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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
_______________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________.
COMMISSION FILE NUMBER: 0-20016
_______________
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 13-3602400
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
50 ROCKEFELLER PLAZA 10020
NEW YORK, NEW YORK 10020 (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBERS:
INVESTOR RELATIONS (212) 492-8920
(212) 492-1100
_______________
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
_______________
CIP(R) has SHARES OF COMMON STOCK registered pursuant to Section 12(g) of the
Act.
CIP(R) HAS NO SECURITIES registered on any exchanges.
CIP(R) does not have any Securities registered pursuant to Section 12(b) of the
Act.
CIP(R) (1) has filed all reports required by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for 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.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ].
CIP(R) has no active market for common stock at May 6, 2004.
CIP(R) has 28,243,670 shares of common stock, $.001 par value outstanding at
May 6, 2004.
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
INDEX
Page No.
--------
PART I
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets, as of March 31, 2004
and December 31, 2003 2
Condensed Consolidated Statements of Income for the three
months ended March 31, 2004 and 2003 3
Condensed Consolidated Statements of Comprehensive Income
for the three months ended March 31, 2004 and 2003 3
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2004 and 2003 4
Notes to Condensed Consolidated Financial Statements 5-9
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-12
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. - Controls and Procedures 13
PART II - Other Information
Item 2. - Changes in Securities, Use of Proceeds and
Issuer Purchaser of Equity Securities 14
Item 4. - Submission of Matters to a Vote of Security Holders 14
Item 6. - Exhibits and Reports on Form 8-K 14
Signatures 15
o The summarized condensed consolidated financial statements contained
herein are unaudited; however, in the opinion of management, all
adjustments necessary for a fair presentation of such financial
statements have been included.
-1-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2004 December 31, 2003
-------------- -----------------
(Unaudited) (Note)
ASSETS:
Land and buildings, net of accumulated depreciation of $39,458,841 at
March 31, 2004 and $37,705,872 at December 31, 2003 $305,182,572 $306,750,951
Net investment in direct financing leases 121,354,260 121,354,117
Assets held for sale 3,092,633 3,092,633
Equity investments 63,276,532 62,381,384
Cash and cash equivalents 19,320,239 27,414,928
Marketable securities 12,180,295 11,954,011
Other assets 12,317,478 11,998,129
------------ ------------
Total assets $536,724,009 $544,946,153
============ ============
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY:
Liabilities:
Limited recourse mortgage notes payable $231,304,312 $241,130,905
Limited recourse mortgage note payable on assets held for sale 2,954,212 2,975,189
Accrued interest 2,350,118 2,325,763
Accounts payable and accrued expenses 3,473,186 2,343,509
Due to affiliates 2,538,744 2,528,398
Dividends payable 6,057,541 6,034,786
Prepaid rental income and security deposits 2,645,148 2,404,450
Other liabilities 3,278,773 3,391,175
------------ ------------
Total liabilities 254,602,034 263,134,175
------------ ------------
Minority interest 15,557,297 15,279,835
------------ ------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value; authorized, 40,000,000 shares; 29,342,899 and
29,237,375 shares issued and outstanding at March
31, 2004 and December 31, 2003 29,343 29,237
Additional paid-in capital 315,573,258 314,143,508
Dividends in excess of accumulated earnings (38,280,499) (36,920,900)
Accumulated other comprehensive income 2,299,296 2,048,243
------------ ------------
279,621,398 279,300,088
Less, common stock in treasury at cost, 1,118,790 and 1,097,399 shares
at March 31, 2004 and December 31, 2003 (13,056,720) (12,767,945)
------------ ------------
Total shareholders' equity 266,564,678 266,532,143
------------ ------------
Total liabilities, minority interest and shareholders' equity $536,724,009 $544,946,153
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Note: The balance sheet at December 31, 2003 has been derived from the audited
consolidated financial statements at that date.
