W. P. Carey Annual Report 2004

Plain-text annual report

a n n u a l r e p o r t 2 0 0 4 W. P. Carey & Co. LLC 50 Rockefeller Plaza, New York, NY 10020 212-492-1100 ■ IR@wpcarey.com ■ www.wpcarey.com NYSE: WPC Wm. Polk Carey Chairman Gordon F. DuGan Chief Executive Ofﬁcer and President Francis J. Carey Chairman of the Executive Committee, Chief Ethics Ofﬁcer George E. Stoddard Chairman of the Investment Committee, Co-Chief Investment Ofﬁcer and Senior Managing Director Below from left, seated: R. Winssinger, W. Carey, C. Townsend; standing: R. Verni, N. Coolidge, K. von Köller, G. Stoddard, L. Klein, F. Carey, E. Faber and G. DuGan. Board of Directors Nathaniel S. Coolidge Chairman of the Audit Committee; Former Head of Bond and Corporate Finance Department, John Hancock Mutual Life Insurance Company Eberhard Faber, IV Chairman of the Nomination and the Corporate Governance Committees; Former Director of the Federal Reserve Bank of Philadelphia Dr. Lawrence R. Klein Chairman of the Economic Policy Committee; Nobel Laureate in Economics, Benjamin Franklin Professor Economics (Emeritus), University of Pennsylvania Charles C. Townsend, Jr. Lead Director of the Board and Chairman of the Compensation Committee; Former Head of Corporate Finance, Morgan Stanley & Co. Ralph F. Verni Former President and Chief Executive Ofﬁcer, State Street Research & Management Dr. Karsten von Köller Former Chairman and Member of the Board of Managing Directors, Eurohypo AG Reginald Winssinger Chairman of Horizon New America National Portfolio Inc. ounded in 1973, W. P. Carey & Co. is a leading global investment ﬁrm that has long served as the pre-eminent provider of sale-leaseback ﬁnancing to corporations and private equity ﬁrms in the United States and Europe. ■ It owns a portfolio of net-leased real estate assets and F provides asset management services to the Corporate Property Associates (CPA®) series of income-generating real estate investment funds. The Company currently owns or manages more than 650 commercial and industrial properties worldwide, representing approximately 90 million square feet and valued at approximately $7 billion. ■ W. P. Carey’s shareholders continue to beneﬁt from the stability of its net-leased portfolio, as well as from its growing asset management business. The Company remains committed to providing its shareholders with stable income and consistent investment performance, while also meeting the ﬁnancing needs of its tenant companies. Financial Highlights Operations (in thousands) Total Revenues Net Income Cash Flows from Operating Activities Funds from Operations (FFO)(1) Per Share Diluted Earnings Per Share Diluted Funds from Operations Dividends Declared Per Share Weighted Average Listed Shares Outstanding (Diluted) Twelve Months Ended December 31, 2004 $ $ $ $ $ $ $ 227,774 63,851 98,849 135,139 1.64 3.47 1.76 38,904,725 Stock Data Price Range (January 2, 2004 through December 31, 2004) Total Return for 2004(2) Number of Shareholders $ 25.22- $ 35.98 21.82% 29,645 Funds from Operations (in thousands)(1) Net income Gain on sale of real estate Funds from Operations of equity investees in excess of equity income Depreciation, amortization, deferred taxes, stock compensation and other noncash charges Funds from Operations applicable to minority investees in excess of minority income Straight-line rent adjustments Impairment loss on real estate Funds from Operations $ $ 63,851 (92) 7,010 41,103 (555) 1,724 22,098 135,139 (1) Funds from Operations is calculated as net income, excluding gains (or losses) from debt extinguishment and sales of property, plus certain noncash items (primarily real estate depreciation, amortization of intan- gible assets, impairments, stock compensation and deferred taxes) and after adjustments for unconsolidated partnerships and joint ventures. The Company’s calculation of FFO may differ from the calculation of similarly named measures by other companies and NAREIT and may not be comparable to such measures. FFO is a supplemental measure of performance and does not represent net income or cash ﬂows generated from operating activities in accordance with generally accepted accounting principles. It should not be considered an alternative to net income as an indication of the Company's operating performance or to cash ﬂows as a measure of liquidity or an indicator of the Company’s ability to fund its cash needs. (2) Includes dividend reinvestment. d e a r f e l l o w s h a r e h o l d e r s e are pleased to report that 2004 proved to be another successful year for W. P. Carey & Co. LLC as we welcomed more than 15,700 new investors to our Corporate Property Associates (CPA®) series of funds. In addition, this past year we completed the successful W liquidation of Carey Institutional Properties (CIP ®), our eleventh income-generating real estate fund, which upon its liquidation provided its investors with an 11.2% return on their initial investment. From an investment standpoint, we had a very active year creating value for our CPA® fund investors. In 2004, we made 24 new investments totaling approximately $890 million. We made investments with tenants across 18 industries and in 7 countries. Our ability to underwrite across industries and borders enables us to ﬁnd what we believe to be the best risk/return investments for our investors. We believe that our brand name, market presence and the hard work of our investment team create attractive opportunities for our investors, even in an environment where a great deal of capital continues to ﬂow into real estate ﬁnance and related areas. We are very proud of the investments we have made on behalf of the CPA® funds and remain signiﬁcant shareholders in these funds. Furthermore, we continue to create value for our investors through the efforts of, among others, our asset management and ﬁnance teams. In 2004, we took innovative approaches to several challenges and found creative solutions. Here are two examples: ■ CIP® Liquidation Our ﬁnance team structured a complex but highly beneﬁcial structure for the CPA® shareholders whereby investors could either take cash for their shares, although they would realize certain capital gains (especially given the strong performance of the fund), or exchange their shares for similar securities in CIP®’s afﬁliate, CPA®:15, preserving their tax basis and income stream. While the investors split roughly 50%-50% as to whether they took From left: Gordon F. DuGan, Chief Executive Ofﬁcer and President, and Wm. Polk Carey, Chairman . © W P. C a r e y & C o . L L C , M a y 2 0 0 5 c l l . o c & y e r a c . p . w 2 shares or cash, of those who voted, 98% voted in favor of the transaction. This high shareholder approval rate is consistent with similar approval rates in the ten prior CPA® liquidations. ■ Asset Management Activity The asset management team is constantly seeking ways to increase and improve the quality of our real estate income. One signiﬁcant project in 2004 was positioning the Red Bank Distribution property for sale. We have owned this 600,000 square foot industrial property in Cincinnati, OH since the late 1980’s. This facility is an older indus- trial building that had been used, until recently, as a distribution and public storage facility. When our tenant vacated the facility, we were faced with a difﬁcult task as we sought to re-lease or sell a property that had environmental issues and was located in a market that favored newer state-of-the art facilities. Despite these challenges, our asset management team was able to secure a grant from the State of Ohio for environmental remediation work and secured funds from the prior owners for environmental work. We have entered into an agreement to sell the 35-acre site at an attractive price upon completion of the environmental remediation. As a result of our efforts to signiﬁcantly enhance the value of the site for our investors, W. P. Carey received an award from the Port of Greater Cincinnati Development Authority “in appreciation of our dedication and assistance in transforming a redevelopment vision into reality.” As we begin 2005, we have a number of signiﬁcant challenges. Income for 2004 was substantially enhanced by non-recurring fees earned in connection with the CIP®- CPA®:15 merger. While the demand for income investments, especially those with the track record of our CPA® funds, is very strong, we have temporarily suspended raising capital for our latest offering, CPA®:16 – Global. We believe that this cautious approach to fundraising is the pru- dent course for the investors in CPA®:16 – Global. Furthermore, we have a 6% hurdle for incentive fees in CPA®:16 – Global which we are not currently meeting. While we are generat- ing returns in excess of the hurdle on the investments we have made, the low returns on the cash balance bring down the overall return. Therefore, while assets under management con- tinue to grow, payment of a signiﬁcant portion of our