11) |
|
|
(29,979 |
) |
|
|
|
|
|
|
|
|
Reimbursable costs |
|
|
(13,782 |
) |
|
|
(63,630 |
) |
|
|
(9,962 |
) |
Depreciation and amortization |
|
|
(25,543 |
) |
|
|
(25,137 |
) |
|
|
(20,051 |
) |
Property expenses |
|
|
(6,245 |
) |
|
|
(5,984 |
) |
|
|
(6,155 |
) |
Impairment charges |
|
|
(1,017 |
) |
|
|
(1,147 |
) |
|
|
(5,704 |
) |
Other real estate expenses |
|
|
(7,690 |
) |
|
|
(5,881 |
) |
|
|
(6,327 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(146,077 |
) |
|
|
(143,155 |
) |
|
|
(93,180 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Other interest income |
|
|
6,842 |
|
|
|
3,305 |
|
|
|
3,507 |
|
Income from equity investments in real estate and CPA® REITs |
|
|
18,357 |
|
|
|
7,608 |
|
|
|
5,182 |
|
Minority interest in income |
|
|
(4,143 |
) |
|
|
(275 |
) |
|
|
(264 |
) |
Gain on sale of securities, foreign currency transactions and other, net |
|
|
3,114 |
|
|
|
12,969 |
|
|
|
1,359 |
|
Interest expense |
|
|
(20,880 |
) |
|
|
(17,016 |
) |
|
|
(15,768 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
3,290 |
|
|
|
6,591 |
|
|
|
(5,984 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
120,342 |
|
|
|
130,923 |
|
|
|
64,076 |
|
Provision for income taxes |
|
|
(51,739 |
) |
|
|
(45,356 |
) |
|
|
(19,208 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
68,603 |
|
|
|
85,567 |
|
|
|
44,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations of discontinued properties |
|
|
2,874 |
|
|
|
1,178 |
|
|
|
9,328 |
|
Gains on sale of real estate, net |
|
|
15,486 |
|
|
|
3,452 |
|
|
|
10,474 |
|
Impairment charges |
|
|
(2,317 |
) |
|
|
(3,357 |
) |
|
|
(16,066 |
) |
Minority interest in income |
|
|
(5,394 |
) |
|
|
(537 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
10,649 |
|
|
|
736 |
|
|
|
3,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
79,252 |
|
|
$ |
86,303 |
|
|
$ |
48,604 |
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
1.80 |
|
|
$ |
2.27 |
|
|
$ |
1.19 |
|
Income from discontinued operations |
|
|
0.28 |
|
|
|
0.02 |
|
|
|
0.10 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2.08 |
|
|
$ |
2.29 |
|
|
$ |
1.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
1.78 |
|
|
$ |
2.20 |
|
|
$ |
1.15 |
|
Income from discontinued operations |
|
|
0.27 |
|
|
|
0.02 |
|
|
|
0.10 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2.05 |
|
|
$ |
2.22 |
|
|
$ |
1.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
38,113,857 |
|
|
|
37,668,920 |
|
|
|
37,688,835 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
39,868,208 |
|
|
|
39,093,897 |
|
|
|
39,020,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions Declared Per Share (a) |
|
$ |
1.88 |
|
|
$ |
1.82 |
|
|
$ |
1.79 |
|
|
|
|
|
|
|
|
|
|
|
(a) Excludes special distribution of $0.27 declared in December 2007 - Note 14.
The accompanying notes are an integral part of these consolidated financial statements.
W. P. Carey 2007 10-K 49
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Net Income |
|
$ |
79,252 |
|
|
$ |
86,303 |
|
|
$ |
48,604 |
|
Other Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
adjustment, net of taxes
of $19 in 2007, $(379) in
2006 and
$(327) in 2005 |
|
|
(42 |
) |
|
|
799 |
|
|
|
722 |
|
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 $(1,240)
in 2007, $(379) in
2006 and $611 in 2005 |
|
|
2,756 |
|
|
|
799 |
|
|
|
(1,350 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
2,714 |
|
|
|
(3,148 |
) |
|
|
(628 |
) |
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
$ |
81,966 |
|
|
$ |
83,155 |
|
|
$ |
47,976 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
W. P. Carey 2007 10-K 50
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS OF MEMBERS EQUITY
For the years ended December 31, 2007, 2006 and 2005
(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, 2005 |
|
|
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 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 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings adjustment on adoption of FIN 48 |
|
|
|
|
|
|
|
|
|
|
1,054 |
|
|
|
|
|
|
|
|
|
|
|
1,054 |
|
Cash proceeds on issuance of shares, net |
|
|
1,581,973 |
|
|
|
20,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,295 |
|
Shares issued in connection with services rendered |
|
|
12,036 |
|
|
|
387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
387 |
|
Shares issued under share incentive plans |
|
|
187,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures of shares |
|
|
(10,963 |
) |
|
|
(241 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(241 |
) |
Distributions declared |
|
|
|
|
|
|
|
|
|
|
(83,349 |
) |
|
|
|
|
|
|
|
|
|
|
(83,349 |
) |
Tax benefit share incentive plans |
|
|
|
|
|
|
1,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,939 |
|
Stock based compensation expense under
SFAS 123(R) |
|
|
|
|
|
|
5,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,760 |
|
Repurchase and retirement of shares |
|
|
(816,310 |
) |
|
|
(25,525 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,525 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
79,252 |
|
|
|
|
|
|
|
|
|
|
|
79,252 |
|
Change in other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,714 |
|
|
|
2,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
|
39,216,493 |
|
|
$ |
748,584 |
|
|
$ |
(117,051 |
) |
|
$ |
|
|
|
$ |
2,738 |
|
|
$ |
634,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
W. P. Carey 2007 10-K 51
W. P. CAREY & CO. LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Cash Flows Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
79,252 |
|
|
$ |
86,303 |
|
|
$ |
48,604 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization including intangible assets and deferred financing
costs |
|
|
27,321 |
|
|
|
27,207 |
|
|
|
21,942 |
|
Income from equity investments in real estate and CPA® REITs in
excess of distributions
received |
|
|
(2,296 |
) |
|
|
(160 |
) |
|
|
479 |
|
Gains on sale of real estate and investments, net |
|
|
(15,827 |
) |
|
|
(14,774 |
) |
|
|
(10,570 |
) |
Recognition of deferred gain on completion of development project |
|
|
|
|
|
|
|
|
|
|
(2,000 |
) |
Minority interest in income |
|
|
9,537 |
|
|
|
812 |
|
|
|
264 |
|
Straight-line rent adjustments |
|
|
2,972 |
|
|
|
3,152 |
|
|
|
3,776 |
|
Management income received in shares of affiliates |
|
|
(55,535 |
) |
|
|
(31,020 |
) |
|
|
(31,858 |
) |
Unrealized (gain) loss on foreign currency transactions, warrants and securities |
|
|
(1,659 |
) |
|
|
(1,128 |
) |
|
|
779 |
|
Impairment charges |
|
|
3,334 |
|
|
|
4,504 |
|
|
|
21,770 |
|
Realized (gain) loss on foreign currency transactions |
|
|
(1,332 |
) |
|
|
(488 |
) |
|
|
19 |
|
Costs paid by issuance of shares |
|
|
|
|
|
|
|
|
|
|
201 |
|
Increase (decrease) in income taxes, net |
|
|
1,796 |
|
|
|
24,311 |
|
|
|
(1,725 |
) |
Settlement provision |
|
|
29,979 |
|
|
|
|
|
|
|
|
|
Tax charge share incentive plan |
|
|
|
|
|
|
|
|
|
|
604 |
|
Stock-based compensation expense |
|
|
5,551 |
|
|
|
3,453 |
|
|
|
3,936 |
|
Decrease in deferred acquisition revenue received |
|
|
16,164 |
|
|
|
12,543 |
|
|
|
8,961 |
|
Increase in structuring revenue receivable |
|
|
(55,897 |
) |
|
|
(3,459 |
) |
|
|
(5,304 |
) |
Net changes in other operating assets and liabilities |
|
|
4,111 |
|
|
|
8,684 |
|
|
|
(7,171 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
47,471 |
|
|
|
119,940 |
|
|
|
52,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Distributions received from equity investments in real estate and CPA®
REITs in excess
of equity income |
|
|
17,441 |
|
|
|
13,286 |
|
|
|
6,164 |
|
Capital contributions made to equity investments in real estate |
|
|
(3,596 |
) |
|
|
|
|
|
|
|
|
Purchases of real estate and equity investments in real estate |
|
|
(80,491 |
) |
|
|
(102,199 |
) |
|
|
(465 |
) |
Capital expenditures |
|
|
(15,987 |
) |
|
|
(4,937 |
) |
|
|
(2,975 |
) |
Loans to affiliates |
|
|
(8,676 |
) |
|
|
(108,000 |
) |
|
|
|
|
Proceeds from repayment of loans to affiliates |
|
|
8,676 |
|
|
|
108,000 |
|
|
|
|
|
Proceeds from sales of property and investments |
|
|
42,214 |
|
|
|
50,053 |
|
|
|
45,542 |
|
Release of funds from escrow in connection with the sale of property |
|
|
19,410 |
|
|
|
10,134 |
|
|
|
|
|
Funds placed in escrow in connection with the sale of property |
|
|
(19,515 |
) |
|
|
(10,374 |
) |
|
|
|
|
Payment of deferred acquisition revenue to affiliate |
|
|
(524 |
) |
|
|
(524 |
) |
|
|
(524 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(41,048 |
) |
|
|
(44,561 |
) |
|
|
47,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Distributions paid |
|
|
(71,608 |
) |
|
|
(68,615 |
) |
|
|
(67,004 |
) |
Contributions from minority interests |
|
|
1,703 |
|
|
|
2,345 |
|
|
|
1,539 |
|
Distributions to minority interests |
|
|
(8,168 |
) |
|
|
(6,226 |
) |
|
|
(355 |
) |
Scheduled payments of mortgage principal |
|
|
(16,072 |
) |
|
|
(11,742 |
) |
|
|
(9,229 |
) |
Proceeds from mortgages and credit facilities |
|
|
189,383 |
|
|
|
174,501 |
|
|
|
121,764 |
|
Proceeds from loans from affiliates |
|
|
7,569 |
|
|
|
|
|
|
|
|
|
Prepayments of mortgage principal and credit facilities |
|
|
(115,090 |
) |
|
|
(166,660 |
) |
|
|
(151,893 |
) |
Release of funds from escrow in connection with the financing of properties |
|
|
|
|
|
|
4,031 |
|
|
|
|
|
Payment of financing costs |
|
|
(1,350 |
) |
|
|
(1,601 |
) |
|
|
(797 |
) |
Proceeds from issuance of shares |
|
|
20,682 |
|
|
|
8,660 |
|
|
|
4,400 |
|
Excess tax benefits associated with stock-based compensation awards |
|
|
1,939 |
|
|
|
626 |
|
|
|
|
|
Repurchase and retirement of shares |
|
|
(25,525 |
) |
|
|
(1,937 |
) |
|
|
(2,206 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(16,537 |
) |
|
|
(66,618 |
) |
|
|
(103,781 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
143 |
|
|
|
333 |
|
|
|
(369 |
) |
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(9,971 |
) |
|
|
9,094 |
|
|
|
(3,701 |
) |
Cash and cash equivalents, beginning of year |
|
|
22,108 |
|
|
|
13,014 |
|
|
|
16,715 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
12,137 |
|
|
$ |
22,108 |
|
|
$ |
13,014 |
|
|
|
|
|
|
|
|
|
|
|
(Continued)
W. P. Carey 2007 10-K 52
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. |
|
We issued restricted shares valued at $387 in 2007, $260 in 2006 and $217 in 2005, to certain
directors in consideration of service rendered. Restricted shares and stock options valued at
$7,394, $5,430 and $3,422 in 2007, 2006 and 2005, respectively, were issued to officers and
employees and were recorded to additional paid-in capital of which
$241, $168 and $459,
respectively, was forfeited in 2007, 2006 and 2005. |
|
B. |
|
During 2006, we 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 non-recourse mortgage notes payable. The fair value of
the assumed mortgages was $58,717. |
Supplemental cash flows information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Interest paid, net of amounts capitalized |
|
$ |
19,311 |
|
|
$ |
17,206 |
|
|
$ |
15,579 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
48,030 |
|
|
$ |
20,730 |
|
|
$ |
20,989 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
W. P. Carey 2007 10-K 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Note 1. Business
We are a provider of long-term net lease financing for companies worldwide. We invest primarily in
commercial properties that are each triple-net leased to single corporate tenants, domestically and
internationally, and earn revenue as the advisor to publicly owned, non-traded real estate
investment trusts (CPA® REITs) sponsored by us that invest in similar properties. We
are currently the advisor to the following CPA® REITs: Corporate Property Associates 14
Incorporated (CPA®:14), Corporate Property Associates 15 Incorporated
(CPA®:15), Corporate Property Associates 16 Global Incorporated (CPA®:16
Global) and Corporate Property Associates 17 Global Incorporated (CPA®:17
Global) and were the advisor to Corporate Property Associates 12 Incorporated
(CPA®:12) until its merger with CPA®:14 in 2006. As of December 31, 2007,
we own and manage over 850 commercial properties domestically and internationally including our own
portfolio. Our owned portfolio is comprised of our full or partial ownership interest in 176
commercial properties net leased to 98 tenants and totaling approximately 17 million square feet
(on a pro rata basis), with an occupancy rate of approximately 97%. We also own 13 domestic
self-storage properties totaling approximately 0.9 million square feet.