-2-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended March 31,
----------------------------------
2004 2003
----------- -----------
Revenues:
Rental income $ 9,910,260 $ 9,494,659
Interest income from direct financing leases 3,587,681 3,871,842
Other operating income 69,146 67,806
----------- -----------
13,567,087 13,434,307
----------- -----------
Operating expenses:
Depreciation 1,773,344 1,710,283
General and administrative (Note 1) 2,112,563 991,807
Property expenses 2,695,559 2,243,500
Impairment charges on real estate -- 674,370
----------- -----------
6,581,466 5,619,960
----------- -----------
Income from continuing operations before other interest income, minority
interest, equity investments, interest expense and
gains and losses 6,985,621 7,814,347
Other interest income 411,909 446,811
Minority interest in income (834,079) (755,715)
Income from equity investments 2,977,151 3,005,065
Interest expense (4,721,310) (4,888,459)
----------- -----------
Income from continuing operations before gains and losses 4,819,292 5,622,049
Gain (loss) on derivative instruments 4,673 (918)
Loss on foreign currency transactions, net (22,776) --
----------- -----------
Income from continuing operations 4,801,189 5,621,131
----------- -----------
(Loss) income from operations of discontinued properties (103,247) 155,650
----------- -----------
Net income $ 4,697,942 $ 5,776,781
=========== ===========
Basic earnings per share:
Earnings from continuing operations $ .17 $ .20
Earnings from discontinued operations -- .01
----------- -----------
Net income $ .17 $ .21
=========== ===========
Diluted earnings per share:
Earnings from continuing operations $ .17 $ .19
Earnings from discontinued operations -- .01
----------- -----------
Net income $ .17 $ .20
=========== ===========
Weighted average common shares outstanding-basic 28,228,526 27,895,272
=========== ===========
Weighted average common shares outstanding-diluted 28,729,610 28,458,953
=========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three Months Ended March 31,
----------------------------------
2004 2003
----------- -----------
Net income $ 4,697,942 $ 5,776,781
----------- -----------
Other comprehensive income:
Change in unrealized gain on marketable securities 273,275 463,396
Change in foreign currency translation adjustment (22,222) 73,570
----------- -----------
251,053 536,966
----------- -----------
Comprehensive income $ 4,948,995 $ 6,313,747
=========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31,
----------------------------------
2004 2003
----------- -----------
Cash flows from operating activities:
Net income $ 4,697,942 $ 5,776,781
Adjustments to reconcile net income to net cash provided by
continuing operations:
Loss (income) from discontinued operations 103,247 (155,650)
Depreciation and amortization 1,895,510 1,974,135
Income from equity investments in excess of distributions received (983,469) (1,058,607)
Minority interest in income 834,079 755,715
Straight-line rent adjustments (19,136) (325,024)
Unrealized loss on foreign currency transactions and derivatives (189,886) --
Realized gain on foreign currency transactions 171,783 --
Impairment charges on real estate -- 674,370
Issuance of shares in satisfaction of performance fees 887,193 899,243
Net change in operating assets and liabilities, net of assets and
liabilities acquired 766,552 (1,055,535)
----------- -----------
Net cash provided by continuing operations 8,163,815 7,485,428
Net cash (used in) provided by discontinued operations (103,247) 164,708
----------- -----------
Net cash provided by operating activities 8,060,568 7,650,136
----------- -----------
Cash flows from investing activities:
Distributions from operations of equity investments in excess
of equity income 88,321 126,754
Acquisition of real estate and additional capitalized costs (334,539) (1,508,209)
----------- -----------
Net cash used in investing activities (246,218) (1,381,455)
----------- -----------
Cash flows from financing activities:
Purchase of treasury stock (288,775) (381,403)
Prepayment of mortgage payable (7,962,614) (1,264,892)
Payments of mortgage principal (1,835,716) (1,531,747)
Proceeds from mortgages -- 582,522
Proceeds from stock issuance 542,663 473,880
Distributions to minority partners (577,686) (520,684)
Contributions from minority partners 209,050 77,903
Dividends paid (6,034,786) (5,936,756)
----------- -----------
Net cash used in financing activities (15,947,864) (8,501,177)
----------- -----------
Effect of exchange rate changes on cash 38,825 (20,639)
----------- -----------
Net decrease in cash and cash equivalents (8,094,689) (2,253,135)
Cash and cash equivalents, beginning of period 27,414,928 25,782,304
----------- -----------
Cash and cash equivalents, end of period $19,320,239 $23,529,169
=========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements of Carey
Institutional Properties Incorporated (the "Company") have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Article
10 of Regulation S-X of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. All significant intercompany balances and transactions
have been eliminated. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the results of the interim periods presented have been included. The results of
operations for the interim periods are not necessarily indicative of results for
the full year. These condensed consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2003.
Approximately $930,000 of general and administrative expenses for the
three-month period ended March 31, 2004 results from costs incurred and accrued
in connection with evaluating liquidity alternatives. In accordance with
accounting principles generally accepted in the United States of America, costs
related to liquidity alternatives are expensed rather than capitalized.
Certain prior year amounts have been reclassified to conform to current year
financial statement presentation.