fees from managing CPA®:16 – Global will be deferred until we meet the hurdle. After 32 years in business, we are pleased to share our accomplishments with our investors, whose continued conﬁdence and support has made our success a reality. We thank you and look forward to working on your behalf in the years to come. Sincerely, Wm. Polk Carey Chairman Gordon F. DuGan Chief Executive Ofﬁcer and President w w w . w p c a r e y . c o m 3 t h e c o r n e r s t o n e o f o u r s u c c e s s uman capital has always been one of the most important assets at W. P. Carey. While our business may be built on the bricks and mortar of companies around the world, it is our employees who make the difference. Their hard work and commitment to our investors and H tenant companies have earned us a reputation that recently led one industry analyst to describe W. P. Carey as “best in class.” We feel that this description well describes our employees, who strive each day to ensure that W. P. Carey’s success is measured by the added value we provide to our investors and tenant companies. The individuals whose pictures appear in this year’s annual report are but a few of the employees who serve as the cornerstone of our success. For more than 30 years, their efforts have enabled W. P. Carey to successfully meet the investment needs of its investors and the ﬁnancing needs of companies worldwide. c c l l l l . . o o c c & & y y e e r r a a c c . . p p . . w w 4 c o n t i n u e d g r o w t h i n 2 0 0 4 W. P. Carey had a successful year in 2004, investing a near record $890 mil- lion. As a result, the value of our port- folio of properties under management o n e c o m p a n y — t w o s u c c e s s f u l f r a n c h i s e s Over the years, W. P. Carey has built a reputation as one of the pre-eminent providers of corporate ﬁnancing or ownership increased 22%, from $5.8 billion in solutions and as manager of the Corporate Property 2003 to $7.1 billion in 2004. Associates (CPA®) series of income-generating Among W. P. Carey’s 2004 ﬁnancial highlights real estate investment funds. These two franchises, were: one providing capital to companies to grow their ■ Net income increased by $1 million to businesses and the other providing income to $63.9 million; investors, continue to exhibit considerable growth ■ Diluted earnings per share (EPS) declined by one and remain the foundation of our corporate business cent to $1.64; model. However, as we look toward the future and ■ Funds from Operations (FFO) increased 28% to seek ways to increase value for our shareholders and $135.1 million or $3.47 per diluted share; tenant companies, we will review new opportunities, ■ Total revenues increased 43% to $227.8 million; which include investing in new countries, new and industries and new ﬁnancing structures. ■ Cash Flows from Operating Activities increased 47% to $98.8 million. w w w . w p c a r e y . c o m 5 a l e a d e r i n c o r p o r a t e f i n a n c i n g s o l u t i o n s Our long-standing philosophy of pro- viding our investors with a reliable stream of income is achieved largely as a result of our expertise in offering will prove beneﬁcial to our investors. In 2004, companies utilized our ﬁnancing for corporate growth, debt reduction, acquisition ﬁnancing and leveraged buyouts. Our success in providing ﬁnancing solutions was alternative ﬁnancing solutions to companies through matched by the creation of several long-term the sale-leaseback structure. W. P. Carey’s Investment partnerships with our tenant companies. We believe Group is comprised of professionals who are well these partnerships are critical to both the success of versed in both credit and real estate analysis. They W. P. Carey and its tenant companies. It is not work diligently to evaluate a prospective tenant’s uncommon for a company or private equity ﬁrm that industry, business plan, management team and real has completed one transaction with W. P. Carey to seek estate assets with the aim of providing them with additional ﬁnancing in future years. customized, value-added ﬁnancing solutions. One company with whom W. P. Carey has formed This past year, we completed 24 transactions, a close working relationship over the years is representing 18 different industries, in 7 countries, Universal Technical Institute, Inc. (NYSE: UTI), a valued at $890 million. While the current sale- leading provider of post-secondary automotive leaseback environment remains extremely competitive, technical education. In 2004, we provided UTI with with an over-abundance of capital chasing deals and approximately $25 million in ﬁnancing to construct a new competition entering the market, we remain new training facility in Rancho Cucamonga, CA. This focused on completing only those transactions that transaction represented our sixth sale-leaseback with c l l . o c & y e r a c . p . w 6 UTI over the past ﬁve years, during which we acquired six facilities totaling more than 900,000 square feet, valued at more than $84 million. In discussing our relationship and the importance of W. P. Carey’s ﬁnancing, UTI’s Chairman Ireland, the Netherlands, Thailand and the United Kingdom. Our International Investment Group consists of individuals with vast knowledge of the global markets. W. P. Carey’s corporate reputation Robert Hartman has commented, “Relationships are precedes them internationally as a leading provider of everything in business. Our sale-leaseback transactions alternative ﬁnancing solutions to companies in the with W. P. Carey have provided us with the ﬁnancing United States. Our transaction with Pohjola Non-Life we needed to build one of the leading technical training Insurance Company Ltd., one of the largest schools in the country.” W. P. Carey is proud of its Scandinavian insurance companies and ﬁnancial relationship with UTI and is pleased to have been a institutions, is reﬂective of our success in introducing part of its success over the years. our ﬁnancing expertise to a broader global community. While we continue to develop our relationships Pohjola sought to sell a portion of its real estate with our existing tenant companies, we are also investment portfolio and reinvest these funds in its making great strides in extending our ﬁnancing core competencies. W. P. Carey, on behalf of its afﬁliates, franchise globally. Following the investment in CPA®:15 and CPA®:16 – Global, acquired Pohjola’s properties in Canada and Sweden this past year, our corporate headquarters in Helsinki, Finland for international portfolio is now comprised of 61 $110 million (Eur 83.6 million). At the conclusion of properties, consisting of more than 13 million square the transaction, Eero Heliövaara, President and feet, located in Belgium, Finland, France, Germany, CEO of Pohjola, said, “We had several parties, both w w w . w p c a r e y . c o m 7 domestic and foreign, interested in acquiring this support in excess of 95%. Following the liquidation of property. We chose W. P. Carey because the company CIP®, eleven of W. P. Carey’s completed programs has extensive experience in real estate investing and have gone full cycle to liquidity, providing investors we are pleased with the results.” with an average annual total return of approximately Our efforts to complete our ﬁnancing transactions 12% and distributing nearly 700 quarterly distributions on time and as proposed, as well as our desire to without a miss. We believe that our track record of serve as long-term working partners to our tenant providing high returns and liquidity to investors is companies, continue to be the hallmarks of our success. one reason why the investor base of our CPA® funds a t r a c k r e c o r d o f s u c c e s s — g e n e r a t i n g i n c o m e f o r i n v e s t o r s The increased popularity of our income-generating has grown year after year, and now totals more than 100,000 investors. The success and strength of our CPA® funds are further reﬂected by the December 31, 2004 independent investments was reﬂected this past year by our ability third-party appraisals of our CPA®:12 and CPA®:14 to raise more than $511 million from retail investors portfolios, in which their net asset value per share on behalf of our afﬁliate, CPA®:16 – Global. At the rose from $11.70 and $11.30 in 2003 to $12.40 and end of 2004, we made the decision to temporarily $12.10 in 2004 respectively. This reﬂects 24% and suspend our fundraising efforts. We felt that it was 21% increases over the initial purchase price of $10.00 our responsibility to raise only what we believed we could prudently invest in a timely fashion. We made this decision with the interest of our investors in mind and believe it is reﬂective of our long-term views on investing. Our efforts to develop and manage real estate funds that remain attractive to investors are made possible by creating a track record that speaks to our success at providing Our efforts to develop and manage real estate funds that remain attractive