Primary Business Segments
Investment Management We provide services to the CPA® REITs in connection with
structuring and negotiating investment and debt placement transactions (structuring revenue) and
provide on-going management of their portfolios (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 from which we earn revenue increases. We may elect to receive revenue in
cash or restricted shares of the CPA® REITs. We may also earn incentive and disposition
revenue and receive termination payments in connection with providing liquidity alternatives to
CPA® REIT shareholders.
Real Estate Ownership We own and invest in commercial properties on a global basis that are then
leased to companies, primarily on a triple-net leased basis. We also invest in other properties on
an opportunistic basis.
Organization
We commenced operations on January 1, 1998 by combining the limited partnership interests in nine
CPA® partnerships, at which time we listed on the New York Stock Exchange. On June 28,
2000, we acquired the net lease real estate management operations of Carey Management LLC (Carey
Management) from Wm. Polk Carey (Carey), our Chairman and then Chief Executive Officer,
subsequent to receiving shareholder approval. The assets acquired included the advisory agreements
with four affiliated CPA® REITs, our 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.
Note 2. Summary of Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements include all our accounts and 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 Financial Accounting Standards Board (FASB) Interpretation No. 46R,
Consolidation of Variable Interest Entities (FIN 46R). 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 46R. 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
W. P. Carey 2007 10-K 54
Notes to Consolidated Financial Statements
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
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.
In February 2007, we formed Corporate Property Associates 17 Global Incorporated
(CPA®:17 Global), an affiliated REIT, 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. In November 2007, the SEC declared the registration
statement to raise up to $2,475,000 of common stock of CPA®:17 Global (including up to
$475,000 under its distribution reinvestment and stock purchase plan) effective. In December 2007,
we commenced fundraising for CPA®:17 Global, however no shares were issued until
January 2008. Therefore, as of and during the period ended December 31, 2007, the financial results
of CPA®:17 Global were included in our consolidated financial statements, as we owned
all of CPA®:17 Globals outstanding common stock. Beginning in 2008, we will account
for our interest in CPA®:17 Global under the equity method of accounting.
The consolidated financial statements 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
registration 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 150-3). As a result of the deferral provisions of FSP
150-3, these minority interests have been reflected as liabilities.
Out of Period Adjustment
During the third quarter of 2007, we determined that a longer schedule of depreciation/amortization
of assets in certain of our equity method investment holdings should appropriately be applied to
reflect the lives of the underlying assets rather than the expected holding period of these
investments. We concluded that these adjustments are not material to any prior periods
consolidated financial statements. We also concluded that the cumulative adjustment was not
material to the third quarter of 2007, nor to the year ended December 31, 2007. As such, the
cumulative effect was recorded in the consolidated statements of income as a one-time cumulative
out of period adjustment in the third quarter of 2007. The effect of this adjustment for the year
ended December 31, 2007 was to increase income from continuing operations before income taxes by
approximately $4,200 and net income by approximately $3,500. There was no associated net impact on
our cash flow from operations for the year ended December 31, 2007.
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
retrospectively adjusted to reflect the disposition (or planned disposition) of certain properties
as discontinued operations for all periods presented.
Purchase Price Allocation
In connection with our 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
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
W. P. Carey 2007 10-K 55
Notes to Consolidated Financial Statements
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 our 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. We also consider 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
We consider 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. Our cash and cash
equivalents at December 31, 2007 and 2006 were held in the
custody of several financial institutions
and these balances, at times, can exceed federally insurable limits. We mitigate this risk by
depositing funds only with major financial institutions.
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 our interest in
unrealized gains and losses on these securities reported as a component of other comprehensive
income until realized.
W. P. Carey 2007 10-K 56
Notes to Consolidated Financial Statements
Real Estate Leased to Others
Our 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, 2007, lessees were responsible for the direct payment of real estate taxes of
approximately $9,680.
Substantially all of our 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 us 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 (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 our 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 (Note 4).
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 ownership
operations have a limited number of lessees, 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
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.
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 we have committed to a plan to actively market
a property for sale and expect 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 (Note 7).
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.
We recognize 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.
Revenue Recognition
We earn 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. At our option, the
performance revenue may be collected in cash or shares of the CPA® REIT. During 2007,
2006 and 2005, we elected to receive our earned performance revenue in CPA® REIT shares.
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
W. P. Carey 2007 10-K 57
Notes to Consolidated Financial Statements
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. Performance and structuring revenue for the year ended
December 31, 2007 includes $11,945 and $31,674, respectively, in connection with CPA®:16
Globals achievement of its performance criterion in June 2007 (Note 3).
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. 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,
we assess the recoverability of our 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. 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 our 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.
We test goodwill for impairment at least annually using a two-step process. To identify any
impairment, we first compare the estimated fair value of the reporting unit (investment management
segment) with its carrying amount, including goodwill. We calculate the estimated fair value of the
investment management segment by applying a multiple, based on comparable companies, to earnings.
If the fair value of the investment management segment exceeds its carrying amount, goodwill is not
considered to be impaired. If the carrying amount of the investment management segment exceeds its
estimated fair value, then the second step is performed to measure the amount of impairment loss.
For the second step, we compare the implied fair value of the goodwill with its carrying amount and
record 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 investment
management segment to its assets and liabilities. The excess of the estimated fair value of the
investment management 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, we performed our annual
test for impairment of our investment management 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 an equity investment in real estate and CPA® REITs 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 and CPA® REITs may be impaired and whether 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 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 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.
W. P. Carey 2007 10-K 58
Notes to Consolidated Financial Statements
Stock Based Compensation
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123
(revised 2004), Share-Based Payment (SFAS 123R), using the modified prospective transition
method and have therefore not restated results for prior periods. Under this
transition method, stock-based compensation expense in 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 No. 123,
Accounting for Stock-Based Compensation (SFAS 123). Stock-based compensation expense for all
stock-based compensation awards granted subsequent to January 1, 2006 is based on the grant date
fair value estimated in accordance with the provisions of SFAS 123R. We recognize 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 123R, we 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 25).
Under APB 25, compensation cost for fixed plans was measured as the excess, if any, of the quoted
market price of our 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 123R and the valuation of share-based payments for public companies. We have
applied the provisions of SAB 107 in our adoption of SFAS 123R.
As a result of adopting SFAS 123R, 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 we 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
123R. In addition, prior to the adoption of SFAS 123R, we presented the tax benefit of stock option
exercises and the vesting of restricted stock as operating cash flows. Upon the adoption of SFAS
123R, 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 had we
applied the fair value recognition provisions of SFAS 123, as follows:
|
|
|
|
|
|
|
Year ended |
|
|
|
December 31, 2005 |
|
Net income as reported |
|
$ |
48,604 |
|
Add: Stock based compensation included in net income as reported, net of related tax effects |
|
|
2,727 |
|
Less: Stock based compensation determined under fair value based methods for all awards, net
of related tax effects |
|
|
(3,166 |
) |
|
|
|
|
Pro forma net income |
|
$ |
48,165 |
|
|
|
|
|
Earnings per share as reported: |
|
|
|
|
Basic |
|
$ |
1.29 |
|
|
|
|
|
Diluted |
|
$ |
1.25 |
|
|
|
|
|
Pro forma earnings per share: |
|
|
|
|
Basic |
|
$ |
1.28 |
|
|
|
|
|
Diluted |
|
$ |
1.23 |
|
|
|
|
|
We have 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 123R, 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 we issue 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
We own interests in several real estate investments in Europe. 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
W. P. Carey 2007 10-K 59
Notes to Consolidated Financial Statements
resulting from this translation are reported as a component of other comprehensive income as part
of members equity. The cumulative translation gain (loss) as of December 31, 2007 and 2006 was
$2,720 and $(36), 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 our 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 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, 2007, 2006 and 2005, we recognized an unrealized gain
(loss) of $1,675, $1,003 and $(830), respectively, from such transactions. In 2007, 2006 and 2005,
we recognized a realized gain (loss) of $1,332, $488, and $(19), respectively, on foreign currency
transactions in connection with the transfer of cash from foreign operating subsidiaries to the
parent company.
Income Taxes
We have elected to be treated as a partnership for U.S. federal income tax purposes. Our 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, we and our
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.
We conduct our investment management operations though a wholly owned taxable corporation. These
operations are subject to federal, state, local and foreign taxes as applicable. Our 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 (Note 15).
In 2006, we formed Carey REIT, Inc. (Carey REIT), to hold certain properties, including certain
properties acquired from CPA®:12 in December 2006. Carey REIT has issued both common and
preferred stock with the latter being held entirely by our employees. Carey REIT was treated as a
corporation for tax purposes through December 31, 2007.
In October 2007, we completed our restructuring plan by transferring our real estate assets from a
wholly owned subsidiary into Carey REIT II, Inc. (Carey REIT II) a newly formed wholly owned REIT
subsidiary. On January 1, 2008, we merged Carey REIT into Carey REIT II with Carey REIT II as the
survivor. To the extent that the fair value of Carey REIT property in the merger exceeded its tax
basis at the time of the merger, Carey REIT II would be subject to corporate level taxes to the
extent of this built-in-gain if the properties were to be sold in a taxable transaction within
ten years from the date of the merger. Based on our current investment strategy we do not expect to
pay built-in-gains tax on these properties.
Carey REIT II 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 II 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 II 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
W. P. Carey 2007 10-K 60
Notes to Consolidated Financial Statements
statements. We have and intend to continue to operate so that
Carey REIT II meets the requirements for taxation as a REIT. Many of
these requirements, however, are highly technical and complex. If we were to fail to meet these
requirements, Carey REIT II would be subject to U.S. federal income tax.
Adoption of New Accounting Pronouncements
EITF 04-05
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 46R. 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 using a cumulative-effect-type adjustment. 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.
SFAS 155
FASB Statement No. 155, Accounting for Certain Hybrid Financial Instruments an Amendment of FASB
No. 133 and 140 (SFAS 155) was issued 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 adopted SFAS 155 as required on January 1, 2007 and the initial application of this
statement did not have a material impact on our financial position or results of operations.
FIN 48
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB
Statement No. 109 (FIN 48) clarifies the accounting for uncertainty in income tax positions.
This Interpretation requires that we 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 adopted FIN 48 as required on January 1, 2007 (Note 15).
Recent Accounting Pronouncements
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. SFAS 157 also provides for certain disclosure requirements, including, but not limited
to, the valuation techniques used to measure fair value and a discussion of changes in valuation
techniques, if any, during the period. This statement is effective for our 2008 fiscal year, except
for nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair
value on a recurring basis, for which the effective date is our 2009 fiscal year. We are currently
evaluating the impact and believe that the adoption of this statement will not have a material
effect on our financial position and results of operations.
SFAS 159
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS 159), which gives entities the option to measure eligible
financial assets, financial liabilities and firm commitments at fair value on an
instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value
under other accounting standards. The election to use the fair value option is available when an
entity first recognizes a financial asset or financial liability or upon entering into a firm
commitment. Subsequent changes (i.e., unrealized gains and losses) in fair value must be recorded
in earnings. Additionally, SFAS 159 allows for a one-time election for existing positions upon
adoption, with the transition adjustment recorded to beginning retained earnings. This statement is
effective for our 2008 fiscal year. We are currently evaluating the potential impact of the
adoption of this statement and believe that the adoption of this statement will not have a material
effect on our financial position and results of operations.