Note 2. Transactions with Related Parties:
In connection with performing services on behalf of the Company, the Advisory
Agreement between the Company and W. P. Carey & Co. LLC (the "Advisor"),
provides that the Advisor receive asset management and performance fees, each of
which are 1/2 of 1% of Average Invested Assets as defined in the Advisory
Agreement. The Advisor has elected at its option to receive the performance fee
in restricted shares of common stock of the Company rather than cash. The
Advisor is also reimbursed for the actual cost of personnel needed to provide
administrative services necessary to the operation of the Company. The Company
incurred asset management fees of $896,937 and $893,696 for the three months
ended March 31, 2004 and 2003, respectively, with performance fees in like
amount. The Company incurred personnel cost reimbursements of $355,354 and
$412,066 for the three months ended March 31, 2004 and 2003, respectively.
Note 3. Equity Investments:
The Company owns an approximate 47% interest in Marcourt Investments, Inc., a
real estate investment trust which net leases 13 Courtyard by Marriott hotel
properties to a wholly-owned subsidiary of Marriott International, Inc., with
the remaining interests owned by a third-party. The Company also owns
noncontrolling interests with affiliates in properties leased to corporations
through interests in various partnerships and limited liability companies and a
tenancy-in-common interest subject to joint control. The ownership interests
range from 33.33% to 50%, and the underlying investments are owned with
affiliates that have similar investment objectives as the Company. The lessees
are Sicor Inc., The Upper Deck Company, Advanced Micro Devices, Inc., Compucom
Systems, Inc. and Del Monte Corporation.
Summarized financial information of the Company's equity investees is as
follows:
(in thousands) March 31, 2004 December 31, 2003
-------------- -----------------
Assets (primarily real estate) $339,776 $340,805
Liabilities (primarily mortgage notes payable) 202,336 204,550
Shareholders' and members' equity 137,440 136,255
Three Months Ended March 31,
-------------------------------
2004 2003
-------- --------
Revenues (primarily rental income and interest income from
direct financing leases) $ 10,971 $ 11,201
Expenses (primarily interest on mortgage and depreciation) (4,999) (5,171)
-------- --------
Net income $ 5,972 $ 6,030
======== ========
-5-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 4. Interest in Mortgage Loan Securitization:
The Company is accounting for its subordinated interest in the Carey Commercial
Mortgage Trust mortgage securitization as an available-for-sale security, which
is measured at fair value with all gains and losses from changes in fair value
reported as a component of accumulated other comprehensive income as part of
shareholders' equity. As of March 31, 2004, the fair value of the Company's
interest was $12,180,295, reflecting an aggregate unrealized gain of $1,854,347
and cumulative net amortization of $290,698 ($46,991 for the three months ended
March 31, 2004). The fair value of the Company's interests in the trust is
determined using a discounted cash flow model with assumptions of market rates
and the credit quality of the underlying lessees.
One of the key variables in determining the fair value of the subordinated
interest is current interest rates. As required by Statement of Financial
Accounting Standards ("SFAS") No. 140, "Accounting for Transfer and Servicing of
Financial Assets and Extinguishments of Liabilities," a sensitivity analysis of
the current value of the interest based on adverse changes in the market
interest rates of 1% and 2% is as follows:
Fair Value as of March 31, 2004 1% Adverse Change 2% Adverse Change
------------------------------- ----------------- -----------------
Fair value of the interests $12,180,295 $11,590,599 $11,039,652
The above sensitivity is hypothetical and changes in fair value, based on a 1%
or 2% variation, should not be extrapolated because the relationship of the
change in assumption to the change in fair value may not always be linear.
Note 5. Lease Revenues:
The Company's operations consist of the direct and indirect investment in and
the leasing of industrial and commercial real estate. The financial reporting
sources of the lease revenues for the three-month periods ended March 31, 2004
and 2003 are as follows:
2004 2003
----------- -----------
Per Statements of Income:
Rental income from operating leases $ 9,910,260 $ 9,494,659
Interest from direct financing leases 3,587,681 3,871,842
Adjustments:
Share of leasing revenue applicable to minority interest (1,506,163) (1,420,591)
Share of leasing revenue from equity investments 4,821,706 4,870,418
----------- -----------
$16,813,484 $16,816,328
=========== ===========
For the three-month periods ended March 31, 2004 and 2003, the Company earned
its net lease revenues from its investments as follows:
2004 % 2003 %
----------- --- ----------- ---
Marriott International, Inc. (a) $ 2,554,294 15% $2,575,268 15%
Omnicom Group, Inc. 1,173,893 7 1,091,509 7
Information Resources, Inc. (b) 854,556 5 870,827 5
Advanced Micro Devices, Inc. (a) 814,734 5 814,734 5
Electronic Data Systems Corporation 751,732 4 751,732 5
Best Buy Co., Inc. (b) 736,000 4 742,699 4
Titan Corporation (b) 582,860 3 556,668 3
Lucent Technologies, Inc. 508,826 3 508,826 3
UTI Holdings, Inc. 462,090 3 437,396 3
EnviroWorks, Inc. 435,478 3 435,478 3
New WAI, L.P./Warehouse Associates 430,016 3 430,016 3
ShopRite Supermarkets, Inc. (b) 415,555 2 468,567 3
Garden Ridge, Inc. 413,435 2 401,801 2
Childtime Childcare, Inc. (b) 373,762 2 356,356 2
Q Clubs, Inc. 370,770 2 370,904 2
Del Monte Corporation (a) 369,428 2 369,429 2
Barnes & Noble, Inc. 368,303 2 365,969 2
Sicor, Inc. (a) 368,184 2 395,921 2
Merit Medical Systems, Inc. 366,351 2 366,351 2
-6-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
2004 % 2003 %
----------- --- ----------- ---
The Upper Deck Company (a) 363,055 2 363,055 2
Compucom Systems, Inc. (a) 352,011 2 352,011 2
Michigan Mutual Insurance Company 340,186 2 340,688 2
Plexus Corp. 339,476 2 317,173 2
Bell Sports Corp. 303,706 2 298,056 2
Other 2,764,783 19 2,834,894 17
----------- --- ----------- ---
$16,813,484 100% $16,816,328 100%
=========== ==== =========== ===
(a) Represents the Company's proportionate share of lease revenues from
its equity investments.