to investors is possible only by creating a track record that speaks to our success of providing investors with income and liquidity for more than 25 years. per share. We are mindful that rising interest rates and other market conditions could have an adverse effect on their future valuations and that there can be no assurance that the amount ultimately received for the shares will equal the value determined by this process. Our other two funds, CPA®:15 and CPA®:16 – Global, have not yet reached the dates on which independent appraisals investors with income and liquidity for more than will begin; as such their estimated value per share has 25 years. In 2004, with the overwhelming support of been determined to be $10.00 as of December 31, 98% of voting shareholders, we completed the 2004. This amount is based on the offering value of liquidation of Carey Institutional Properties (CIP®), the shares. which provided its investors with a 11.2% return on This past year, due in large part to the liquidation their initial investment. This high level of investor of CIP®, our management business accounted for 65% support is consistent with the liquidation of of our total revenues while the rental income from W. P. Carey’s ten previous funds, which saw investor our net leased portfolio of properties represented the c l l . o c & y e r a c . p . w 8 remaining 35%. We believe W. P. Carey’s continued success, as well as its future success, is directly correlated to the strong performance of our CPA® funds. We recognize the value of aligning our interests with those of the CPA® funds’ 2.4 million square feet, consist of ofﬁce, industrial, retail and warehouse facilities located in nine states and will further strengthen W. P. Carey’s portfolio. This past year we were also able to reduce W. P. Carey’s portfolio shareholders. To that end, we have developed a vacancies by 1.1 million square feet and sold six compensation plan that includes both performance properties for approximately $6.9 million. Contractual hurdles (certain fees are subordinated to preferred rent increases with 24 tenants in 2004 totaled an returns to investors) as well as our ability to take additional $957,285 in rental income. We are very payment of certain fees in shares of the CPA® REITs to pleased with the success our asset management group build W. P. Carey’s position alongside our CPA® has had in making improvements to W. P. Carey’s shareholders. As a result, W. P. Carey currently holds portfolio and the portfolios of our CPA® funds. By more than 5 million outstanding shares across the year-end, our portfolio of properties, owned and CPA® series of funds. managed, increased 14% to 88.8 million square feet from 77.8 million square feet in 2003. m a n a g i n g o u r g r o w i n g p o r t f o l i o One of the most signiﬁcant events affecting W. P. Carey’s portfolio in recent years was our acquisition of w . p . c a r e y ’ s n e x t g e n e r a t i o n o f l e a d e r s 17 properties from our afﬁliate CIP® for approximately Earlier this year, W. P. Carey’s Board of Directors $142 million in 2004. These properties, totaling named Gordon DuGan Chief Executive Ofﬁcer and w w w . w p c a r e y . c o m 9 Thomas Zacharias Chief Operating Ofﬁcer. These ﬁrst quarter of 2005, we originated and structured a appointments, in line with our previously announced $54 million ﬁrst mortgage loan for afﬁliates of transition plan, reﬂect W. P. Carey’s commitment to Rosemont, IL-based Reyes Holdings, L.L.C., one of the ensure the long-term success of the Company. And largest privately held food and beverage distributors in while W. P. Carey’s Chairman and founder, Wm. Polk North America. The 10-year ﬁxed rate ﬁrst mortgage Carey, will remain an active force and continue to loan is secured by a beer distribution facility in play a prominent role in guiding our future strategic Gardena, CA and three cold storage facilities located direction, daily decisions regarding W. P. Carey’s in Rogers, MN, Mt. Pleasant, PA and Oak Creek, WI, operations will be handled by Mr. DuGan. totaling 837,000 square feet. Due in large part to the signiﬁcant growth W. P. In 2004, we acquired a $20 million interest in a Carey and its afﬁliates have experienced over the years, ﬁrst mortgage secured by the distribution facilities of both in terms of assets and After 32 years in business, W. P. Carey Atlanta, GA-based BlueLinx investors, we are becoming Holdings Inc. (NYSE: BXC), an increasingly large and has built a reputation of success second the largest distributor of complex company with the building products in attendant needs of such a to none. We owe this success to our the United States. The company. Accordingly, Doug $20 million represents the Barzelay has joined the ﬁrm investors, tenant companies and our junior position in a $165 as General Counsel, a posi- million ﬁve-year ﬂoating tion he has held with a large talented, dedicated family of employees. rate ﬁrst mortgage loan ﬁnancial institution in the past in between practicing at two against BlueLinx’s real estate portfolio, which consists of large law ﬁrms. Additionally, the depth and experience 61 distribution centers located throughout 36 states. of the management of W. P. Carey today can be seen These are examples of the alternative forms of in the fact that we have 17 professionals considered to ﬁnancing we are able to structure for our tenant be partners of the company with an average age of companies and we anticipate completing similar 47 years. transactions in the future. w e l l p o s i t i o n e d f o r f u t u r e s u c c e s s After 32 years in business, W. P. Carey has built a reputation of success that is second to none. We owe this success to our investors, tenant companies and As we look to build upon our past successes, we are our talented, dedicated family of employees. As we mindful of the competitive investment environment look to the future, we are pleased to have been able to and will remain diligent in our investment practices. surround ourselves with such a strong group and We will also continue to look for new investment believe now, more than ever before, that W. P. Carey opportunities and alternative ways in which we can is well positioned for future success. provide ﬁnancing to our tenant companies. In the c l l . o c & y e r a c . p . w 10 Results 38.9% 30.8% 21.8% 18.2% 14.4% 6.7% 5.5% 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 2 0 0 2 3 0 0 2 4 0 0 2 Cumulative Shareholder Returns Since Inception 2,831 2,324 1,776 1,552 1,117 1,000 945 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 2 0 0 2 3 0 0 2 4 0 0 2 Value of $1000 Invested from 1999 through 2004 at Year End 7,180 5,824 4,568 3,553 2,625 2,221 1,848 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 2 0 0 2 3 0 0 2 4 0 0 2 Total Assets Under Ownership or Management $ in millions w w w . w p c a r e y . c o m 11 Results 29,645 27,587 20,835 20,616 21,801 88,148 76,655 57,603 45,445 39,500 0 0 0 2 1 0 0 2 2 0 0 2 3 0 0 2 4 0 0 2 Growth in WPC Investors 0 0 0 2 1 0 0 2 2 0 0 2 3 0 0 2 4 0 0 2 Growth in CPA® Investors Average Annual Return End Value Plus Distributions % of Original Investment Received Fund / Date of Final Closing 19.4% 15.3% 408% 369% 14.3% 310% $4,082 $3,687 $3,101 7.3% 237% $2,367 12.7% 264% 7.9% 210% 13.8% 229% 10.8% 215% 11.2% 242% 9.0% 208% 10.4% 184% $2,639 $2,103 $2,151 $2,286 $2,424 $2,083 $1,839 1 : ® A P C 9 7 / 2 1 / 6 2 : ® A P C 0 8 / 3 2 / 9 3 : ® A P C 2 8 / 3 1 / 5 4 : ® A P C 3 8 / 6 1 / 6 5 : ® A P C 3 8 / 1 2 / 2 1 6 : ® A P C 5 8 / 3 1 / 2 7 : ® A P C 7 8 / 7 1 / 9 8 : ® A P C 8 8 / 1 2 / 1 1 9 : ® A P C 0 9 / 0 3 / 4 0 1 : ® A P C 1 9 / 7 1 / 7 3 9 / 2 1 / 8 ® P I C CPA® Program Track Record c l l . o c & y e r a c . p . w 12 The W. P. Carey Group Portfolio of Properties Properties owned or managed by W. P. Carey & Co. LLC 2004 Investments 2005 Investments as of 3/31/05 North America From left: United States and Canada Europe From left: Ireland, United Kingdom, France, Belgium, Netherlands, Germany, Sweden and Finland Asia Thailand w w w . w p c a r e y . c o m 13 Portfolio Diversiﬁcation of Owned or Managed Properties Based on Contractual Annualized Rent Total Rent = $560,238,338 2 . 0 % 0 . 1 % 6 . 9 % 1 4 . 7 % Industrial Office Warehouse/ Distribution Other Properties* 16.4% 32.7% Retail 27.2% Hospitality Land * Other includes: Assisted Living; Educational/Childcare Facilities; Fitness Centers; Self-Storage; Theaters By Property Type 2 . 2 . 1 % 1 % 2 . 3 % 3 . 8 3 . 9 % % % 5.1 5.7% 7.4% 7. 5 % 10.2% 1 4 . 1 % Manufacturing Other* Retail Trade Wholesale Trade Professional, Scientific and Technical Services 3 5.8 % Arts, Entertainment and Recreation Transportation and Warehousing Educational Services Finance and Insurance Health Care and Social Assistance Information Real Estate, Rental and Leasing * Other includes: Accommodation and Food Services; Administrative and Support and Waste Management and Remediation Services; Construction; Management of Companies and Enterprises; Mining; Other Services; Public Administration By Tenant Industry 1 7 . 