W. P. Carey 2007 10-K 61
Notes to Consolidated Financial Statements
SOP 07-1
In June 2007, the Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants (AICPA) issued Statement of Position 07-1, Clarification of the Scope of the
Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity
Method Investors for Investments in Investment Companies (SOP 07-1). SOP 07-1 addresses when the
accounting principles of the AICPA Audit and Accounting Guide Investment Companies must be
applied by an entity and whether investment company accounting must be retained by a parent company
in consolidation or by an investor in the application of the equity method of accounting. In
addition, SOP 07-1 includes certain disclosure requirements for parent companies and equity method
investors in investment companies that retain investment company accounting in the parent companys
consolidated financial statements or the financial statements of an equity method investor. In
February 2008, FSP SOP 07-1-1 was issued to delay indefinitely the effective date of SOP 07-1 and
prohibit adoption of SOP 07-1 for an entity that has not early adopted SOP 07-1 before issuance of
the final FSP. We are currently assessing the potential impact the adoption of this statement will
have on our financial position and results of operations.
SFAS 141R
In December 2007, the FASB issued Statement No. 141 (revised 2007), Business Combinations (SFAS
141R), which establishes principles and requirements for how the acquirer shall recognize and
measure in its financial statements the identifiable assets acquired, liabilities assumed, any
noncontrolling interest in the acquiree and goodwill acquired in a business combination. SFAS 141R
is effective for our 2009 fiscal year. We are currently assessing the potential impact that the
adoption of this statement will have on our financial position and results of operations.
SFAS 160
In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated
Financial Statements an Amendment of ARB No. 51 (SFAS 160), which establishes and expands
accounting and reporting standards for minority interests, which will be recharacterized as
noncontrolling interests, in a subsidiary and the deconsolidation of a subsidiary. SFAS 160 is
effective for our 2009 fiscal year. We are currently assessing the potential impact that the
adoption of this statement will have on our financial position and results of operations.
Note 3. Transactions with Related Parties
Advisory Services
Directly and through a wholly-owned subsidiary, we earn revenue as the advisor to the
CPA® REITs. 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. We earn 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. The advisory agreements allow us to elect to receive restricted
stock for any revenue due from each CPA® REIT. We are also reimbursed for certain costs,
primarily broker/dealer commissions paid on behalf of the CPA® REITs and marketing and
personnel costs. For the years ended December 31, 2007, 2006 and 2005, total asset-based revenue
earned was $83,051, $57,633 and $52,332, respectively, while reimbursed costs totaled $13,782,
$63,630 and $9,962, respectively. Asset-based revenue for the year ended December 31, 2007 includes
amounts recognized in connection with CPA®:16 Globals achievement of its performance
criterion (as described below). In 2007 and 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. In 2005, we 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, we may receive acquisition revenue of up to an
average of 4.5% of the total cost of all investments made by each CPA® REIT. A portion
of this revenue (generally 2.5%) is paid when the transaction is completed while the remainder
(generally 2%) is payable in equal annual installments ranging from three to eight years, subject
to the relevant CPA® REIT meeting its performance criterion. Unpaid installments bear
interest at annual rates ranging from 5% to 7%. We 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. We earned structuring revenue of $78,175, $22,506 and $28,197 for the years
ended December 31, 2007, 2006 and 2005, respectively. Structuring revenue for the year ended
December 31, 2007 includes amounts recognized in connection with CPA®:16 Globals
achievement of its performance criterion (as described below). In addition, we may also earn
revenue related to the disposition of properties, subject to subordination provisions, and will
only recognize such revenue as such provisions are achieved.
W. P. Carey 2007 10-K 62
Notes to Consolidated Financial Statements
CPA®:16 Global Performance Criterion
In June 2007, CPA®:16 Global met its performance criterion (a non-compounded
cumulative distribution return of 6% per annum), as defined in its advisory agreement, and as a
result, we recognized previously deferred revenue totaling $45,919 (consisting of asset based
revenue of $11,945, structuring revenue of $31,674 and interest income on the previously deferred
structuring revenue of $2,300). In addition, as a result of CPA®:16 Global meeting its
performance criterion, we recognized and paid to certain employees incentive and commission
compensation of $6,191 and interest thereon of $434 that had previously been deferred.
The deferred asset-based revenue of $11,945 was paid in July 2007 by CPA®:16 Global in
the form of 1,194,549 shares of CPA®:16 Globals restricted common stock while the
deferred structuring revenue of $31,674 and interest thereon of $2,300 is payable in cash in annual
installments beginning in January 2008. We received the first installment of $28,259 in January
2008 (including accrued interest). CPA®:16 Global will pay the remaining deferred
structuring revenue of $4,663 in January 2009 and $1,052 in January 2010. Interest will accrue on
amounts outstanding at the rate of 5% per annum.
Merger of CPA®:12 and CPA®:14
On December 1, 2006, CPA®:12 and CPA®:14 completed a merger transaction (the
CPA®:12/14 Merger) under which CPA®:14 acquired CPA®:12s
business for a combination of cash and stock. 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
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 non-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 non-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
in accordance with SFAS 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities.
Other Transactions
We own interests in entities which range from 5% to 95%, with the remaining interests generally
held by affiliates, and own common stock in each of the CPA® REITs.
We are the general partner in a limited partnership that leases our home office space and
participates in an agreement with certain affiliates, including the CPA® REITs, for the
purpose of leasing office space used for the administration of our operations, the operations of
our affiliates and for sharing the associated costs. During the fourth quarter of 2005, we began
consolidating the results of operations of this limited partnership. As a result, during the years
ended December 31, 2007 and 2006, we recorded income from minority interest partners of $2,022 and
$1,924, respectively, related to reimbursements from these affiliates. During the year ended
December 31, 2005 (prior to consolidation) our share of rental expenses under this agreement was
$826. The average estimated minimum lease payments on the office lease, inclusive of minority
interest, as of December 31, 2007 approximates $2,879 annually through 2016.
Included in other liabilities in the consolidated balance sheets at December 31, 2007 and 2006 are
amounts due to affiliates totaling $10,344 and $1,239, respectively, comprised primarily of loans
payable and amounts due in connection with the office sharing agreement and deferred acquisition
fees.
One of our directors and officers is the sole shareholder of Livho, Inc. (Livho), a subsidiary
company. We consolidate the accounts of Livho in our consolidated financial statements in
accordance with FIN 46R as it is a VIE of which we are the primary beneficiary.
Family members of one of our directors have an ownership interest in certain companies that own
minority interests in our French majority-owned subsidiaries. These ownership interests are subject
to substantially the same terms as all other ownership interests in the subsidiary companies.
W. P. Carey 2007 10-K 63
Notes to Consolidated Financial Statements
Two employees 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.
We have the right to loan funds to affiliates under our unsecured credit facility. Such loans
generally bear interest at comparable rates to our credit facility. In August 2007, we loaned
$8,676 to a venture in which CPA®:15 has an ownership interest, to facilitate the
defeasance of a mortgage obligation in connection with the ventures sale of a property. We
recognized interest income of $41 prior to this loan being repaid in September 2007. In December
2006, in connection with the CPA®:12/14 Merger, we loaned CPA®:14 $24,000 to
fund this transaction. The loan was repaid within a few business days. In June 2006, we loaned
$84,000 to CPA®:15 to facilitate the early repayment of a mortgage obligation in
connection with their sale of a property. The loan was repaid within a few business days. We
recognized interest income of $35 in connection with the 2006 transactions. There were no such
loans to affiliates during 2005.
In December 2007, we received a loan totaling $7,569 from two affiliated ventures in which we have
interests that are accounted for under the equity method of accounting. The loan was used to fund
the acquisition of tenancy-in-common interests in Europe. We incurred interest expense of $15 in
connection with this loan.
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, |
|
|
|
2007 |
|
|
2006 |
|
Land |
|
$ |
110,141 |
|
|
$ |
108,119 |
|
Buildings |
|
|
491,968 |
|
|
|
512,353 |
|
Less: Accumulated depreciation |
|
|
(88,704 |
) |
|
|
(79,968 |
) |
|
|
|
|
|
|
|
|
|
$ |
513,405 |
|
|
$ |
540,504 |
|
|
|
|
|
|
|
|
Operating real estate, which consists primarily of our self-storage investments and Livho
subsidiary, at cost, is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Land |
|
$ |
15,408 |
|
|
$ |
8,815 |
|
Buildings (a) |
|
|
65,950 |
|
|
|
32,460 |
|
Less: Accumulated depreciation |
|
|
(8,169 |
) |
|
|
(7,669 |
) |
|
|
|
|
|
|
|
|
|
$ |
73,189 |
|
|
$ |
33,606 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes $8,855 of costs incurred through December 31, 2007 in connection with renovations to
the hotel facility at our Livho subsidiary which are scheduled for completion in 2008. |
Real Estate Acquired
2007 We acquired an investment in Poland at a total cost of $13,905, based upon the exchange rate
of the Euro at the date of acquisition. We also acquired seven domestic self-storage properties at
a total cost of $35,000. In connection with these investments, we borrowed $20,080 under our
secured credit facility.
2006 We acquired six domestic self-storage properties at a total cost of $24,800. In connection
with these investments, we borrowed $15,501 under our secured credit facility.
Carey Storages results of operations are included in other real estate income and other real
estate expenses in the consolidated financial statements. Borrowings under the secured credit
facility are described in Note 10.
W. P. Carey 2007 10-K 64
Notes to Consolidated Financial Statements
Scheduled Future Minimum Rents
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, |
|
|
|
|
2008 |
|
$ |
65,461 |
|
2009 |
|
|
62,667 |
|
2010 |
|
|
50,057 |
|
2011 |
|
|
38,230 |
|
2012 |
|
|
30,268 |
|
Thereafter through 2025 |
|
|
102,793 |
|
Percentage rent revenue was $333, $262 and $369 in 2007, 2006 and 2005, respectively.
Note 5. Net Investment in Direct Financing Leases
Net investment in direct financing leases is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Minimum lease payments receivable |
|
$ |
66,385 |
|
|
$ |
69,137 |
|
Unguaranteed residual value |
|
|
85,516 |
|
|
|
102,881 |
|
|
|
|
|
|
|
|
|
|
|
151,901 |
|
|
|
172,018 |
|
Less: unearned income |
|
|
(62,438 |
) |
|
|
(63,437 |
) |
|
|
|
|
|
|
|
|
|
$ |
89,463 |
|
|
$ |
108,581 |
|
|
|
|
|
|
|
|
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, |
|
|
|
|
2008 |
|
$ |
11,833 |
|
2009 |
|
|
10,937 |
|
2010 |
|
|
8,626 |
|
2011 |
|
|
7,148 |
|
2012 |
|
|
6,975 |
|
Thereafter through 2022 |
|
|
20,866 |
|
Percentage rent revenue was $99, $103 and $110 in 2007, 2006 and 2005, respectively.
Note 6. Equity Investments in Real Estate and CPA® REITs
Our equity investments in real estate, which are accounted for under the equity method, are
summarized below for our CPA® REITs and interests in joint venture properties. As
described in Note 2 we recognized an out of period adjustment in the third quarter of 2007 that
impacted our equity investments in real estate and CPA® REITs.
CPA® REITs
We own interests in the CPA® REITs with which we have advisory agreements. Our interests
in the CPA® REITs are accounted for under the equity method due to our 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. We have elected, in
certain cases, to receive restricted shares of common stock in the CPA® REITs rather
than cash in connection with earning asset management and performance revenue (Note 3).