(b) Net of amounts applicable to minority interests.
Note 6. Assets Held for Sale and Discontinued Operations:
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the net income (or loss) and gain or loss on sale of real
estate for properties sold or held for sale are to be reflected in the condensed
consolidated financial statements as "Discontinued Operations" for all periods
presented.
The results of operations of the Nicholson Warehouse L.P. property in Maple
Heights, Ohio, which is held for sale as of March 31, 2004, and the operations
of properties in Broken Arrow, Oklahoma and Austin, Texas which were sold in
2003, are included as "Discontinued Operations" and are summarized as follows:
Three Months Ended March 31,
-------------------------------
2004 2003
--------- ----------
Revenues (primarily rental revenues and miscellaneous income) $ 213,635 $ 277,134
Expenses (primarily interest on mortgages, depreciation and
property expenses) (316,882) (121,484)
--------- ----------
Income (loss) from discontinued operations $(103,247) $ 155,650
========= ==========
As a result of classifying the properties as held for sale, no depreciation has
been incurred from the date of reclassification. The effect of suspending
depreciation expense was to reduce the expense by $94,128 for the three-month
period ended March 31, 2003. There was no effect on depreciation expense for the
three-month period ended March 31, 2004.
Note 7. Earnings Per Share:
Basic and diluted earnings per common share for the Company for the three-month
periods ended March 31, 2004 and 2003 were calculated as follows:
Three Months Ended March 31,
-------------------------------
2004 2003
------------ ------------
Income from continuing operations $ 4,801,189 $ 5,621,131
(Loss) income from discontinued operations (103,247) 155,650
------------ ------------
Net income $ 4,697,942 $5,776,781
============ ============
Weighted average shares - basic 28,228,526 27,895,272
Effect of dilutive securities: Stock warrants 501,084 563,681
------------ ------------
Weighted average shares - diluted 28,729,610 28,458,953
============ ============
Basic earnings per share from continuing operations $ .17 $ .20
Basic earnings from discontinued operations -- .01
------------ ------------
Basic earnings per share $ .17 $ .21
============ ============
Diluted earnings per share from continuing operations $ .17 $ .19
Diluted earnings from discontinued operations -- .01
------------ ------------
Diluted earnings per share $ .17 $ .20
============ ============
-7-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Note 8. Accounting Pronouncements:
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others," ("FIN 45")
which changes the accounting for, and disclosure of certain guarantees.
Beginning with transactions entered into after December 31, 2002, certain
guarantees are required to be recorded at fair value, which is different from
prior practice, under which a liability was recorded only when a loss was
probable and reasonably estimable. In general, the change applies to contracts
or indemnification agreements that contingently require the Company to make
payments to a guaranteed third-party based on changes in an underlying asset,
liability, or an equity security of the guaranteed party. The adoption of the
accounting provisions of FIN 45 on January 1, 2003 did not have a material
effect on the Company's financial statements.
In December 2002, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," which amends SFAS No. 123, Accounting for Stock Based Compensation.
SFAS No. 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock based compensation (i.e.,
recognition of a charge for issuance of stock options in the determination of
income.). However, SFAS No. 148 does not permit the use of the original SFAS No.