0 % 18.3 % 2 1 . 9 % 2 1.4 % 2 1 . 4 % East South West Midwest International* * International includes: Belgium, Canada, Finland, France, Germany, Ireland, Netherlands, Sweden, Thailand, United Kingdom By Geography c l l . o c & y e r a c . p . w 14 f i n a n c i a l s t a t e m e n t s c o n t e n t s 16 Management’s Report on Internal Control Over Financial Reporting 17 Selected Financial Data 18 Management’s Discussion and Analysis of Financial Condition and Results of Operations 40 Report of Independent Registered Public Accounting Firm 42 Consolidated Balance Sheets 43 Consolidated Statements of Income 45 Consolidated Statements of Members’ Equity 47 Consolidated Statements of Cash Flows 50 Notes to Consolidated Financial Statements 82 Market for the Company’s Common Stock and Related Stockholder Matters 83 Report on Form 10-K 84 Corporate Information w w w . w p c a r e y . c o m 15 m a n a g e m e n t ’ s r e p o r t o n i n t e r n a l c o n t r o l o v e r f i n a n c i a l r e p o r t i n g Our management is responsible for establishing and maintaining adequate internal control over ﬁnancial report- ing (as deﬁned in Rule 13a-15(f) under the Exchange Act). 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 accounting principles generally accepted in the United States of America. Our 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 our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of ﬁnancial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our manage- ment and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unautho- rized acquisition, use, or disposition of our 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 mis- statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that con- trols may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We assessed the effectiveness of our internal control over ﬁnancial reporting as of December 31, 2004. In mak- ing this assessment, we used criteria set forth in Internal Control – Integrated Framework issued by the Commit- tee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, we concluded that, as of December 31, 2004, our internal control over ﬁnancial reporting is effective based on those criteria. Our assessment of the effectiveness of internal control over ﬁnancial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting ﬁrm who also audited our consolidated ﬁnancial statements included herein. c l l . o c & y e r a c . p . w 16 w . p . c a r e y & c o . l l c Selected Financial Data (In thousands except per share amounts) Operating Data: Revenues(1) Income (loss) from continuing operations(2) Basic earnings (loss) from continuing operations per share Diluted earnings (loss) from continuing operations per share Net income (loss) Basic earnings (loss) per share Diluted earnings (loss) per share Cash dividends paid Cash provided by operating activities Cash dividends declared per share Payment of mortgage principal(3) 2004 2003 2002 2001 2000 $ 227,774 $159,238 $152,404 $120,493 $101,469 69,048 62,562 44,138 31,079 (12,688) 1.85 1.71 1.24 .90 (.43) 1.77 63,851 1.71 1.64 65,073 98,849 1.76 9,428 1.64 62,878 1.72 1.65 62,978 67,295 1.73 8,548 1.21 46,588 1.31 1.28 60,708 75,896 1.72 8,428 .89 35,761 1.04 1.02 58,048 58,877 1.70 8,230 (.43) (9,278) (.31) (.31) 49,957 58,222 1.69 7,590 Balance Sheet Data: Real estate, net(4) Net investment in direct ﬁnancing leases Total assets Long-term obligations(5) $ 485,505 190,644 1,013,539 278,821 $421,543 182,452 906,505 158,605 $440,193 189,339 893,524 226,102 $435,629 258,041 915,883 287,903 $433,867 287,876 904,242 176,657 (1) Prior year amounts have been reclassiﬁed to conform to the current year presentation of excluding other interest income from revenues. (2) Includes gain on sale of real estate in 2002 and 2001 and a loss on sale of real estate in 2000. (3) Represents scheduled mortgage principal amortization paid. (4) Includes real estate accounted for under the operating method, operating real estate and real estate under construction, net of accumulated depreciation. (5) Represents mortgage and note obligations and deferred acquisition fee installments that are due after more than one year. w w w . w p c a r e y . c o m 17 m a n a g e m e n t ’ s d i s c u s s i o n a n d a n a l y s i s o f f i n a n c i a l c o n d i t i o n a n d r e s u l t s o f o p e r a t i o n s ( I n t h o u s a n d s e x c e p t s h a r e a n d p e r s h a r e a m o u n t s ) The following discussion and analysis of ﬁnancial condition and results of operations of W. P. Carey & Co. LLC contain forward-looking statements and should be read in conjunction with the consolidated ﬁnancial state- ments and notes thereto for the year ended December 31, 2004. As used in this Annual Report, the terms “the Company,” “we,” “us” and “our” include W. P. Carey and Co, LLC, its consolidated subsidiaries and predecessors, unless otherwise indicated. Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “expect,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seeks,” “plans” or similar expressions. Do not unduly rely on forward-looking statements. They give our expectations about the future and are not guarantees, and speak only as of the date they are made. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievement to be materially different from the results of operations or plan expressed or implied by such forward-looking statements. While we cannot pre- dict all of the risks and uncertainties, they include, but are not limited to, those described in Item 1 of our Annual Report on Form 10-K. 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. Executive Overview n a t u r e o f b u s i n e s s As described in more detail in Item 1 of this Annual Report, we are a publicly traded limited liability company. Our stock is listed on the New York Stock Exchange. We operate in two operating segments, real estate opera- tions, with investments in the United States and Europe, and management services operations. Within our man- agement services operations, we are the advisor to the following afﬁliated publicly-owned, non-traded real estate investment trusts: Corporate Property Associates 12 Incorporated (“CPA®:12”), Corporate Property Associates 14 Incorporated (“CPA®:14”), Corporate Property Associates 15 Incorporated (“CPA®:15”), Corporate Property Associates 16 – Global Incorporated (“CPA®:16 – Global”) and, until its merger into CPA®:15 during 2004, Carey Institutional Properties Incorporated (“CIP®”), (collectively, the “CPA® REITs”). CPA®:16 – Global was formed in 2003. Revenues from the management services operations are earned by providing services to the CPA® REITs in connection with structuring and negotiating acquisition and debt placement transactions (transaction fees) and h o w w e e a r n r e v e n u e c l l . o c & y e r a c . p . w 18 providing on-going management of the portfolio (asset-based management and performance fees). Asset-based management and performance fees for the CPA® REITs are determined based on real estate assets under manage- ment. We may also earn incentive and disposition fees in connection with providing liquidity alternatives to CPA® REIT shareholders. As funds available to the CPA® REITs are invested in properties, the asset base for which we earn revenue increases. We may elect to collect performance fee revenue in cash or shares of the CPA® REITs at our option. The revenues and income of this business segment are subject to ﬂuctuation because the volume and timing of transactions that are originated on behalf of the CPA® REITs are subject to various uncertainties including competition for net lease transactions, the requirement that each acquisition meet suitability standards and due diligence requirements including approval of each purchase of real estate by the investment committee and the ability to raise capital on behalf of the CPA® REITs. We typically start to evaluate liquidity alternatives for the CPA® REITs that we manage, 8 to 12 years after completion of the offering. Such events occur periodically and generally result in higher revenue being realized than in periods where there are no such events. Revenues from our real estate operations are earned primarily from leasing real estate. We acquire and own commercial and industrial properties that are then leased to companies domestically and internationally, prima- rily on a net lease basis. Revenue from this business segment is subject to ﬂuctuation because of lease expirations, lease terminations, the timing of new lease transactions, tenant defaults and sales of property. h o w m a n a g e m e n t e v a l u a t e s r e s u l t s o f o p e r a t i o n s Management evaluates our results with a primary focus on increasing and enhancing the value, quality and amount of the assets under management by our management services