W. P. Carey 2007 10-K 65
Notes to Consolidated Financial Statements
Information about our investments in the CPA® REITs is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Outstanding Shares |
|
|
Carrying Amount of Investment |
|
|
|
December 31, |
|
|
December 31, |
|
Fund |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
CPA®:14 (a) |
|
|
6.6 |
% |
|
|
5.7 |
% |
|
$ |
67,049 |
|
|
$ |
53,200 |
|
CPA®:15 |
|
|
4.5 |
% |
|
|
3.5 |
% |
|
|
61,976 |
|
|
|
45,030 |
|
CPA®:16
Global
(b) |
|
|
2.9 |
% |
|
|
0.8 |
% |
|
|
36,677 |
|
|
|
9,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
165,702 |
|
|
$ |
107,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In December 2006, in connection with the CPA®:12/14 Merger we 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. |
|
(b) |
|
In July 2007, we received 1,194,549 shares in connection with CPA®:16 Global
meeting its performance criterion. |
Combined summarized financial information of the CPA® REITs (for the entire entities,
not our proportionate share) is presented below:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Assets |
|
$ |
8,296,685 |
|
|
$ |
6,785,186 |
|
Liabilities |
|
|
(4,701,869 |
) |
|
|
(3,594,816 |
) |
|
|
|
|
|
|
|
Owners equity |
|
$ |
3,594,816 |
|
|
$ |
3,121,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Revenues |
|
$ |
605,049 |
|
|
$ |
511,308 |
|
|
$ |
407,647 |
|
Expenses |
|
|
(409,623 |
) |
|
|
(321,147 |
) |
|
|
(278,371 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
195,426 |
|
|
$ |
190,161 |
|
|
$ |
129,276 |
|
|
|
|
|
|
|
|
|
|
|
Our share of income from equity investments in CPA® REITs |
|
$ |
11,166 |
|
|
$ |
5,002 |
|
|
$ |
2,092 |
|
|
|
|
|
|
|
|
|
|
|
Interests in Joint Venture Properties
We own interests in single-tenant net leased properties leased to corporations through
noncontrolling interests in (i) partnerships and limited liability companies in which our ownership
interests are 50% or less and we exercise significant influence, and (ii) as tenants-in-common
subject to common control. The underlying investments are generally owned with affiliates.
W. P. Carey 2007 10-K 66
Notes to Consolidated Financial Statements
Our ownership interests in our equity investments in real estate and their respective carrying
values are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership |
|
|
Carrying Value |
|
|
|
Interest at |
|
|
December 31, |
|
Lessee |
|
December 31, 2007 |
|
|
2007 |
|
|
2006 |
|
Schuler A.G. (a) (b) |
|
|
33 |
% |
|
$ |
26,576 |
|
|
$ |
|
|
Carrefour France, S.A. (a) (c) |
|
|
46 |
% |
|
|
25,186 |
|
|
|
21,741 |
|
Medica France, S.A. (a) (d) |
|
|
46 |
% |
|
|
10,461 |
|
|
|
9,040 |
|
Hologic, Inc. |
|
|
36 |
% |
|
|
4,439 |
|
|
|
4,620 |
|
Federal Express Corporation |
|
|
40 |
% |
|
|
3,595 |
|
|
|
4,690 |
|
Consolidated Systems, Inc. (e) |
|
|
60 |
% |
|
|
3,497 |
|
|
|
3,505 |
|
Hellweg Die Profi-Baumarkte GmbH & Co. KG (a) (f) |
|
|
5 |
% |
|
|
2,641 |
|
|
|
|
|
Childtime Childcare, Inc. |
|
|
34 |
% |
|
|
1,711 |
|
|
|
1,725 |
|
Information Resources, Inc. |
|
|
33 |
% |
|
|
1,542 |
|
|
|
1,509 |
|
The Retail Distribution Group |
|
|
40 |
% |
|
|
682 |
|
|
|
596 |
|
Sicor, Inc. (g) |
|
|
50 |
% |
|
|
(3,355 |
) |
|
|
11,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
76,975 |
|
|
$ |
58,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Amounts shown are based on the exchange rate of the Euro as of December 31, 2007 and 2006,
respectively. |
|
(b) |
|
We acquired our interest in this venture in December 2007 |
|
(c) |
|
In December 2006, we increased our interest in this venture to 50% from 22% as a result of
the CPA®:12 Acquisition. Our interest was subsequently reduced to 46% in September
2007 as a result of a restructuring of ownership interests with an affiliate. |
|
(d) |
|
In December 2006, we acquired our initial 35% interest in this venture as a result of the
CPA®:12 Acquisition. Our interest was subsequently increased to 46% in September
2007 as a result of a restructuring of ownership interests with an affiliate. |
|
(e) |
|
We acquired our interest in this investment in October 2006.
|
|
(f) |
|
We acquired our interest in this investment in April 2007. |
|
(g) |
|
In June 2007, this venture completed the refinancing of an existing $2,483 non-recourse
mortgage with new non-recourse financing of $35,350 based on the appraised value of the
underlying real estate of the venture and distributed the proceeds to the venture partners. |
Combined summarized financial information of our equity investments in real estate (for the entire
entities, not our proportionate share) is presented below:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Assets |
|
$ |
872,056
|
|
|
$ |
407,145 |
|
Liabilities |
|
|
(643,154 |
) |
|
|
(273,798 |
) |
|
|
|
|
|
|
|
Owners equity |
|
$ |
228,902 |
|
|
$ |
133,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Revenues |
|
$ |
71,737 |
|
|
$ |
44,355 |
|
|
$ |
42,604 |
|
Expenses |
|
|
(53,791 |
) |
|
|
(34,094 |
) |
|
|
(34,532 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
17,946 |
|
|
$ |
10,261 |
|
|
$ |
8,072 |
|
|
|
|
|
|
|
|
|
|
|
Our share of net income from equity investments in real estate |
|
$ |
7,191 |
|
|
$ |
2,606 |
|
|
$ |
3,090 |
|
|
|
|
|
|
|
|
|
|
|
W. P. Carey 2007 10-K 67
Notes to Consolidated Financial Statements
Note 7. 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, we assess whether the
highest value is obtained from re-leasing or selling the property. In addition, in certain cases,
we may elect to sell a property that is occupied if it is considered advantageous to do so. When it
is determined that the relevant criteria have been met in accordance with FASB Statement No. 144
Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), the asset is
reclassified as an asset held for sale.
During 2007, we sold several properties for combined sales proceeds of $46,000, net of selling
costs and, in addition, received lease termination proceeds of $1,905. We recognized a combined net
gain on sale of $15,486, exclusive of an impairment charge of $2,317 recognized in 2007 and
combined impairment charges totaling $2,687 recognized in prior years.
During 2006, we sold several domestic properties 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 in 2006. We previously recognized combined impairment
charges of $18,662 related to these properties.
During 2005, we sold several domestic properties 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.
In accordance with SFAS 144, the results of operations for properties held for sale or disposed of
are reflected in the consolidated financial statements as discontinued operations for all periods
presented and are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Revenues |
|
$ |
6,701 |
|
|
$ |
6,962 |
|
|
$ |
14,470 |
|
Expenses |
|
|
(3,827 |
) |
|
|
(5,784 |
) |
|
|
(5,142 |
) |
Gains on sales of real estate, net |
|
|
15,486 |
|
|
|
3,452 |
|
|
|
10,474 |
|
Impairment charges |
|
|
(2,317 |
) |
|
|
(3,357 |
) |
|
|
(16,066 |
) |
Minority interest in income |
|
|
(5,394 |
) |
|
|
(537 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
10,649 |
|
|
$ |
736 |
|
|
$ |
3,736 |
|
|
|
|
|
|
|
|
|
|
|
W. P. Carey 2007 10-K 68
Notes to Consolidated Financial Statements
Note 8. Intangible Assets and Goodwill
In connection with its acquisition of properties, we have recorded net lease intangibles of
$36,331. These intangibles are being amortized over periods ranging
from 2 to 30 years.
Amortization of below-market and above-market rent intangibles are recorded as an adjustment to
revenue.
Intangibles and goodwill are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Amortized Intangibles Assets |
|
|
|
|
|
|
|
|
Management contracts |
|
$ |
32,765 |
|
|
$ |
32,765 |
|
Less: accumulated amortization |
|
|
(20,716 |
) |
|
|
(17,943 |
) |
|
|
|
|
|
|
|
|
|
$ |
12,049 |
|
|
$ |
14,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Intangibles: |
|
|
|
|
|
|
|
|
In-place lease |
|
$ |
18,602 |
|
|
$ |
18,345 |
|
Tenant relationship |
|
|
10,031 |
|
|
|
8,783 |
|
Above-market rent |
|
|
9,707 |
|
|
|
9,707 |
|
Less: accumulated amortization |
|
|
(18,098 |
) |
|
|
(11,890 |
) |
|
|
|
|
|
|
|
|
|
$ |
20,242 |
|
|
$ |
24,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized Goodwill and Indefinite-Lived Intangible Assets |
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
63,607 |
|
|
$ |
63,607 |
|
Trade name |
|
|
3,975 |
|
|
|
3,975 |
|
|
|
|
|
|
|
|
|
|
$ |
67,582 |
|
|
$ |
67,582 |
|
|
|
|
|
|
|
|
|
|
$ |
99,873 |
|
|
$ |
107,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Below-Market Rent Intangible |
|
|
|
|
|
|
|
|
Below-market rent |
|
$ |
(2,009 |
) |
|
$ |
(2,009 |
) |
Less: accumulated amortization |
|
|
432 |
|
|
|
325 |
|
|
|
|
|
|
|
|
|
|
$ |
(1,577 |
) |
|
$ |
(1,684 |
) |
|
|
|
|
|
|
|
Net amortization of intangibles was $8,873, $11,344 and $9,649 for the years ended December 31,
2007, 2006 and 2005, 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.
Based on the intangible assets as of December 31, 2007, annual net amortization of intangibles for
each of the next five years is as follows: 2008 $7,245; 2009 $6,639; 2010 $5,716, 2011
$2,696 and 2012 $1,989.
Note 9. Disclosures About Fair Value of Financial Instruments
We estimate that the fair value of mortgage notes payable and other notes payable was $314,497 and
$274,625 at December 31, 2007 and 2006, respectively. The fair value of our 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 $316,751 and $278,653
at December 31, 2007 and 2006, respectively.
Marketable securities had a carrying value of $551 and $545 as of December 31, 2007 and 2006,
respectively, and a fair value of $539 and $602 as of December 31, 2007 and 2006, respectively. Our
other assets and liabilities had fair values that approximated their carrying values at December
31, 2007 and 2006, respectively.
W. P. Carey 2007 10-K 69
Notes to Consolidated Financial Statements
Note 10. Debt
Scheduled debt principal payments during each of the next five years following December 31, 2007
and thereafter are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed |
|
|
Variable |
|
Years ended December 31, |
|
Total Debt |
|
|
Rate Debt |
|
|
Rate Debt |
|
2008 (a) |
|
$ |
50,209 |
|
|
$ |
7,777 |
|
|
$ |
42,432 |
|
2009 |
|
|
36,730 |
|
|
|
34,794 |
|
|
|
1,936 |
|
2010 |
|
|
14,552 |
|
|
|
12,555 |
|
|
|
1,997 |
|
2011 (b) |
|
|
90,546 |
|
|
|
25,712 |
|
|
|
64,834 |
|
2012 |
|
|
33,374 |
|
|
|
31,239 |
|
|
|
2,135 |
|
Thereafter through 2040 |
|
|
91,340 |
|
|
|
71,103 |
|
|
|
20,237 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
316,751 |
|
|
$ |
183,180 |
|
|
$ |
133,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes $35,581 drawn under our secured credit facility which matures in December 2008. |
|
(b) |
|
Includes $62,700 drawn under our unsecured credit facility which matures in June 2011. |
Non-recourse debt
Mortgage notes payable, substantially all of which are non-recourse obligations, are collateralized
by the assignment of various leases and by real property with a carrying value of $382,940 at
December 31, 2007. In addition, self storage real estate assets with a carrying value of $57,613
have been used to collateralize the secured credit facility.
The annual interest rates on the variable rate debt as of December 31, 2007 ranged from 3.9% to
7.3% and mature from 2008 to 2016. The annual interest rates on the fixed rate debt as of December
31, 2007 ranged from 4.9% to 8.1% and mature from 2009 to 2017.
In December 2006, Carey Storage, a wholly owned subsidiary, entered into a secured credit facility
for up to $105,000 with Morgan Stanley Mortgage Capital Inc. that provides for advances through
March 8, 2008 and matures in December 2008. The credit facility is collateralized by any
self-storage real estate assets acquired by Carey Storage with proceeds from the facility. Advances
from this facility bear interest at an annual fixed rate of 7.6% for the first month of borrowing
and at an annual variable rate equal to the one-month LIBOR plus a spread which ranges from 175 to
235 basis points thereafter depending on the aggregate debt yield for the collateralized asset
pool. At December 31, 2007, our interest rate was based on the one-month LIBOR plus 225 basis
points. 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. Carey Storage is in compliance with these covenants as of
December 31, 2007.