123 prospective method of transition for changes to the fair value based method
made in fiscal years beginning after December 15, 2003. In addition, this
Statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock based employee compensation, description of
transition method utilized and the effect of the method used on reported
results. The transition and annual disclosure provisions for valuing stock-based
compensation of SFAS No. 148 are to be applied for fiscal years ending after
December 15, 2002. The Company does not have any employees nor any stock-based
compensation plans. Accordingly, the adoption of SFAS No. 148 did not impact the
Company.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), the primary objective of which is to
provide guidance on the identification of entities for which control is achieved
through means other than voting rights ("variable interest entities" or "VIEs")
and to determine when and which business enterprise should consolidate the VIE
(the "primary beneficiary"). In December 2003, the FASB issued a revised FIN 46
which modifies and clarifies various aspects of the original Interpretation. FIN
46 applies when either (1) the equity investors (if any) lack one or more of the
essential characteristics of controlling financial interest, (2) the equity
investment at risk is insufficient to finance that entity's activities without
additional subordinated financial support or (3) the equity investors have
voting rights that are not proportionate to their economic interest. In addition
FIN 46 requires additional disclosures. The adoption of FIN 46 did not have a
material impact on the financial statements as none of its investments in
unconsolidated joint ventures are VIEs.
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging under SFAS No. 133. The
statement (1) clarifies under what circumstances a contract with an initial net
investment meets the characteristics of a derivative instrument discussed in
paragraph 6(b) of SFAS No. 133, (2) clarifies when a derivative contains a
financing component, (3) amends the definition of an underlying to conform it to
language used in FIN 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others", and (4)
amends certain other existing pronouncements. SFAS No. 149 is generally
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The adoption of SFAS No.
149 did not have a material effect on the financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). In particular, it requires
that mandatorily redeemable financial instruments be classified as liabilities
and reported at fair value and that changes in their fair values be reported as
interest cost.
-8-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
This statement was effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective for the Company as of July 1,
2003. On November 7, 2003, the FASB indefinitely deferred the classification and
measurement provisions of SFAS No. 150 as they apply to certain mandatorily
redeemable non-controlling interests entered into before November 5, 2003. This
deferral is expected to remain in effect while these provisions are further
evaluated by the FASB. The Company has interests in four limited partnerships
that are consolidated and have minority interests that have finite lives and
were considered mandatorily redeemable noncontrolling interests prior to the
issuance of the deferral. Accordingly, in accordance with the deferral noted
above, these minority interests have not been reflected as liabilities. The
carrying value and fair value of these minority interests are approximately
$9,458,000 and $37,013,000, respectively, at March 31, 2004. Based on the FASB's
deferral of this provision, the adoption of SFAS No. 150 did not have a material
effect on the Company's financial statements.
-9-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following discussion and analysis of financial condition and results of
operations of Carey Institutional Properties Incorporated ("CIP(R)") should be
read in conjunction with the condensed consolidated financial statements and
notes thereto as of March 31, 2004 included in this quarterly report and
CIP(R)'s Annual Report on Form 10-K for the year ended December 31, 2003. The
following discussion includes forward-looking statements. Forward-looking
statements, which are based on certain assumptions, describe future plans,
strategies and expectations of CIP(R). 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", "estimate", "intend", "could", "should", "would", "may", 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 the actual results, performance
or achievement of CIP(R) to be materially different from the results of
operations or plan expressed or implied by such forward looking statements. The
risk factors are described in Item 1 of the Annual Report on Form 10-K for the
year ended December 31, 2003. Accordingly, such information should not be
regarded as representations by CIP(R) that the results or conditions described
in such statements or objectives and plans of CIP(R) will be achieved.
Additionally, a description of CIP(R)'s critical accounting estimates is
included in the management's discussion and analysis in the Annual Report on
Form 10-K. There has been no significant change in such critical accounting
estimates.
Management evaluates the results of CIP(R) with a primary focus on the ability
to generate cash flow necessary to meet its investment objectives of overall
property appreciation and increasing its distribution rate to its shareholders.
As a result, Management's assessment of operating results gives less emphasis to
the effect of unrealized gains and losses which may cause fluctuations in net
income for comparable periods but has no impact on cash flow and to other
noncash charges such as depreciation and impairment charges. Based on annual
independent valuations, Management believes that there has been a substantial
increase in the value of the portfolio and that this increase is not reflected
in its financial statements. In evaluating cash flow from operations, Management
includes equity distributions that are included in investing activities to the
extent that the distributions in excess of equity income is the result of
noncash charges such as depreciation. For the three months ended March 31, 2004,
cash flow generated from operations was sufficient to fund dividends paid and
scheduled mortgage principal installments.