operations and seeking to increase value in our real estate operations through focusing efforts on underperforming assets through re-leasing efforts, including negotiation of lease renewals, or selectively selling such assets. The ability to increase assets under man- agement by structuring acquisitions on behalf of the CPA® REITs is affected, among other things, by the CPA® REITs ability to raise capital. During 2004, we managed CPA®:16 – Global’s “best efforts” public offering. CPA®:16 – Global suspended this offering in December 2004 for an unspeciﬁed time and subsequently withdrew its offering. CPA®:16 – Global has ﬁled a registration statement, which is not yet effective, for a second offering. Management’s evaluation of operating results includes our ability to generate necessary cash ﬂow in order to fund dividends to our shareholders. As a result, management’s assessment of operating results gives less emphasis to the effect of unrealized gains and losses, which may cause ﬂuctuations in net income for comparable periods but have no impact on cash ﬂow and to other noncash charges such as depreciation and impairment charges. In evaluating cash ﬂow from operations, management includes equity distributions that are included in investing activities to the extent that the distributions in excess of equity income are the result of noncash charges such as depreciation and amortization. Management does not consider unrealized gains and losses from foreign currency when evaluating our ability to fund dividends. Management’s evaluation of our potential for generating cash ﬂow is based on long-term assessments of both our real estate portfolio and our assets under management. w w w . w p c a r e y . c o m 19 Our real estate operations consist of the investment in and the leasing of industrial and commercial real estate. Management’s evaluation of the sources of lease revenues for the years ended December 31, 2004, 2003 and 2002 are as follows: Per Statements of Income: Rental income Interest income from direct ﬁnancing leases Adjustments: Share of lease revenues applicable to minority interests Share of lease revenues from equity investments 2004 2003 2002 $46,472 21,322 $43,992 20,655 $44,304 22,298 (1,597) 12,426 (1,316) (766) 7,434 8,786 $ 78,623 $72,117 $73,270 c l l . o c & y e r a c . p . w 20 For the years ended December 31, 2004, 2003 and 2002, we earned net lease revenues (i.e., rental income and interest income from direct ﬁnancing leases) from over 100 lessees. A summary of net lease revenues including all current lease obligors with more than $1,000 in 2004 annual revenues is as follows: Dr Pepper Bottling Company of Texas Detroit Diesel Corporation Bouygues Telecom, S.A.(a) (b) Gibson Greetings, Inc., a wholly owned subsidiary of American Greetings, Inc. Carrefour France, SA(b) (d) (g) Federal Express Corporation(c) America West Holdings Corp. Orbital Sciences Corporation Quebecor Printing Inc. AutoZone, Inc. Sybron International Corporation CheckFree Holdings, Inc.(d) Sybron Dental Specialties Inc. Unisource Worldwide, Inc. Information Resources, Inc.(d) CSS Industries, Inc. BE Aerospace, Inc. Sprint Spectrum L.P. Titan Corporation(e) Eagle Hardware & Garden, Inc., a wholly owned subsidiary of Lowe’s Companies Inc. Brodart Co. AT&T Corporation United States Postal Service BellSouth Telecommunications, Inc. Hologic, Inc.(d) Lockheed Martin Corporation Cendant Operations, Inc. Swat-Fame, Inc. United Space Alliance Anthony’s Manufacturing Company, Inc. Other(b) (f) For the Year Ended December 31, 2004 % 2003 % 2002 % $ 4,334 4,158 3,619 6% 5 5 $ 4,290 4,158 3,193 6% 6 4 $ 4,405 4,158 2,952 6% 6 4 3,578 3,417 2,933 2,838 2,747 2,653 2,362 2,286 2,180 1,770 1,705 1,644 1,637 1,585 1,425 1,316 1,306 1,273 1,259 1,233 1,224 1,136 1,094 1,093 1,086 1,051 1,019 17,662 5 4 4 4 4 3 3 3 3 2 2 2 2 2 2 2 2 2 2 2 1 1 1 1 1 1 1 22 3,593 253 2,903 2,738 2,655 2,632 2,393 2,083 2,128 1,613 1,710 1,644 1,647 1,620 1,425 517 1,338 1,235 1,259 1,233 1,224 1,136 1,196 1,075 885 951 1,019 16,371 5 0 4 4 4 4 3 3 3 2 2 2 2 2 2 1 2 2 2 2 2 2 2 1 1 1 1 23 4,149 — 2,876 2,539 2,655 2,563 2,411 2,164 2,108 1,613 1,732 1,644 1,656 433 1,425 507 1,313 1,519 1,259 1,233 1,224 382 1,389 1,075 749 885 1,019 19,233 6 — 4 3 4 3 3 3 3 2 2 2 2 1 2 1 2 2 2 2 2 1 2 1 1 1 1 26 (a) Net of proportionate share applicable to our minority interest owners. $78,623 100% $72,117 100% $73,270 100% w w w . w p c a r e y . c o m 21 (b) Revenue amounts are subject to ﬂuctuations in foreign currency exchange rates. (c) Includes our 40% proportionate share of lease revenues from our equity ownership in one of the properties. (d) Represents our proportionate share of lease revenue from our equity investment. (e) Includes our 18.54% proportionate share of lease revenues from our equity ownership from the period January 1, 2004 through August 31, 2004, at which time we acquired the remaining 81.46% interest in the investment. (f) Includes proportionate share of lease revenues from our equity investments and net of proportionate share applicable to our minority interest owners. (g) The Carrefour France, SA interest was acquired in November 2003. c u r r e n t d e v e l o p m e n t s a n d t r e n d s Competition for investments remains strong. If general economic conditions continue to improve, inﬂation and interest rates, at least for the short term, are expected to continue to rise as well. Rising interest rates are expected to have the following impact on our business: ■ Rising interest rates would likely cause a decline in the values of properties in our investment portfolio; ■ Rising interest rates would likely cause an increase in the Consumer Price Index (“CPI”), which over time will result in increased revenue and partially offset the impact of declining property values; ■ Rising interest rates would have an impact on debt costs as the line of credit under our credit facility is a vari- able rate obligation; ■ Rising interest rates are expected to enable us to achieve higher rates of return on new investments, which would be partially offset by increased debt costs on these new investments associated with increased interest rates; and ■ Rising interest rates could make other income-generating products more attractive to investors on a relative basis than our CPA® REITs. Our objective is to increase shareholder value and earnings through prudent management of both our real estate assets and the real estate assets of the CPA® REITs, through the expansion of our management services business and opportunistic investments. We expect to evaluate a number of different opportunities in a variety of property types and geographic locations and to pursue the most attractive opportunities based upon our analysis of the risk/return tradeoffs. We expect to continue investing in the international commercial real estate market, as we believe the interna- tional market provides for favorable opportunities relative to risk/return as compared to U.S. opportunities. In addition, ﬁnancing terms are generally more favorable for international transactions. Financing terms for international transactions generally provide for lower interest rates and greater ﬂexibility to ﬁnance the underlying property. These beneﬁts are partially offset by shorter ﬁnancing maturities. Investing in additional international properties is also expected to increase our exposure to ﬂuctuations in foreign currency exchange rates (primarily the Euro). For the year ended December 31, 2004, cash ﬂows generated from operations and equity investments were suf- ﬁcient to fund dividends paid and meet other obligations including paying scheduled mortgage principal pay- ments and making distributions to minority interests which hold ownership interests in several of our properties. Such cash flows also provided partial funding for the purchase of interests in 17 properties from CIP® prior to the merger. c l l . o c & y e r a c . p . w 22 We evaluate our results from operations by major business segment as follows: Results of Operations r e a l e s t a t e o p e r a t i o n s This business segment includes the operations of properties under operating lease, properties under direct ﬁnancing leases, real estate under construction and development, assets held for sale and equity investments in ventures accounted for under the equity method which are engaged in these activities. Because of our legal struc- ture, these operations are not generally subject to federal income taxes; however, they may be subject to certain state, local and foreign taxes. m a n a g e m e n t s e r v i c e s o p e r a t i o n s This business segment includes management operations on a fee for services basis predominately from the CPA® REITs pursuant to the advisory agreements and to a lesser extent from third parties. This business line also includes interest on deferred fees and earnings from unconsolidated investments in the CPA® REITs accounted for under