Unsecured credit facility
In June 2007, we entered into an unsecured credit facility for a $250,000 revolving line of credit
to replace our previous $175,000 line of credit that was due to expire in July 2007. The credit
facility, which matures in June 2011, can be increased up to $300,000 upon satisfaction of certain
conditions and carries a one-year extension option subject to the satisfaction of certain
conditions and the payment of an extension fee equal to 0.125% of the total commitments under the
facility at that time. However, such expansion is at the discretion of the lenders.
The credit facility has an annual interest rate of either (i) LIBOR plus a spread which ranges from
75 to 120 basis points depending on our leverage or (ii) the greater of the lenders prime rate and
the Federal Funds Effective Rate plus 50 basis points. At December 31, 2007, the average interest
rate on advances on the credit facility was 5.7%. In addition, we pay an annual fee ranging between
12.5 and 20 basis points of the unused portion of the credit facility, depending on our leverage
ratio. Based on our leverage at December 31, 2007, we pay interest at LIBOR plus 75 basis points
and pay 12.5 basis points on the unused portion of the credit facility. The credit facility has
financial covenants that among other things require us to maintain a minimum equity value and meet
or exceed certain operating and coverage ratios. We are in compliance with these covenants as of
December 31, 2007.
W. P. Carey 2007 10-K 70
Notes to Consolidated Financial Statements
Note 11. Commitments and Contingencies
SEC Investigation
In 2004, following a broker-dealer examination of Carey Financial, our wholly-owned broker-dealer
subsidiary, the staff of the SEC 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. The matters investigated by the staff of the SEC
principally included whether, 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, whether the delivery of the investor funds into escrow after
completion of the first phase of the offering, completed in the fourth quarter of 2002, but before
a registration statement with respect to the second phase of the offering became effective in the
first quarter of 2003, constituted sales of securities in violation of Section 5 of the Securities
Act of 1933.
The investigation was later expanded to include matters relating to compensation arrangements with
broker-dealers in connection with the CPA® REITs managed by us, including principally certain
payments, aggregating in excess of $9,600, made to a broker-dealer which distributed shares of the
REITs, the disclosure of such arrangements and compliance with applicable Financial Industry
Regulatory Authority, Inc. (FINRA) requirements. The costs 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.
We have now reached an agreement in
principle with the staff of the SEC to settle all matters relating to the above-described
investigations. The agreement in principle is subject to approval by the Commission and also to
the satisfactory completion of settlement papers, and accordingly the agreement in principle could
fail to be implemented or be implemented in a different form. Pursuant to the agreement in
principle with the SEC staff, and assuming approval by the Commission, the SEC would file a
complaint in federal court alleging violations of certain provisions of the federal securities
laws, and seeking to enjoin us from violating those laws in the future. In its complaint the SEC
would allege violations of Section 5 of the Securities Act of 1933, in connection with the
offering of shares of CPA®:15, and Section 17(a) of the Securities Act of 1933 and Sections 10(b),
13(a), 13(b)(2)(A) and 14(a) of the Securities Exchange Act of 1934, and Rules 10b-5, 12b-20,
13a-1, 13a-13 and 14a-9 thereunder, among others, in connection with the above-described payments
to broker-dealers and related disclosures. With respect to Carey Financial, the complaint would
allege violations of, and seek to enjoin Carey Financial from violating, Section 5 of the
Securities Act of 1933. Without admitting or denying the allegations in the SECs complaint, we
would consent to the entry of the injunction, which would be subject to court approval. As part
of the agreement in principle with the SEC staff, and assuming approval by the Commission, we
would expect to make disgorgement payments of $19,979, including interest, with the payments
being made to certain of our managed REITs, and we would also pay a $10,000 civil penalty.
In connection with the agreement in principle, we have taken a charge of approximately $29,979 in
the fourth quarter of 2007, and recognized an offsetting $8,967 tax benefit in the same period.
We expect that the SECs complaint
would also allege violations of certain provisions of the federal securities laws by our officers
John Park, who was formerly our Chief Financial Officer, and Claude Fernandez, who was formerly
our Chief Accounting Officer, and it is our understanding that Messrs. Park and Fernandez have
separately reached agreements in principle to settle the charges against them, the terms of which
are subject to approval by the Commission. The terms of such settlement agreements, if approved,
are not expected to have a material effect on us.
Other
The Maryland Securities Commission has sought information from Carey Financial and
CPA®:15 relating to the matters described above. While it 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 the SEC
agreement in principle described above.
As of December 31, 2007, we were not involved in any material litigation.
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 has filed
a notice of appeal 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 defenses to such claims.
W. P. Carey 2007 10-K 71
Notes to Consolidated Financial Statements
We have provided indemnification in connection with divestitures. These indemnities address a
variety of matters including environmental liabilities. Our maximum obligations under such
indemnification cannot be reasonably estimated. We are not aware of any claims or other information
that would give rise to material payments under such indemnifications.
Note 12. Impairment Charges
We recorded impairment charges of $3,334, $4,504 and $21,770 for the years ended December 31, 2007,
2006 and 2005, respectively, of which $2,317, $3,357 and $16,066 are included in discontinued
operations for each respective year.
Impairment Charges on Direct Finance Leases
In connection with our annual review of the estimated residual values on our properties classified
as net investments in direct financing leases, there were no impairments charges arising on direct
finance leases during 2007. During 2006 and 2005, we 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 and $2,774
in 2006 and 2005, respectively.
Impairment Charges on Operating Assets
During the years ended December 31, 2007 and 2005 we recognized impairment charges on various
properties totaling $1,017 and $2,930, respectively, primarily related to a decline in property
values. There were no such impairments recognized during 2006.
Impairment Charges on Assets Held for Sale
During the years ended December 31, 2007, 2006 and 2005, we recognized impairment charges on
properties classified as held for sale or sold totaling $2,317, $3,357 and $16,066, 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 (Note 7).
Note 13. Risk Management and Use of Derivative Financial Instruments
Risk Management
In the normal course of our on-going business operations, we encounter economic risk. There are
three main components of economic risk: interest rate risk, credit risk and market risk. We are
subject to interest rate risk on our interest-bearing liabilities. Credit risk is the risk of
default on our operations and tenants inability or unwillingness to make contractually required
payments. Market risk includes changes in the value of the properties and related loans we hold due
to changes in interest rates or other market factors as well as changes in the value of the shares
we hold in the CPA® REITs. In addition, we own investments in Europe and are also
subject to the risks associated with changing foreign currency exchange rates. We manage foreign
currency exchange rate movements by generally placing both our debt obligation to the lender and
the tenants rental obligation to us in the local currency but are subject to such movements to the
extent of the difference between the rental obligation and the debt service. We also face
challenges with repatriating cash from our foreign investments and may encounter instances where it
is difficult or costly to bring cash back into our U.S. operations.
We do not generally use derivative financial instruments to manage foreign currency rate risk
exposure and generally do not use derivative instruments to hedge credit/market risks or for
speculative purposes.
Concentration of Credit Risk
Concentrations of credit risk arise when a number of tenants are engaged in similar business
activities or have similar economic features that would cause their ability to meet contractual
obligations, including those to us, to be similarly affected by changes in economic conditions. We
regularly monitor our portfolio to assess potential concentrations of credit risk. We believe our
portfolio is reasonably well diversified and does not contain any unusual concentration of credit
risks.
The majority of our directly owned real estate properties and related loans are located in the
United States, with Texas (15%) and California (12%) representing the only significant geographic
concentration (10% or more of current annualized lease revenue). No individual tenant accounted for
more than 10% of current annualized lease revenue. Our directly owned real estate properties
contain significant concentrations in the following asset types as of December 31, 2007: industrial
(38%), office (34%) and warehouse/distribution (15%) and the following tenant industries as of
December 31, 2007: telecommunications (15%) and business and commercial services (14%).
W. P. Carey 2007 10-K 72
Notes to Consolidated Financial Statements
Note 14. Members Equity and Stock Based and Other Compensation
Distributions Payable
We declared a quarterly distribution of $0.477 per share and a special distribution of $0.27 per
share in December 2007, which was paid in January 2008 to shareholders of record as of December 31,
2007. The special distribution was approved by our Board of Directors in connection with our
corporate restructuring.
Accumulated Other Comprehensive Income
As of December 31, 2007 and 2006, accumulated other comprehensive income reflected in the members
equity, net of tax, is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Unrealized gains on marketable securities |
|
$ |
18 |
|
|
$ |
60 |
|
Foreign currency translation adjustment |
|
|
2,720 |
|
|
|
(36 |
) |
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
2,738 |
|
|
$ |
24 |
|
|
|
|
|
|
|
|
Stock Based Compensation
At December 31, 2007, we had the following stock-based compensation plans as described below. The
total compensation expense (net of forfeitures) for these plans was $5,551, $3,453 and $3,368 for
the years ended December 31, 2007, 2006 and 2005, respectively. The tax benefit recognized in the
years ended December 31, 2007, 2006 and 2005 related to stock-based compensation plans totaled
$2,491, $1,640 and $1,671, respectively. Prior to January 1, 2006, we accounted for these plans
under the provisions of APB 25.
1997 Share Incentive Plan
We maintain the 1997 Share Incentive Plan (the Incentive Plan), as amended, which authorizes the
issuance of up to 6,200,000 shares, of which 4,913,790 have been issued or are currently reserved
for issuance upon exercise of outstanding options as of December 31, 2007. The Incentive Plan
provides for the grant of (i) share options which may or may not qualify as incentive stock
options, (ii) performance shares or units, (iii) dividend equivalent rights and (iv) restricted shares or units. The
vesting of grants is accelerated upon a change in our control and under certain other conditions.
Historically, options granted under the Incentive Plan generally had a 10-year term and generally
vested over periods ranging from three to nine years from the date of grant. In October 2007, our
Board of Directors approved a modification to accelerate the vesting period for all outstanding
options that originally had vested in the fifth through ninth, or seventh and eighth, years after
grant so that they would vest in four equal annual installments beginning in 2008. As a result of this
modification, 71 employees were affected and we recognized an incremental compensation expense of
$52 for the year ended December 31, 2007. We expect to recognize an incremental compensation
expense totaling approximately $400 over the revised vesting period.
Non-Employee Directors Plan
We maintain the Non-Employee Directors Plan (the Directors Plan), which authorizes the issuance
of up to 300,000 shares, of which 116,108 have been granted as of December 31, 2007. 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 generally over three years
from the date of grant. In June 2007, the Directors Plan, which had been due to expire in October
2007, was extended through October 2017.
Employee Share Purchase Plan
We sponsor an Employee Share Purchase Plan (ESPP), pursuant to which eligible employees may
contribute up to 10% of compensation, subject to certain limits, to purchase our common stock.
Employees can purchase stock semi-annually at a price equal to 85% of the fair market value at
certain plan defined dates. The ESPP is not material to our results of operations. Compensation
expense under this plan for the years ended December 31, 2007 and 2006 was $178 and $164,
respectively. There was no corresponding compensation expense for the year ended December 31, 2005.
Carey Management Warrants
In January 1998, the predecessor of Carey Management was granted warrants to purchase 2,284,800
shares of our common stock exercisable at $21 per share and warrants to purchase 725,930 shares
exercisable at $23 per share as compensation for investment banking services in connection with structuring the consolidation of the CPA®
Partnerships. During the years ended December 31, 2007 and 2006,
684,800 and 100,000
warrants were
exercised for proceeds of $14,381 and $2,100, respectively.
In addition, during 2007, 1,500,000 warrants were exercised at $21 per share in a cashless exercise for which 567,164 shares were issued.
As of December 31,
W. P. Carey 2007 10-K 73
Notes to Consolidated Financial Statements
2007, all of the $21 per share
warrants have been exercised. There have been no exercises of the $23
warrants. These warrants are exercisable until January 2009. These warrants were fully vested prior
to January 1, 2006.