RESULTS OF OPERATIONS:
Net income for the three months ended March 31, 2004 decreased by $1,079,000 as
compared with net income for the three months ended March 31, 2003. The results
for the three-month period ended March 31, 2003 included a noncash impairment
charge of $674,000. The decrease in income from continuing operations before
gains and losses was due to increases in general and administrative and property
expenses.
Lease revenues (rental income and interest income from direct financing leases)
increased by $131,000 for the comparable three-month periods. Rent increases at
13 properties since March 31, 2003 contributed $221,000 to lease revenues, and
the completion of improvements at CIP(R)'s Holiday Inn property in Toulouse,
France provided an additional $150,000. These increases were partially offset by
$209,000 of decreases in interest income from direct financing leases
attributable to noncash adjustments which produce a constant periodic rate of
return on CIP(R)'s net investment. Interest income was adjusted to reflect
changes in the rate of return which resulted from changes in the estimated
residual value of the underlying properties.
CIP(R) anticipates that lease revenues will remain stable. In December 2003,
CIP(R) entered into a net lease with Cognitive Solutions, Inc. for a portion of
a property in Bolder, Colorado which will contribute $206,000 of annual lease
revenues. The lease commenced in February 2004 and has an initial term of ten
years and six months, followed by two three-year renewal options. CIP(R)'s lease
with Sears Logistics, Inc., which was scheduled to expire in September 2004, has
been renewed through September 2005. Sears has been seeking a larger facility
and any additional renewals are expected to be on a short-term basis. Sears'
current annual rent is $933,000 and annual carrying costs on the property if
vacant are estimated to be $276,000. Lucent Technologies, Inc.'s lease for a
property in Charlotte, North Carolina will expire in March 2005. CIP(R) expects
Lucent to extend its lease and has entered into discussions with Lucent for a
two-year extension with a five-year renewal option. Annual rent from the Lucent
lease is $2,035,000. Eight leases have rent increases scheduled in 2004. Most of
the increases are CPI-based, with increases scheduled at intervals which range
between one and five years. CIP(R) continues to monitor the financial condition
of Kmart Corporation, a lessee of two
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CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
rental properties in California and Michigan. The Kmart leases have combined
annual base rents of $390,000 and contributed percentage of sales rent in 2003
of $381,000.
CIP(R) benefited from a decrease in interest expense of $167,000 for the
comparable three-month periods, primarily as the result of paying off two
mortgage loans in both 2003 and 2004. As a result of paying off the loans in
2004, annual debt service will decrease by $1,919,000. General and
administrative and property expenses increased by $1,121,000 and $452,000,
respectively. Approximately $930,000 of the increase in general and
administrative expense results from costs incurred and accrued in connection
with evaluating liquidity alternatives for CIP(R). One of CIP(R)'s objectives is
to provide liquidity for its shareholders beginning eight to twelve years after
the net proceeds of its public offerings were substantially invested. CIP(R) is
within that period and the Board of Directors is actively evaluating liquidity
options. CIP(R) expects to present a liquidity plan to shareholders in either
the second or third quarter. The increase in property expense is attributable to
increased charges for uncollected rents and an increase in appraisal costs
incurred in connection with the annual valuation of CIP(R)'s assets.
Garden Ridge Corporation has filed a petition of bankruptcy and is in the
process of submitting its plan of reorganization to the bankruptcy court. Garden
Ridge continues to make rental payments; however, it is uncertain whether Garden
Ridge will affirm its two leases. The Garden Ridge leases provide $1,654,000 of
annual rents. The Garden Ridge properties are encumbered by mortgage debt that
is included in the Carey Commercial Mortgage Trust mortgage pool, and in the
event the leases are terminated cash flow from CIP(R)'s subordinated interest in
the mortgage pool might be adversely affected. CIP(R) owns a property in the
United Kingdom which is currently leased on a month-to-month basis but the
lessee has not agreed to enter into a long-term lease. The prior lessee,
Gloystarne & Co. Ltd, entered into receivership and its business operations were
sold.
FINANCIAL CONDITION:
CIP(R)'s cash balances have decreased by $8,095,000 since December 31, 2003,
primarily as a result of paying off two mortgage loans. CIP(R)'s cash flow from
its operations (including distributions from operations of equity investments in
excess of equity income) and its cash balances of $19,320,000 as of March 31,
2004 are sufficient to meet its investment objectives. For the three months
ended March 31, 2004, cash flow from operations and equity investments of
$8,149,000 were not fully sufficient to fund dividends to shareholders of
$6,035,000, fund distributions to minority partners of $578,000 and pay mortgage
principal installments of $1,836,000; however, cash flows from operations are
expected to increase as a result of paying off the two mortgages.