the equity method which were received in lieu of cash for certain fees. In connection with maintaining our status as a publicly traded partnership, these operations are performed in corporate subsidiaries and are sub- ject 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. A summary of comparative results of these business segments is as follows: Real Estate Operations 2004 2003 Change 2003 2002 Change For the Year Ended December 31, Lease revenue Other operating income Total revenue Depreciation and amortization General and administrative expenses Property expenses Impairment charges and loan losses Operating expenses Other interest income Minority interest in (income) loss Income (loss) from equity investments Interest expense Gain on foreign currency transactions Gain on sales of real estate and securities Income from continuing operations before income taxes Provision for income taxes $ 67,794 5,798 $ 62,847 5,233 $ 4,947 565 $ 62,847 5,233 $ 64,077 1,258 $ (1,230) 3,975 73,592 10,841 3,561 5,651 7,048 27,101 46,491 270 (489) 3,665 (14,803) 1,222 — 68,080 9,474 1,893 5,854 1,480 18,701 49,379 248 (168) 3,149 (14,982) 48 — 5,512 1,367 1,668 (203) 5,568 8,400 (2,888) 22 (321) 516 179 1,174 — 68,080 9,474 1,893 5,854 1,480 18,701 65,335 10,213 1,456 5,281 20,510 2,745 (739) 437 573 (19,030) 37,460 (18,759) 27,875 49,379 542 248 120 (168) (895) 3,149 (15,893) (14,982) 48 — — 12,415 21,504 (294) (288) 4,044 911 48 (12,415) 36,356 (1,437) 37,674 (1,401) (1,318) (36) 37,674 (1,401) 24,164 (1,496) 13,510 95 Income from continuing operations $ 34,919 $ 36,273 $(1,354) $ 36,273 $ 22,668 $ 13,605 w w w . w p c a r e y . c o m 23 l e a s e r e v e n u e 2004 VS. 2003 – For the comparable years ended December 31, 2004 and 2003, lease revenue (rental income and interest income from direct ﬁnancing leases) increased by $4,947. The increase was primarily attributable to rev- enue earned from the properties acquired from CIP® in September 2004 of $3,559 and additional revenue from scheduled rent increases and new leases of $1,638. Annual contractual lease revenues from the interests acquired from CIP® are $11,321 for 2005. 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. In February 2005, Winn-Dixie Stores, Inc., a lessee of WPC’s Bay Minette, Alabama property, indicated that it intends to terminate its lease in connection with its reorganization in Chapter 11 bankruptcy. Annual lease rev- enue from the Bay Minette property is $128. 2003 VS. 2002 – For the comparable years ended December 31, 2003 and 2002, lease revenue decreased by $1,230. Lease terminations and expirations in 2002 and 2003 reduced lease revenue by $2,535 in 2003. As the result of writedowns of direct ﬁnancing leases in 2003 and 2002, the rates of return on several leases were revised, and interest income from direct ﬁnancing leases for ﬁnancial reporting purposes in 2003 decreased by approximately $1,460. Lease revenues were also negatively affected by the reclassiﬁcation of our ownership inter- est in Learning Care Group, Inc. (formerly Childtime Childcare, Inc.) as an equity investment in August 2002, which decreased lease revenue by $256. These decreases were partially offset by revenue from a new lease with BE Aerospace, Inc. on properties purchased during the third quarter of 2002 which contributed revenue of $1,187, the positive effect of increases in average foreign currency exchange rate for the Euro of approximately $1,050, as well as new leases and several rent increases on existing leases of approximately $775. o t h e r o p e r a t i n g i n c o m e 2004 VS. 2003 – Other operating income generally consists of lease termination payments and other non-rent related revenues including, but not limited to, settlements of claims against former lessees. We receive settlements in the ordinary course of business; however, the timing and amount of such settlements cannot always be esti- mated. For the comparable years ended December 31, 2004 and 2003, other operating income increased $565 primarily due to increased bankruptcy claim distributions and other settlement income received from former lessees in 2004. 2003 VS. 2002 – For the comparable years ended December 31, 2003 and 2002, other operating income increased $3,975 primarily due to the same reasons as stated above. In 2003, we received a lease termination settlement of $2,250 from The Gap, Inc. d e p r e c i a t i o n a n d a m o r t i z a t i o n 2004 VS. 2003 – For the comparable years ended December 31, 2004 and 2003, depreciation and amortization expense increased $1,367. The increase is primarily a result of depreciation and amortization expense recognized on the properties acquired from CIP®, which represented $1,766, partially offset by a decrease in amortization of certain intangibles that became fully amortized in 2003. Annual depreciation and amortization expense for the properties acquired from CIP® is expected to be approximately $6,050. 2003 VS. 2002 – For the comparable years ended December 31, 2003 and 2002, depreciation expense decreased $739. The decrease is primarily the result of certain intangibles becoming fully amortized in 2003, c l l . o c & y e r a c . p . w 24 which resulted in a decrease of $1,356. This decrease was partially offset by additional depreciation of $228 relat- ed to the acquisition of the BE Aerospace properties in 2002, and increases in depreciation for capital improve- ments on existing properties and the effect of increases in average foreign currency exchange rates. g e n e r a l a n d a d m i n i s t r a t i v e e x p e n s e s 2004 VS. 2003 – For the comparable years ended December 31, 2004 and 2003, general and administrative expenses increased $1,668 primarily due to an increase in fees for auditing and consulting services related to ongoing securities law compliance, including the Sarbanes-Oxley Act, and internal audit fees, as well as an increase in legal fees related to the ongoing SEC investigation. 2003 VS. 2002 – For the comparable years ended December 31, 2003 and 2002, general and administrative expenses increased $437 primarily due to increases in fees for accounting, auditing and consulting services including internal audit fees. i m p a i r m e n t c h a r g e s a n d l o a n l o s s e s 2004, 2003 and 2002 – For the comparable years ended December 31, 2004 and 2003, impairment charges and loan losses increased $5,568. For the comparable years ended December 31, 2003 and 2002, impairment charges and loan losses decreased $19,030. Impairment charges were recorded due to several factors including our deci- sion to sell property at less than its carrying value, our determination that the property has experienced an other than temporary decline in value and for direct ﬁnancing leases our assessment that the unguaranteed residual value of the underlying property had declined. The table below summarizes the impairment charges recorded in 2004, 2003 and 2002 for both assets held for use and assets held for sale: Property Meristar operating partnership units Cincinnati, Ohio Williamsport, Pennsylvania Memphis, Tennessee Winona, Minnesota Various properties Bay Minette, Alabama Impairment charges from continuing operations Toledo, Ohio Winona, Minnesota Frankenmuth, Michigan Lancaster, Pennsylvania Various properties Impairment charges from discontinued operations 2004 Impairment Charges 2003 Impairment Charges 2002 Impairment Charges Reason $ 4,596 4,588 3,486 Evaluation determined that investment value has declined Decline in unguaranteed residual value of property Decline in unguaranteed residual value of property Decline in unguaranteed residual value of property $1,480 7,840 Loan loss related to sale of property Decline in unguaranteed residual value of properties or decline in asset value Evaluation determined that property value has declined $1,480 $20,510 $ 4,000 Property sold for less than carrying value Property sold for less than carrying value $1,430 1,530 4,901 Property to be sold for less than carrying value Property sold for less than carrying value Decided to sell property or property value has declined $2,337 1,250 2,911 550 $7,048 $4,700 1,000 1,850 $7,550 $2,960 $ 8,901 w w w . w p c a r e y . c o m 25 i n c o m e ( l o s s ) f r o m e q u i t y i n v e s t m e n t s 2004 VS. 2003 – For the comparable years ended December 31, 2004 and 2003, income from equity investments increased $516, primarily due to income of $755 representing the full year impact from the acquisition of a 22.5% interest in eight Carrefour France, SA properties in France in November 2003, partially offset by a decrease in equity income in connection with acquiring a 50% interest in a general partnership and the remaining 81.46% interest in a limited partnership (both interests were acquired in connection with our acquisition of 17 properties from CIP®). We recorded a loss of $136 related to the 50% interest in the general partnership for ﬁnancial report- ing purposes because of non-cash charges relating to the amortization of the difference between the fair value of the interest acquired and its underlying cost basis. Our share of annual cash ﬂow (contractual lease revenues, net of property-level debt service) from our interest in the general partnership is projected to be $712. 