Partnership Equity Plan Unit
During 2003, we adopted a non-qualified deferred compensation plan (Partnership Equity Plan, or
PEP) under which a portion of any participating officers cash compensation in excess of
designated amounts was deferred and the officer was awarded Partnership Equity Plan Units (PEP
Units). The value of each PEP Unit was intended to correspond to the value of a share of the
CPA® REIT designated at the time of such award. During 2005, further contributions to
the initial PEP Plan were terminated and it was succeeded by a second PEP Plan. Redemption under
these plans will occur at the earlier of a liquidity event of the underlying CPA® REIT
(in the case of the initial PEP Plan) or twelve years from the date of award. The award is fully
vested upon grant. The value of each PEP Unit will be adjusted to reflect the underlying appraised
value of the designated CPA® REIT. Additionally, each PEP Unit will be entitled to distributions
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 our compensation expense. Each
of the PEP Plans is a deferred compensation plan and is therefore considered to be outside the
scope of SFAS 123R. Compensation expense under these Plans for the years ended December 31, 2007,
2006 and 2005 was $5,152, $1,979 and $2,412, respectively. Further contributions to the second PEP
Plan were terminated as of December 31, 2007, however this termination will not affect any
awardees rights pursuant to awards granted under this Plan.
Profit-Sharing Plan
We sponsor a qualified profit-sharing plan and trust covering substantially all of our full-time
employees who have attained age 21, worked a minimum of 1,000 hours and completed one year of
service. We are under no obligation to contribute to the plan and the amount of any contribution is
determined by and at the discretion of our Board of Directors. Our Board of Directors can authorize
contributions to a maximum of 15% of an eligible participants compensation, limited to $34
annually per participant. For the years ended December 31, 2007, 2006 and 2005, amounts expensed
for contributions to the trust were $2,389, $2,440 and $2,108, respectively. The profit-sharing
plan is a deferred compensation plan and is therefore considered to be outside the scope of SFAS
123R.
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 vested ratably over five years, with full vesting
occurring December 31, 2007. 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 our shares. Any redemption will be subject to a third party
valuation of WPCI.
Company Options and Grants
Option and warrant activity as of December 31, 2007 and changes during the year ended December 31,
2007 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 |
|
|
5,600,069 |
|
|
$ |
23.14 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
384,348 |
|
|
|
32.85 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(2,494,247 |
) |
|
|
20.71 |
|
|
|
|
|
|
|
|
|
Forfeited / Expired |
|
|
(62,000 |
) |
|
|
30.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year |
|
|
3,428,170 |
|
|
$ |
25.87 |
|
|
|
5.35 |
|
|
$ |
26,443,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at end of year |
|
|
3,418,444 |
|
|
$ |
25.79 |
|
|
|
5.30 |
|
|
$ |
25,818,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year |
|
|
2,108,393 |
|
|
$ |
23.30 |
|
|
|
3.83 |
|
|
$ |
20,478,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
W. P. Carey 2007 10-K 74
Notes to Consolidated Financial Statements
Option and warrant activity for 2006 and 2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
|
|
|
|
|
Average |
|
|
Contractual Term |
|
|
|
|
|
|
Average |
|
|
Contractual Term |
|
|
|
Shares |
|
|
Exercise Price |
|
|
(in Years) |
|
|
Shares |
|
|
Exercise Price |
|
|
(in Years) |
|
Outstanding at beginning of year |
|
|
5,360,967 |
|
|
$ |
22.64 |
|
|
|
|
|
|
|
5,165,617 |
|
|
$ |
22.05 |
|
|
|
|
|
Granted |
|
|
621,828 |
|
|
|
26.76 |
|
|
|
|
|
|
|
365,277 |
|
|
|
31.79 |
|
|
|
|
|
Exercised |
|
|
(319,988 |
) |
|
|
20.57 |
|
|
|
|
|
|
|
(86,558 |
) |
|
|
18.26 |
|
|
|
|
|
Forfeited / Expired |
|
|
(62,738 |
) |
|
|
28.89 |
|
|
|
|
|
|
|
(83,369 |
) |
|
|
25.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year |
|
|
5,600,069 |
|
|
|
23.14 |
|
|
|
4.23 |
|
|
|
5,360,967 |
|
|
|
22.64 |
|
|
|
4.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year |
|
|
4,133,782 |
|
|
$ |
21.08 |
|
|
|
|
|
|
|
4,394,887 |
|
|
$ |
21.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted during the years ended December 31,
2007, 2006 and 2005 was $3.00, $2.15 and $1.94, respectively. The total intrinsic value of options
exercised during the years ended December 31, 2007, 2006 and 2005 was $4,200, $2,066 and $888,
respectively.
Nonvested restricted stock awards as of December 31, 2007 and changes during the year ended
December 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
Grant Date |
|
|
|
Shares |
|
|
Fair Value |
|
Nonvested at January 1, 2007 |
|
|
303,361 |
|
|
$ |
29.20 |
|
Granted |
|
|
199,636 |
|
|
|
33.26 |
|
Vested |
|
|
(89,598 |
) |
|
|
30.96 |
|
Forfeited |
|
|
(10,963 |
) |
|
|
31.67 |
|
|
|
|
|
|
|
|
Nonvested at December 31, 2007 |
|
|
402,436 |
|
|
$ |
30.76 |
|
|
|
|
|
|
|
|
The total fair value of shares vested during the years ended December 31, 2007, 2006 and 2005 was
$2,774, $2,356 and $1,960, 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
preceding the award expressed as a percentage of our stock price. Expected volatilities are based
on a review of the five and ten-year historical volatility of our 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 our awards giving consideration to their maturity dates and remaining time to
vest. We use 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, 2007, 2006 and 2005,
the following assumptions and weighted average fair values were used:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2007 |
|
2006 |
|
2005 |
Risk-free interest rates |
|
|
3.8 - 4.7 |
% |
|
|
4.6 - 5.1 |
% |
|
|
3.9 - 4.6 |
% |
Dividend yields |
|
|
5.4 - 6.2 |
% |
|
|
6.3 - 7.1 |
% |
|
|
7.7 - 7.8 |
% |
Expected volatility |
|
|
15.0 - 16.0 |
% |
|
|
17.0 - 17.5 |
% |
|
|
20.0 |
% |
Expected term in years |
|
|
6.1 - 6.3 |
|
|
|
6.2 - 8.5 |
|
|
|
10.0 |
|
As of December 31, 2007, approximately $10,500 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 years.
W. P. Carey 2007 10-K 75
Notes to Consolidated Financial Statements
We have the ability and intent to issue shares upon stock option exercises. Historically, we have
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, 2007 was $6,271.
Earnings Per Share
Basic and diluted earnings per share were calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Net income basic |
|
$ |
79,252 |
|
|
$ |
86,303 |
|
|
$ |
48,604 |
|
Income effect of dilutive securities, net of taxes |
|
|
2,616 |
|
|
|
574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income diluted |
|
|
81,868 |
|
|
|
86,877 |
|
|
|
48,604 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic |
|
|
38,113,857 |
|
|
|
37,668,920 |
|
|
|
37,688,835 |
|
Effect of dilutive securities |
|
|
1,754,351 |
|
|
|
1,424,977 |
|
|
|
1,331,966 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted |
|
|
39,868,208 |
|
|
|
39,093,897 |
|
|
|
39,020,801 |
|
|
|
|
|
|
|
|
|
|
|
Securities included in our diluted earnings per share determination consist of stock options and
warrants and restricted stock. Securities totaling 261,691 shares for the years 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, 2007
and 2005.
Share Repurchase Programs
In December 2005, our 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 shares totaling $4,138. In June 2007, our
Board of Directors approved a $20,000 share repurchase program through December 31, 2007. In
September 2007, our Board of Directors approved the repurchase of an additional $20,000 of our
stock under this share repurchase program. The board also approved an extension of this program to
March 31, 2008. Under this program, we may now repurchase up to $40,000 of our common stock in the
open market through March 31, 2008 as conditions warrant. Through December 31, 2007, we repurchased
and cancelled shares totaling $25,525 under this program.
Other
During 2006, we 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 our provision for income taxes for the years ended December 31, 2007, 2006 and
2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Federal |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
20,531 |
|
|
$ |
29,029 |
|
|
$ |
11,761 |
|
Deferred |
|
|
13,806 |
|
|
|
1,079 |
|
|
|
1,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,337 |
|
|
|
30,108 |
|
|
|
12,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State, Local and Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
10,846 |
|
|
|
14,707 |
|
|
|
5,898 |
|
Deferred |
|
|
6,556 |
|
|
|
541 |
|
|
|
327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,402 |
|
|
|
15,248 |
|
|
|
6,225 |
|
|
|
|
|
|
|
|
|
|
|
Total Provision |
|
$ |
51,739 |
|
|
$ |
45,356 |
|
|
$ |
19,208 |
|
|
|
|
|
|
|
|
|
|
|
W. P. Carey 2007 10-K 76
Notes to Consolidated Financial Statements
Deferred income taxes as of December 31, 2007 and 2006 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Deferred tax assets |
|
|
|
|
|
|
|
|
Unearned and deferred compensation |
|
$ |
9,800 |
|
|
$ |
4,955 |
|
Settlement provision deductible |
|
|
8,967 |
|
|
|
|
|
Other |
|
|
629 |
|
|
|
136 |
|
|
|
|
|
|
|
|
|
|
|
19,396 |
|
|
|
5,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Receivables from affiliates |
|
|
38,970 |
|
|
|
15,925 |
|
Investments |
|
|
41,343 |
|
|
|
30,474 |
|
Other |
|
|
414 |
|
|
|
219 |
|
|
|
|
|
|
|
|
|
|
|
80,727 |
|
|
|
46,618 |
|
|
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
61,331 |
|
|
$ |
41,527 |
|
|
|
|
|
|
|
|
The difference between the tax provision and the tax benefit recorded at the statutory rate at
December 31, 2007, 2006 and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Pre-tax income from taxable subsidiaries |
|
$ |
92,274 |
|
|
$ |
90,303 |
|
|
$ |
38,680 |
|
Federal provision at statutory tax rate (35%) |
|
|
32,296 |
|
|
|
31,606 |
|
|
|
13,538 |
|
State and local taxes, net of federal benefit |
|
|
11,136 |
|
|
|
8,949 |
|
|
|
3,566 |
|
Settlement provision nondeductible |
|
|
4,488 |
|
|
|
|
|
|
|
|
|
Amortization of intangible assets |
|
|
867 |
|
|
|
1,629 |
|
|
|
1,245 |
|
Other |
|
|
1,328 |
|
|
|
2,494 |
|
|
|
313 |
|
|
|
|
|
|
|
|
|
|
|
Tax provision taxable subsidiaries |
|
|
50,115 |
|
|
|
44,678 |
|
|
|
18,662 |
|
Other state, local and foreign taxes |
|
|
1,624 |
|
|
|
678 |
|
|
|
546 |
|
|
|
|
|
|
|
|
|
|
|
Total tax provision |
|
$ |
51,739 |
|
|
$ |
45,356 |
|
|
$ |
19,208 |
|
|
|
|
|
|
|
|
|
|
|
Included in income taxes in the consolidated balance sheets as of December 31, 2007 and 2006 are
accrued income taxes totaling $3,307 and $21,935, respectively, and deferred income taxes totaling
$61,331 and $41,527, respectively.
We have elected to be treated as a partnership for U.S. Federal income tax purposes and prior to
our restructuring (Note 2) conducted our real estate ownership operations through partnership or
limited liability companies electing to be treated as partnerships for U.S. Federal income tax
purposes. As partnerships, we and our partnership subsidiaries are generally not directly subject
to tax. We conduct our investment management services through wholly owned taxable corporations.
These operations are subject to federal, state, local and foreign taxes as applicable. We conduct
business in the United States and Europe, and as a result, we or one or more of our subsidiaries
file income tax returns in the U.S. Federal jurisdiction and various state and certain foreign
jurisdictions. With few exceptions, we are no longer subject to U.S. Federal, state and local, or
non-U.S. income tax examinations for years before 2003. Certain of our inter-company transactions
that have been eliminated in consolidation for financial accounting purposes are also subject to
taxation. Periodically, we distribute shares in the CPA® REITs received for services
rendered from our taxable subsidiaries to the LLC. While this generates current taxable income on
the current appreciation of those shares (which is eliminated for financial accounting purposes),
it reduces corporate level taxability of future dividends and future appreciation on these
distributed shares.