CIP(R)'s investing activities included using $335,000 to fund improvements,
including $318,000 of costs to complete an additional expansion of the Toulouse,
France Holiday Inn property and $17,000 to fund leasehold improvements at the
Golden, Colorado property in connection with the Cognitive Solutions lease.
CIP(R) has a commitment to fund approximately $408,000 of additional leasehold
improvements at the Golden, Colorado property and may commit to funding
additional improvements at the property in the course of negotiating leases.
In addition to the payment of dividends and scheduled principal mortgage
payments, CIP(R)'s financing activities for the three months ended March 31,
2004 included using $7,963,000 to pay off mortgage loans on the Lucent and Sears
properties. Annual debt service on the two loans was approximately $1,900,000.
The loans had been scheduled to mature in March 2004 and November 2005,
respectively. CIP(R) also raised $543,000 through its dividend reinvestment
plan, and used $289,000 to redeem shares.
CIP(R)'s financing strategy has been to purchase substantially all of its
properties with a combination of equity and limited recourse mortgage debt. A
lender on a limited recourse mortgage loan has recourse only to the property
collateralizing such debt and not to any of CIP(R)'s other assets. The use of
limited recourse mortgage debt, therefore, allows CIP(R) to limit its exposure
of all of its assets, and this strategy has allowed CIP(R) to diversify its
portfolio of properties and, thereby, limit its risk. In the event that a
balloon payment comes due, CIP(R) may seek to refinance the loan, restructure
the debt with existing lenders, evaluate its ability to pay the balloon payment
from its cash reserves or sell the property and use the proceeds to satisfy the
mortgage debt. CIP(R) may seek to finance its unencumbered properties and use
the proceeds to make additional investments in real estate. To the extent that
CIP(R) obtains such financing, it may increase CIP(R)'s overall leverage. CIP(R)
has obtained a one-year extension on a balloon payment scheduled for January
2004 of approximately $2,897,000 on a property held for sale so that the loan
may be paid off with sales proceeds.
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CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
CIP(R) expects to meet its capital requirements to fund future property
acquisitions, capital expenditures on existing properties and scheduled debt
maturities through long-term limited recourse mortgages and possibly unsecured
indebtedness. CIP(R) is not currently seeking additional sources of refinancing
such as an unsecured line of credit; however, its financing strategies could
change in the future. Unsecured financing, if obtained, would likely require
CIP(R) to meet financial covenants such as maintaining specific operating ratios
and leverage ratios.
If any proposed liquidity transaction becomes probable and which would result in
the anticipated sale of properties, those properties will be reclassified as
held for sale. Under accounting principles generally accepted in the United
States of America, assets held for sale are assessed for potential impairment
charges differently than assets held for use. Therefore, any reclassification
may result in the recognition of significant impairment charges in 2004. The
proposed price per share in any liquidation would be based on an independent
valuation of CIP(R)'s portfolio. Management expects overall appreciation in
value per share as compared with the issuance price of shares from its public
offerings. However, there may be writedowns of individual assets for financial
reporting purposes prior to any liquidity transaction.
OFF-BALANCE SHEET ARRANGEMENTS, GUARANTEES AND AGGREGATE CONTRACTUAL AGREEMENTS:
A summary of CIP(R)'s contractual obligations and commitments is as follows:
(in thousands) Total 2004 2005 2006 2007 2008 Thereafter
- ------------- -------- -------- -------- -------- -------- -------- ----------
Obligations:
Limited recourse mortgage notes
payable (1) ................ $234,259 $ 6,367 $ 5,180 $ 5,554 $ 15,528 $ 6,460 $195,170
Subordinated disposition fees . 1,164 -- -- -- -- -- 1,164
Commitments:
Leasehold improvements ........ 408 408 -- -- -- -- --
Share of minimum rents payable
under office cost-sharing
agreement .................. 435 121 179 135 -- -- --
-------- -------- -------- -------- -------- -------- --------
$236,266 $ 6,896 $ 5,359 $ 5,689 $ 15,528 $ 6,460 $196,334
======== ======== ======== ======== ======== ======== ========
(1) The limited recourse mortgage notes payable were obtained in connection
with the acquisition of properties in the ordinary course of business.
-12-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates and equity prices. In pursuing its business
plan, the primary market risks to which CIP(R) is exposed are interest rate risk
and foreign currency exchange risk.
The value of CIP(R)'s real estate is subject to fluctuations based on changes in
interest rates and foreign currency exchange rates, local and regional economic
conditions, changes in the creditworthiness of lessees and may affect CIP(R)'s
ability to refinance its debt when balloon payments are scheduled.