2003 VS. 2002 – For the comparable years ended December 31, 2003 and 2002, income from equity invest- ments increased $4,044, primarily due to the conversion of our ownership interest in MeriStar to publicly traded common stock in 2003. For the year ended December 31, 2002, we incurred a loss from the MeriStar investment of $3,019, which was included in equity income. We now account for our investment in common stock of MeriStar as an available-for-sale security and, therefore record income as dividends are earned and no longer rec- ognize our share of MeriStar’s reported net income or loss. Equity income for 2003 was also affected by the acquisition, in December 2002, of a jointly controlled tenancy-in-common interest in the Hologic, Inc. proper- ties, which contributed $530 and increases in the earnings of our equity investees. i n t e r e s t e x p e n s e 2004 VS. 2003 – For the comparable years ended December 31, 2004 and 2003, interest expense decreased by $179. The decrease was partially due to a reduction in interest expense of $1,371 as a result of paying off mort- gages on two properties in 2004 and ﬁve properties in 2003 and reductions in mortgage notes payable balances, all of which provide for scheduled mortgage principal payments. The decrease was partially offset by increases in interest expense of $615 related to the assumption of mortgages from our acquisition of 17 properties from CIP® and $458 related to additional borrowings and higher interest rates related to our credit facility. The average out- standing balance and interest rate on our credit facility, which incurs annual interest at a variable rate, increased by approximately $15,000 and 1.1%, respectively, for the comparable years. Annual debt service on mortgages assumed in our acquisition from CIP® is approximately $3,148. 2003 VS. 2002 – For the comparable years ended December 31, 2003 and 2002, interest expense decreased by $911 primarily due to a decrease in interest of $1,323 on our credit facility arising from lower average outstand- ing balances during 2003, partially offset by an increase in mortgage interest expense of $308. The increase in mortgage interest was due primarily to new mortgage ﬁnancing placed on two of our properties during the third and fourth quarters of 2002, which contributed $765, partially offset by decreases in interest expense on ﬁve mortgages that were paid off during 2003. The average outstanding balance on the credit facility decreased by approximately $38,000 for the comparable years but was not affected by ﬂuctuations caused by changes in the interest rate, as rates were relatively stable throughout 2003. c l l . o c & y e r a c . p . w 26 i n c o m e f r o m c o n t i n u i n g o p e r a t i o n s 2004 VS. 2003 – For the comparable years ended December 31, 2004 and 2003, income from continuing opera- tions decreased $1,354, primarily due to an increase in impairment charges of $5,568 and increases in general and administrative expenses and depreciation and amortization, all of which are described above. These decreas- es were partially offset by an increase in total revenue of $5,512, which is described above and an increase in gain on foreign currency transactions of $1,174. 2003 VS. 2002 – For the comparable years ended December 31, 2003 and 2002, income from continuing oper- ations increased $13,605, primarily due to a decrease in impairment charges of $19,030 and increases in total rev- enue of $2,020, and equity income of $4,044. These were partially offset by a decrease in gain on sales of real estate of $12,415. Management Services Operations 2004 2003 Change 2003 2002 For the Year Ended December 31, Management income from afﬁliates Incentive and subordinated disposition fees $106,362 42,095 $ 88,060 — $ 18,302 42,095 $ 88,060 $ 84,255 — — Total revenue Depreciation and amortization General and administrative 148,457 9,366 47,424 88,060 7,123 41,802 60,397 2,243 5,622 88,060 7,123 41,802 84,255 7,575 41,133 Operating expenses 56,790 48,925 7,865 48,925 48,708 Income from continuing operations before other interest income, minority interest, equity income, interest expense and taxes Other interest income Minority interest in (income) loss Income from equity investments Interest expense Income from continuing operations before taxes Provision for income taxes 91,667 2,857 (1,010) 1,643 (35) 39,135 2,323 (202) 859 — 52,532 534 (808) 784 (35) 39,135 2,323 (202) 859 — 35,547 1,098 — 452 — 95,122 (51,537) 42,115 (17,715) 53,007 (33,822) 42,115 (17,715) 37,097 (16,587) 5,018 (1,128) Income from continuing operations $ 43,585 $ 24,400 $ 19,185 $ 24,400 $ 20,510 $ 3,890 m a n a g e m e n t i n c o m e f r o m a f f i l i a t e s 2004 VS. 2003 – For the comparable years ended December 31, 2004 and 2003, management income from afﬁli- ates increased $18,302 primarily due to increases in transaction fees of $10,687 and asset-based management and performance fees of $8,607. Transaction fees included fees from structuring acquisitions and ﬁnancing on behalf of the CPA® REITs and $11,493 that we earned in connection with the merger between CIP® and CPA®:15 (“Merger”). We structured $890,000 of acquisitions for the year ended December 31, 2004 as compared with $725,000 in 2003. The transaction fees do not include $7,535 from structuring acquisitions on behalf of CPA®:16 – Global as the fees are subject to subordination provisions that were not met as of December 31, 2004. Because CPA®:16 – Global’s proportion of total acquisition volume is expected to increase in 2005 relative to the w w w . w p c a r e y . c o m 27 Change $ 3,805 — 3,805 (452) 669 217 3,588 1,225 (202) 407 — other CPA® REITs and its subordination provisions are not expected to be met during 2005, transaction based revenue for 2005 is likely to decrease. The increase in asset-based fees resulted from an approximately 41% increase in the asset base (including the asset base of the interests in properties we acquired from CIP® of the CPA® REITs since December 31, 2003. Annual asset-based fees related to the interests in properties we acquired from CIP® were approximately $1,422, and we will no longer receive these asset-based fees. There will be no effect on annual asset-based fees related to the properties involved in the Merger. Based on assets under management of the CPA® REITs as of December 31, 2004, annualized management and performance fees under the advisory agreements are approximately $47,680. The asset based fees that we earn increase or decrease in direct relation to increases and decreases in the values of the real estate asset bases of the CPA® REITs. If the real estate asset bases of the CPA® REITs continue to increase, asset management fees are projected to increase. Currently, we are evaluating a number of proposed transactions on behalf of the CPA® REITs. Acquisition activity is subject to ﬂuctuations. We are facing increased competition for the acquisition of com- mercial and industrial properties. This competition is from insurance companies, credit companies, pension funds, private individuals, investment companies and other REITs. We also face competition from institutions that provide or arrange for other types of commercial ﬁnancing through private or public offerings of equity or debt or traditional bank ﬁnancings. A portion of the CPA® REIT transaction and management fees is based on each CPA® REIT meeting specific performance criteria and is earned only if the criteria are achieved. The performance criterion for CPA®:16 – Global has not yet been satisﬁed as of December 31, 2004, resulting in $7,535 in transaction fees and $819 in performance fees not being recognized. The performance criterion for CPA®:16 – Global is a cumulative preferred return of 6%. As of December 31, 2004, the cumulative distribution rate for CPA®:16 – Global is approximately 4.61%. Based on management’s current assessment, CPA®:16 – Global is expected to meet the cumulative preferred return in 2006, at which time we will record and collect the cumulative unrecognized fees. There is no assurance that the preferred return will be achieved as projected. 