W. P. Carey 2007 10-K 77
We adopted FIN 48 on January 1, 2007. As a result of the implementation we recognized a $1,050
decrease to reserves for uncertain tax positions. This decrease in reserves was accounted for as an
adjustment to the beginning balance of retained earnings on the balance sheet. Including the
cumulative effect decrease in reserves, at the beginning of 2007, we had approximately $833 of
total gross unrecognized tax benefits. A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
Notes to Consolidated Financial Statements
|
|
|
|
|
Balance at January 1, 2007 |
|
$ |
833 |
|
Additions based on tax positions related to the current year |
|
|
|
|
Additions for tax positions of prior years |
|
|
5 |
|
Reductions for tax positions of prior years |
|
|
|
|
Settlements |
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
$ |
838 |
|
|
|
|
|
At December 31, 2007, we had unrecognized tax benefits of $444 (net
of federal benefits) that, if recognized, would favorably
affect the effective income tax rate in any future periods. We recognize interest and penalties
related to uncertain tax positions in income tax expense. As of December 31, 2007, we have
approximately $407 of accrued interest and penalties related to uncertain tax positions.
During the next year, we currently expect the liability for uncertain taxes to increase on a
similar basis to the additions that occurred in 2007. We or one of our subsidiaries files income
tax returns in the United States federal jurisdiction, and various state and foreign jurisdictions.
Our tax returns are subject to audit by taxing authorities. Such audits can often take years to
complete and settle. The tax years 2004-2006 remain open to examination by the major taxing
jurisdictions to which we are subject.
Note 16. Segment Reporting
We evaluate our results from operations by our two major business segments as follows:
Investment Management
This business segment includes investment 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 that 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 Ownership
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. 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 2007 10-K 78
Notes to Consolidated Financial Statements
A summary of comparative results of these business segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Investment Management |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (a) |
|
$ |
175,008 |
|
|
$ |
189,787 |
|
|
$ |
90,863 |
|
Operating expenses (a) |
|
|
(102,505 |
) |
|
|
(107,015 |
) |
|
|
(55,022 |
) |
Other, net (b) |
|
|
14,463 |
|
|
|
15,268 |
|
|
|
7,503 |
|
Provision for income taxes |
|
|
(50,158 |
) |
|
|
(44,710 |
) |
|
|
(18,662 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
36,808 |
|
|
$ |
53,330 |
|
|
$ |
24,682 |
|
|
|
|
|
|
|
|
|
|
|
Real Estate Ownership |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
88,121 |
|
|
|
77,700 |
|
|
|
72,377 |
|
Operating expenses |
|
|
(43,572 |
) |
|
|
(36,140 |
) |
|
|
(38,158 |
) |
Interest expense |
|
|
(20,880 |
) |
|
|
(17,016 |
) |
|
|
(15,768 |
) |
Other, net (b) |
|
|
9,707 |
|
|
|
8,339 |
|
|
|
2,281 |
|
Provision for income taxes |
|
|
(1,581 |
) |
|
|
(646 |
) |
|
|
(546 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
31,795 |
|
|
$ |
32,237 |
|
|
$ |
20,186 |
|
|
|
|
|
|
|
|
|
|
|
Total Company |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (a) |
|
|
263,129 |
|
|
|
267,487 |
|
|
|
163,240 |
|
Operating expenses (a) |
|
|
(146,077 |
) |
|
|
(143,155 |
) |
|
|
(93,180 |
) |
Interest expense |
|
|
(20,880 |
) |
|
|
(17,016 |
) |
|
|
(15,768 |
) |
Other, net (b) |
|
|
24,170 |
|
|
|
23,607 |
|
|
|
9,784 |
|
Provision for income taxes |
|
|
(51,739 |
) |
|
|
(45,356 |
) |
|
|
(19,208 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
68,603 |
|
|
$ |
85,567 |
|
|
$ |
44,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Investments in Real Estate |
|
|
Total Long-Lived Assets(c) |
|
|
Total Assets |
|
|
|
as of December 31, |
|
|
as of December 31, |
|
|
as of December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Investment Management |
|
$ |
165,702 |
|
|
$ |
107,391 |
|
|
$ |
178,965 |
|
|
$ |
122,828 |
|
|
$ |
347,086 |
|
|
$ |
299,036 |
|
Real Estate Ownership |
|
|
76,975 |
|
|
|
58,756 |
|
|
|
772,058 |
|
|
|
765,777 |
|
|
|
806,198 |
|
|
|
793,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company |
|
$ |
242,677 |
|
|
$ |
166,147 |
|
|
$ |
951,023 |
|
|
$ |
888,605 |
|
|
$ |
1,153,284 |
|
|
$ |
1,093,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Included in revenues and operating expenses are reimbursable costs from affiliates totaling
$13,782, $63,630 and $9,962 for the years ended December 31, 2007, 2006 and 2005,
respectively. |
|
(b) |
|
Includes interest income, income from equity investments in real estate, minority interest
and gains and losses on sales and foreign currency transactions. |
|
(c) |
|
Includes real estate, net investment in direct financing leases, equity investments in real
estate, operating real estate and intangible assets related to management contracts. |
Geographic information for the real estate ownership segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
Domestic |
|
|
Foreign(a) |
|
|
Total |
|
Revenues |
|
$ |
82,551 |
|
|
$ |
5,570 |
|
|
$ |
88,121 |
|
Operating expenses |
|
|
(41,664 |
) |
|
|
(1,908 |
) |
|
|
(43,572 |
) |
Interest expense |
|
|
(19,211 |
) |
|
|
(1,669 |
) |
|
|
(20,880 |
) |
Other, net (b) |
|
|
5,995 |
|
|
|
3,712 |
|
|
|
9,707 |
|
Provision for income taxes |
|
|
(1,456 |
) |
|
|
(125 |
) |
|
|
(1,581 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
26,215 |
|
|
$ |
5,580 |
|
|
$ |
31,795 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
744,297 |
|
|
|
61,901 |
|
|
|
806,198 |
|
Total long-lived assets |
|
|
719,059 |
|
|
|
52,999 |
|
|
|
772,058 |
|
W. P. Carey 2007 10-K 79
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
Domestic |
|
|
Foreign(a) |
|
|
Total |
|
Revenues |
|
$ |
72,914 |
|
|
$ |
4,786 |
|
|
$ |
77,700 |
|
Operating expenses |
|
|
(34,373 |
) |
|
|
(1,767 |
) |
|
|
(36,140 |
) |
Interest expense |
|
|
(15,180 |
) |
|
|
(1,836 |
) |
|
|
(17,016 |
) |
Other, net (b) |
|
|
6,721 |
|
|
|
1,618 |
|
|
|
8,339 |
|
Provision for income taxes |
|
|
(580 |
) |
|
|
(66 |
) |
|
|
(646 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
29,502 |
|
|
$ |
2,735 |
|
|
$ |
32,237 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
729,649 |
|
|
|
64,325 |
|
|
|
793,974 |
|
Total long-lived assets |
|
|
705,662 |
|
|
|
60,115 |
|
|
|
765,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
Domestic |
|
|
Foreign(a) |
|
|
Total |
|
Revenues |
|
$ |
67,703 |
|
|
$ |
4,674 |
|
|
$ |
72,377 |
|
Operating expenses |
|
|
(36,465 |
) |
|
|
(1,693 |
) |
|
|
(38,158 |
) |
Interest expense |
|
|
(13,567 |
) |
|
|
(2,201 |
) |
|
|
(15,768 |
) |
Other, net (b) |
|
|
2,410 |
|
|
|
(129 |
) |
|
|
2,281 |
|
Provision for income taxes |
|
|
(521 |
) |
|
|
(25 |
) |
|
|
(546 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
19,560 |
|
|
$ |
626 |
|
|
$ |
20,186 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
638,130 |
|
|
|
56,206 |
|
|
|
694,336 |
|
Total long-lived assets |
|
|
601,193 |
|
|
|
55,213 |
|
|
|
656,406 |
|
|
|
|
(a) |
|
Our international operations consist of investments in France, Germany and Poland. |
|
(b) |
|
Includes other interest income, minority interest in income, income from equity investments
in real estate and gains and losses on sales of securities, foreign currency transactions and
other gains, net. |
Note 17. Selected Quarterly Financial Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
March 31, 2007 |
|
June 30, 2007 |
|
September 30, 2007(b) |
|
December 31, 2007(c) |
Revenues (a) |
|
$ |
44,681 |
|
|
$ |
109,040 |
|
|
$ |
54,577 |
|
|
$ |
54,831 |
|
Expenses (a) |
|
|
26,032 |
|
|
|
36,071 |
|
|
|
26,364 |
|
|
|
57,610 |
|
Net income |
|
|
10,800 |
|
|
|
42,030 |
|
|
|
20,409 |
|
|
|
6,013 |
|
Earnings per
share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
0.28 |
|
|
|
1.10 |
|
|
|
0.53 |
|
|
|
0.17 |
|
Diluted |
|
|
0.27 |
|
|
|
1.10 |
|
|
|
0.53 |
|
|
|
0.15 |
|
Distributions declared per share |
|
|
0.462 |
|
|
|
0.467 |
|
|
|
0.472 |
|
|
|
0.477 |
(d) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
March 31, 2006 |
|
June 30, 2006 |
|
September 30, 2006 |
|
December 31, 2006(e) |
Revenues (a) |
|
$ |
47,727 |
|
|
$ |
57,508 |
|
|
$ |
52,166 |
|
|
$ |
110,086 |
|
Expenses (a) |
|
|
23,154 |
|
|
|
38,469 |
|
|
|
31,729 |
|
|
|
49,803 |
|
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 |
|
|
|
|
(a) |
|
Certain amounts from previous quarters have been reclassified to discontinued operations
(Note 7). |
|
(b) |
|
Includes impact of out of period adjustment (Note 2). |
|
(c) |
|
As discussed in Note 11, in the three months ended December 31, 2007, we reflected a charge
for $29,979 with a related tax benefit of $(8,967) relating to a provision in connection with
reaching an agreement in principle to settle the SEC investigation. |
|
(d) |