CIP(R) owns marketable securities through its ownership interests in Carey
Commercial Mortgage Trust ("CCMT"). The value of the marketable securities is
subject to fluctuations based on changes in interest rates, economic conditions
and the creditworthiness of lessees at the mortgaged properties. As of March 31,
2004 the interests in CCMT had a fair value of approximately $12,180,295.
Approximately $221,448,000 of CIP(R)'s long-term debt bears interest at fixed
rates, and therefore the fair value of these instruments is affected by changes
in the market interest rates. The following table presents principal cash flows
based upon expected maturity dates of the debt obligations and the related
weighted-average interest rates by expected maturity dates for the fixed rate
debt. The annual interest rates on the fixed rate debt as of March 31, 2004
ranged from 6.08% to 10.00%. The annual interest rates on the variable rate debt
as of March 31, 2004 were 3.41% and 5.63%.
(in thousands) 2004 2005 2006 2007 2008 Thereafter Total Fair Value
- -------------- -------- -------- -------- -------- -------- ---------- -------- ----------
Fixed rate debt... $ 3,357 $ 4,971 $ 5,316 $ 15,230 $ 6,162 $186,412 $221,448 $224,824
Weighted average
interest rate 7.63% 7.71% 7.63% 8.39% 7.65% 7.42%
Variable rate debt $ 3,010 $ 209 $ 238 $ 298 $ 298 $ 8,758 $ 12,811 12,811
Annual interest expense on CIP(R)'s variable rate debt would increase or
decrease CIP(R)'s by approximately $128 for each 1% change in interest rates.
CIP(R) has foreign operations. Accordingly, CIP(R) is subject to foreign
currency exchange risk from the effects of exchange rate movements of foreign
currencies and this may affect future costs and cash flows; however, exchange
rate movements to date have not had a significant effect on CIP(R)'s financial
position or results of operations. To date we have not entered into any foreign
currency forward exchange contracts or other derivative financial instruments to
hedge the effects of adverse fluctuations in foreign currency exchange rates.
Item 4. - CONTROLS AND PROCEDURES
The Co-Chief Executive Officers and Chief Financial Officer of the Company have
conducted a review of the Company's disclosure controls and procedures as of
March 31, 2004.
The Company's disclosure controls and procedures include the Company's controls
and other procedures designed to ensure that information required to be
disclosed in this and other reports filed under the Securities Exchange Act of
1934, as amended (the "Exchange Act") is accumulated and communicated to the
Company's management, including its Co-Chief Executive Officers and Chief
Financial Officer, to allow timely decisions regarding required disclosure and
to ensure that such information is recorded, processed, summarized and reported,
within the required time periods.
Based upon this review, the Company's Co-Chief Executive Officers and Chief
Financial Officer have concluded that the Company's disclosure controls (as
defined in Rule 13a-14(c) promulgated under the Exchange Act) are sufficiently
effective to ensure that the information required to be disclosed by the Company
in the reports it files under the Exchange Act is recorded, processed,
summarized and reported with adequate timeliness.
-13-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
PART II
Item 2. - CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
(c) For the quarter ended March 31, 2004, 65,475 shares were issued
to the Advisor as consideration for performance fees and 40,049
shares were issued pursuant to the Company's Stock Purchase and
Dividend Reinvestment Plan. Shares were issued at $13.55 per
share.
(e) Issuer Purchases of Equity Securities
Total Number of Shares
Purchased as Part of
Total Number of Average Price Publicly Announced
Period Shares Purchased Paid Per Share Plans or Programs (1)
------ ---------------- -------------- ----------------------
January 1, 2004 - January 31, 2004 -- -- N/A
February 1, 2004 - February 29, 2004 -- -- N/A
March 1, 2004 - March 31, 2004 21,391 $13.50 N/A
------
Total 21,391
======
(1) All shares were purchased pursuant to the Company's Redemption
Plan. The maximum amount of shares purchasable in any period
depends on the availability of funds generated by the Dividend
Reinvestment Plan and other factors at the discretion of the
Company's Board of Directors.
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended March 31, 2004, no matters were submitted to a
vote of Security Holders.
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification of Co-Chief Executive Officers
31.2 Certification of Chief Financial Officer
32.1 Certification of Co-Chief Executive Officers Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
During the quarter ended March 31, 2004, the Company furnished a report on
Form 8-K on March 25, 2004, which included an Item 9 disclosure with
respect to the Company's dividend.
-14-
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
5/6/2004 By: /s/ John J. Park
- -------- ---------------------------------------
Date John J. Park
Managing Director and
Chief Financial Officer
(Principal Financial Officer)
5/6/2004 By: /s/ Claude Fernandez
- -------- ---------------------------------------
Date Claude Fernandez
Managing Director and
Chief Accounting Officer
(Principal Accounting Officer)
-15-