|
Excludes a special distribution of $0.27 per share paid in January 2008 to shareholders of
record as of December 31, 2007. |
|
(e) |
|
As discussed in Note 3, in the three months ended December 31, 2006, we recognized fees
totaling $46,018 in connection with the CPA®:12/14 Merger which was completed in
December 2006. |
W. P. Carey 2007 10-K 80
SCHEDULE III REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2007
(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(d) |
|
|
Accumulated |
|
|
Date |
|
|
Income is |
|
Description |
|
Encumbrances |
|
|
Land |
|
|
Buildings |
|
|
Acquisition(a) |
|
|
Investments(b) |
|
|
Land |
|
|
Buildings |
|
|
Total |
|
|
Depreciation(d) |
|
|
Acquired |
|
|
Computed |
|
Real Estate Under Operating Leases: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office facilities in Broomfield, Colorado |
|
$ |
|
|
|
$ |
248 |
|
|
$ |
2,538 |
|
|
$ |
4,780 |
|
|
$ |
(1,785 |
) |
|
$ |
2,928 |
|
|
$ |
2,853 |
|
|
$ |
5,781 |
|
|
$ |
852 |
|
|
Jan. 1998 |
|
40 yrs. |
Distribution facilities and warehouses in Erlanger, Kentucky |
|
|
10,323 |
|
|
|
1,526 |
|
|
|
21,427 |
|
|
|
1,571 |
|
|
|
142 |
|
|
|
1,526 |
|
|
|
23,140 |
|
|
|
24,666 |
|
|
|
5,702 |
|
|
Jan. 1998 |
|
40 yrs. |
Retail stores in Montgomery and Brewton, Alabama |
|
|
|
|
|
|
855 |
|
|
|
6,762 |
|
|
|
|
|
|
|
(5,221 |
) |
|
|
407 |
|
|
|
1,989 |
|
|
|
2,396 |
|
|
|
617 |
|
|
Jan. 1998 |
|
40 yrs. |
Land in Commerce, California |
|
|
|
|
|
|
4,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,573 |
|
|
|
|
|
|
|
4,573 |
|
|
|
|
|
|
Jan. 1998 |
|
N/A |
Office facility in Beaumont, Texas |
|
|
|
|
|
|
164 |
|
|
|
2,344 |
|
|
|
595 |
|
|
|
|
|
|
|
164 |
|
|
|
2,939 |
|
|
|
3,103 |
|
|
|
839 |
|
|
Jan. 1998 |
|
40 yrs. |
Office and industrial facilities in Bridgeton, Missouri |
|
|
|
|
|
|
270 |
|
|
|
5,100 |
|
|
|
4,166 |
|
|
|
|
|
|
|
270 |
|
|
|
9,266 |
|
|
|
9,536 |
|
|
|
1,436 |
|
|
Jan. 1998 |
|
40 yrs. |
Office facility in College Station, Texas |
|
|
|
|
|
|
1,390 |
|
|
|
5,337 |
|
|
|
92 |
|
|
|
(1,039 |
) |
|
|
1,108 |
|
|
|
4,672 |
|
|
|
5,780 |
|
|
|
1,140 |
|
|
Jan. 1998 |
|
40 yrs. |
Partially
vacant industrial/office and distribution facilities in Salisbury, North Carolina |
|
|
|
|
|
|
247 |
|
|
|
5,035 |
|
|
|
2,242 |
|
|
|
|
|
|
|
247 |
|
|
|
7,277 |
|
|
|
7,524 |
|
|
|
1,938 |
|
|
Jan. 1998 |
|
40 yrs. |
Office facility in Raleigh, North Carolina |
|
|
|
|
|
|
1,638 |
|
|
|
2,844 |
|
|
|
157 |
|
|
|
(2,554 |
) |
|
|
828 |
|
|
|
1,257 |
|
|
|
2,085 |
|
|
|
100 |
|
|
Jan. 1998 |
|
N/A |
Office facility in King of Prussia, Pennsylvania |
|
|
|
|
|
|
1,219 |
|
|
|
6,283 |
|
|
|
540 |
|
|
|
|
|
|
|
1,219 |
|
|
|
6,823 |
|
|
|
8,042 |
|
|
|
1,696 |
|
|
Jan. 1998 |
|
40 yrs. |
Warehouse and distribution facilities in Fort Lauderdale, Florida |
|
|
|
|
|
|
1,173 |
|
|
|
3,368 |
|
|
|
543 |
|
|
|
99 |
|
|
|
1,173 |
|
|
|
4,010 |
|
|
|
5,183 |
|
|
|
909 |
|
|
Jan. 1998 |
|
40 yrs. |
Industrial facilities in Pinconning, Mississippi |
|
|
|
|
|
|
32 |
|
|
|
1,692 |
|
|
|
|
|
|
|
|
|
|
|
32 |
|
|
|
1,692 |
|
|
|
1,724 |
|
|
|
423 |
|
|
Jan. 1998 |
|
40 yrs. |
Industrial facilities in San Fernando, California |
|
|
8,895 |
|
|
|
2,052 |
|
|
|
5,322 |
|
|
|
|
|
|
|
152 |
|
|
|
2,052 |
|
|
|
5,474 |
|
|
|
7,526 |
|
|
|
1,359 |
|
|
Jan. 1998 |
|
40 yrs. |
Land leased in several cities in
the following states: Alabama, Florida, |
|
|
2,579 |
|
|
|
9,382 |
|
|
|
|
|
|
|
|
|
|
|
(172 |
) |
|
|
9,210 |
|
|
|
|
|
|
|
9,210 |
|
|
|
|
|
|
Jan. 1998 |
|
N/A |
Georgia, Illinois, Louisiana, Missouri, New Mexico,
North Carolina, South Carolina and Texas
Industrial facility in Milton, Vermont |
|
|
|
|
|
|
220 |
|
|
|
1,579 |
|
|
|
|
|
|
|
|
|
|
|
220 |
|
|
|
1,579 |
|
|
|
1,799 |
|
|
|
395 |
|
|
Jan. 1998 |
|
40 yrs. |
Land in Glendora, California |
|
|
|
|
|
|
1,135 |
|
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
1,152 |
|
|
|
|
|
|
|
1,152 |
|
|
|
|
|
|
Jan. 1998 |
|
N/A |
Office facilities in Bloomingdale, Illinois |
|
|
|
|
|
|
1,075 |
|
|
|
11,453 |
|
|
|
723 |
|
|
|
|
|
|
|
1,090 |
|
|
|
12,161 |
|
|
|
13,251 |
|
|
|
2,931 |
|
|
Jan. 1998 |
|
40 yrs. |
Industrial facility in Manassas, Virginia |
|
|
|
|
|
|
460 |
|
|
|
1,352 |
|
|
|
|
|
|
|
|
|
|
|
460 |
|
|
|
1,352 |
|
|
|
1,812 |
|
|
|
338 |
|
|
Jan. 1998 |
|
40 yrs. |
Industrial facility in Doraville, Georgia |
|
|
|
|
|
|
3,288 |
|
|
|
9,864 |
|
|
|
|
|
|
|
275 |
|
|
|
3,288 |
|
|
|
10,139 |
|
|
|
13,427 |
|
|
|
2,517 |
|
|
Jan. 1998 |
|
40 yrs. |
Office facilities in Collierville, Tennessee |
|
|
|
|
|
|
335 |
|
|
|
1,839 |
|
|
|
|
|
|
|
|
|
|
|
335 |
|
|
|
1,839 |
|
|
|
2,174 |
|
|
|
460 |
|
|
Jan. 1998 |
|
40 yrs. |
Land in Irving and Houston, Texas |
|
|
8,993 |
|
|
|
9,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,795 |
|
|
|
|
|
|
|
9,795 |
|
|
|
|
|
|
Jan. 1998 |
|
N/A |
Industrial facility in Detroit, Michigan |
|
|
6,406 |
|
|
|
5,968 |
|
|
|
31,731 |
|
|
|
|
|
|
|
775 |
|
|
|
5,968 |
|
|
|
32,506 |
|
|
|
38,474 |
|
|
|
8,076 |
|
|
Jan. 1998 |
|
40 yrs. |
Industrial facility in Chandler, Arizona |
|
|
12,536 |
|
|
|
5,035 |
|
|
|
18,957 |
|
|
|
2,185 |
|
|
|
541 |
|
|
|
5,035 |
|
|
|
21,683 |
|
|
|
26,718 |
|
|
|
5,310 |
|
|
Jan. 1998 |
|
40 yrs. |
Warehouse and distribution facilities in Houston, Texas |
|
|
|
|
|
|
167 |
|
|
|
885 |
|
|
|
53 |
|
|
|
|
|
|
|
167 |
|
|
|
938 |
|
|
|
1,105 |
|
|
|
225 |
|
|
Jan. 1998 |
|
40 yrs. |
Industrial facility in Prophetstown, Illinois |
|
|
|
|
|
|
70 |
|
|
|
1,477 |
|
|
|
|
|
|
|
(428 |
) |
|
|
70 |
|
|
|
1,049 |
|
|
|
1,119 |
|
|
|
45 |
|
|
Jan. 1998 |
|
40 yrs. |
Office facilities in Bridgeton, Missouri |
|
|
6,000 |
|
|
|
842 |
|
|
|
4,762 |
|
|
|
1,267 |
|
|
|
71 |
|
|
|
842 |
|
|
|
6,100 |
|
|
|
6,942 |
|
|
|
184 |
|
|
Jan. 1998 |
|
40 yrs. |
Industrial facility in Industry, California |
|
|
|
|
|
|
3,789 |
|
|
|
13,164 |
|
|
|
1,262 |
|
|
|
318 |
|
|
|
3,789 |
|
|
|
14,744 |
|
|
|
18,533 |
|
|
|
2,345 |
|
|
Jan. 1998 |
|
40 yrs. |
Warehouse and distribution facilities in Memphis, Tennessee |
|
|
|
|
|
|
1,051 |
|
|
|
14,037 |
|
|
|
510 |
|
|
|
(2,571 |
) |
|
|
1,051 |
|
|
|
11,976 |
|
|
|
13,027 |
|
|
|
3,458 |
|
|
Jan. 1998 |
|
7 yrs. |
Retail store in West Mifflin, Pennsylvania |
|
|
|
|
|
|
1,839 |
|
|
|
6,535 |
|
|
|
|
|
|
|
(4,895 |
) |
|
|
1,839 |
|
|
|
1,640 |
|
|
|
3,479 |
|
|
|
61 |
|
|
Jan. 1998 |
|
2 yrs. |
Retail store in Bellevue, Washington |
|
|
9,468 |
|
|
|
4,125 |
|
|
|
11,812 |
|
|
|
393 |
|
|
|
|
|
|
|
4,494 |
|
|
|
11,836 |
|
|
|
16,330 |
|
|
|
2,872 |
|
|
Apr. 1998 |
|
40 yrs. |
Office facility in Houston, Texas |
|
|
5,000 |
|
|
|
3,260 |
|
|
|
22,574 |
|
|
|
591 |
|
|
|
|
|
|
|
3,260 |
|
|
|
23,165 |
|
|
|
26,425 |
|
|
|
5,543 |
|
|
Jun. 1998 |
|
40 yrs. |
Office facility in Tempe, Arizona |
|
|
15,613 |
|
|
|
2,275 |
|
|
|
26,702 |
|
|
|
|
|
|
|
|
|
|
|
2,275 |
|
|
|
26,702 |
|
|
|
28,977 |
|
|
|
5,783 |
|
|
Jun. 1998 |
|
40 yrs. |
Office facility in Rio Rancho, New Mexico |
|
|
8,215 |
|
|
|
1,190 |
|
|
|
9,353 |
|
|
|
1,316 |
|
|
|
|
|
|
|
1,467 |
|
|
|
10,392 |
|
|
|
11,859 |
|
|
|
2,293 |
|
|
Jul. 1998 |
|
40 yrs. |
Vacant office facility in Moorestown, New Jersey |
|
|
5,558 |
|
|
|
351 |
|
|
|
5,981 |
|
|
|
420 |
|
|
|
42 |
|
|
|
351 |
|
|
|
6,443 |
|
|
|
6,794 |
|
|
|
1,652 |
|
|
Feb. 1999 |
|
40 yrs. |
Office facility in Norcross, Georgia |
|
|
30,000 |
|
|
|
5,200 |
|
|
|
25,585 |
|
|
|
|
|
|
|
11,822 |
|
|
|
5,200 |
|
|
|
37,407 |
|
|
|
42,607 |
|
|
|
7,651 |
|
|
Jun. 1999 |
|
40 yrs. |
Office facility in Lafayette, Louisiana |
|
|
3,401 |
|
|
|
720 |
|
|
|
7,708 |
|
|
|
120 |
|
|
|
|
|
|
|
720 |
|
|
|
7,828 |
|
|
|
8,548 |
|
|
|
1,572 |
|
|
Dec. 1999 |
|
40 yrs. |
Office facility in Tours, France |
|
|
9,054 |
|
|
|
1,034 |
|
|
|
9,737 |
|
|
|
|
|
|
|
5,832 |
|
|
|
1,617 |
|
|
|
14,986 |
|
|
|
16,603 |
|
|
|
2,637 |
|
|
Sep. 2000 |
|
40 yrs. |
Office facility in Illkirch, France |
|
|
21,237 |
|
|
|
|
|
|
|
18,520 |
|
|
|
|
|
|
|
12,275 |
|
|
|
|
|
|
|
30,795 |
|
|
|
30,795 |
|
|
|
5,986 |
|
|
Dec. 2001 |
|
40 yrs. |
Industrial,
warehouse and distribution facilities in Lenexa, Kansas; |
|
|
8,606 |
|
|
|
1,860 |
|
|
|
12,539 |
|
|
|
|
|
|
|
5 |
|
|
|
1,860 |
|
|
|
12,544 |
|
|
|
14,404 |
|
|
|
1,702 |
|
|
Sep. 2002 |
|
40 yrs. |
Winston-Salem, North Carolina and Dallas, Texas
Office buildings in Venice, California |
|
|
|
|
|
|
2,032 |
|
|
|
10,152 |
|
|
|
|
|
|
|
1 |
|
|
|
2,032 |
|
|
|
10,153 |
|
|
|
12,185 |
|
|
|
835 |
|
|
Sep. 2004 |
|
40 yrs. |
W. P. Carey 2007 10-K 81
SCHEDULE III REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2007
(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(d) |
|
|
Accumulated |
|
|
Date |
|
|
Income is |
|
Description |
|
Encumbrances |
|
|
Land |
|
|
Buildings |
|
|
Acquisition(a) |
|
|
Investments(b) |
|
|
Land |
|
|
Buildings |
|
|
Total |
|
|
Depreciation(d) |
|
|
Acquired |
|
|
Computed |
|
Real Estate Under Operating Leases (Continued): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail stores in Drayton Plains, Michigan and Citrus Heights,
California |
|
|
|
|
|
|
1,039 |
|
|
|
4,788 |
|