2003 VS. 2002 – For the comparable years ended December 31, 2003 and 2002, management income from afﬁliates increased $3,805 due to increases in asset-based management and performance fees of $15,853, partially offset by a decrease in transaction fees of $12,048. The increase in asset-based management and performance fees resulted from an increase in the asset base of the CPA® REITs during 2003 of approximately 30%. The decrease in transaction fees resulted from a decrease in structuring volume of acquisitions on behalf of the CPA® REITs of $256,000 for the comparable years. i n c e n t i v e a n d s u b o r d i n a t e d d i s p o s i t i o n f e e s 2004 VS. 2003 – In connection with the Merger, we earned incentive fees of $23,681 and subordinated disposition fees of $18,414 from CIP®. Incentive and disposition fees are earned in connection with events which provide liq- uidity or alternatives to the CPA® REIT shareholders. While we anticipate that such events will occur again, no liq- uidity events are currently being planned and the timing of such events cannot be predicted with any certainty. d e p r e c i a t i o n a n d a m o r t i z a t i o n 2004 VS. 2003 – For the comparable years ended December 31, 2004 and 2003, depreciation and amortization expense increased by $2,243 primarily due to accelerated amortization of certain intangible assets of $2,798 c l l . o c & y e r a c . p . w 28 related to the management contract with CIP®, which was terminated as a result of the Merger. This increase was partially offset by a reduction in amortization expense on certain intangibles assets that became fully amor- tized during 2003. 2003 VS. 2002 – For the comparable years ended December 31, 2003 and 2002, depreciation and amortization expense decreased by $452 primarily due to certain intangibles assets that became fully amortized during 2003. g e n e r a l a n d a d m i n i s t r a t i v e 2004 VS. 2003 – For the comparable years ended December 31, 2004 and 2003, general and administrative expense increased by $5,622, primarily due to an increase in personnel costs of $3,903 and increases in fees for accounting, auditing and consulting services related to ongoing securities law compliance, including the Sarbanes- Oxley Act, as well as an increase in legal fees related to the ongoing SEC investigation. A portion of personnel costs is directly related to CPA® REIT fundraising and transaction activities. The increase in personnel costs was attributable to higher transaction volume of $165,000 during the comparable years and a $2,385 increase in per- sonnel costs related to non-cash charges for compensation from share incentive plan awards to our ofﬁcers and employees. Of the $2,385 increase, $2,155 reﬂects an increase in awards that ﬂuctuate with changes in fair value because such awards are accounted for using variable plan accounting. These increases were partially offset by a decrease in capital raising activities. For the comparable years, there was a decrease in fund raising volume of approximately $41,000. 2003 VS. 2002 – For the comparable years ended December 31, 2003 and 2002, general and administrative expense increased by $669, primarily due to increases in fees for accounting, auditing and consulting services including internal audit fees. o t h e r i n t e r e s t i n c o m e 2004 VS. 2003 – For the comparable years ended December 31, 2004 and 2003, other interest income increased $534, due to an increase in interest income earned on deferred acquisition fees. In connection with structuring and negotiating acquisitions and related mortgage ﬁnancing for the CPA® REITs, the advisory agreements provide for transaction fees based on the cost of properties acquired. A portion of the fees applicable to the CPA® REITs is deferred and payable in equal annual installments over periods ranging from three to eight years, subject to each CPA® REIT meeting its preferred return. Unpaid installments bear interest at annual rates ranging from 5% to 7%. 2003 VS. 2002 – For the comparable years ended December 31, 2004 and 2003, other interest income increased $1,225 due to the same factor as stated above. i n c o m e f r o m e q u i t y i n v e s t m e n t s 2004 VS. 2003 – For the comparable years ended December 31, 2004 and 2003, income from equity investments increased $784, primarily due to an increase in our ownership of shares in the CPA® REITs as a result of receiving restricted shares in consideration for performance fees. In general, the CPA® REITs, like other REITs, have the ability to distribute amounts in excess of their net income because of depreciation and amortization, which are both non-cash expenses. Based on current distribution rates, our annual dividends from the CPA® REITs for 2005 are projected to be $4,262. 2003 VS. 2002 – For the comparable years ended December 31, 2003 and 2002, income from equity invest- ments increased $407, due to the same factor as mentioned above. w w w . w p c a r e y . c o m 29 p r o v i s i o n f o r i n c o m e t a x e s 2004 VS. 2003 – For the comparable years ended December 31, 2004 and 2003, the provision for income taxes increased $33,822 due to increased pre-tax earnings in 2004 as discussed above. Approximately 95% of our man- agement revenue in 2004, which increased $60,397 as compared to 2003, was earned by a taxable, wholly owned subsidiary. The effective income tax rate for 2004 was 54% as compared to 42% in 2003. The increase is primarily due to increases in state and local taxes, and increases in permanent differences, such as certain stock based com- pensation, which are not deductible for income tax purposes, but are recorded as expenses for ﬁnancial reporting purposes. 2003 VS. 2002 – For the comparable years ended December 31, 2003 and 2002, the provision for income taxes increased by $1,128 to $17,715, of which $9,478 represented deferred taxes and the reclassiﬁcation of $2,700 of tax beneﬁts related to share incentive plans as a direct beneﬁt to Partners’ Capital. In 2003, approximately 91% of management revenues were earned by a taxable, wholly owned subsidiary, and income tax expense is most affected by its earnings. i n c o m e f r o m c o n t i n u i n g o p e r a t i o n s 2004 VS. 2003 – For the comparable years ended December 31, 2004 and 2003, income from continuing operations increased $19,185 primarily due to fees earned in connection with the Merger and increased management fees earned in connection with 2004 fundraising and acquisition activity on behalf of the CPA® REITs. These increases were primarily offset by an increase in the provision for income taxes. These variances are all described above. 2003 VS. 2002 – For the comparable years ended December 31, 2003 and 2002, income from continuing oper- ations increased $3,890 primarily due to an increase in management income from afﬁliates of $3,805, and to a lesser extent an increase in equity income of $407 and a decrease in depreciation and amortization expenses of $452. These were partially offset by an increase in the provision for income taxes of $1,128. o t h e r In 2002, a wholly-owned indirect subsidiary of ours entered into a build-to-suit development management agreement with the Los Angeles United School District (“School District”) with respect to the development and construction of a new high school. Income on the project is being recognized under the percentage of comple- tion method of accounting. The School District and we are currently preparing for an arbitration proceeding relating to certain disagreements regarding the costs of the project and whether we are entitled to reimbursement for incurring these costs. Due to our disputes with the School District and the possibility that certain costs will not be reimbursed, we have revised our estimate of proﬁt on the development project, and recognized a loss in development income of $1,303 for the year ended December 31, 2004 as compared with development income of $1,298 for the comparable year ended December 31, 2003. We currently project that we will recognize an overall proﬁt under our development management agreement. In addition, during 2004 we incurred an impairment charge of $7,500 related to our hotel operations in Livonia, Michigan. The impairment charge was the result of decline in this property’s value. c l l . o c & y e r a c . p . w 30 Financial Condition u s e s o f c a s h d u r i n g t h e y e a r There has been no material change in our ﬁnancial condition since December 31, 2003. Cash and cash equivalents totaled $16,715 as of December 31, 2004, a decrease of $7,644 from the December 31, 2003 balance. We believe that we will generate sufﬁcient cash from operations and, if necessary, from the proceeds of limited recourse mortgage loans, unsecured indebtedness and the issuance of additional equity securities to meet our short-term and long-term liquidity needs. We assess our ability to access capital on an ongoing basis. Our use of cash during the year is described below. o p e r a t i n g a c t i v i t i e s Cash ﬂows from operating activities and distributions received from equity investments for the year ended December 31, 2004 of $105,782 were sufﬁcient to fund dividends to shareholders of $65,073. During 2004, we received fees of $36,679 in connection with structuring acquisition transactions and fees of $24,215 from provid- ing asset-based management services on behalf of the CPA® REITs. We also beneﬁted from the Merger, which generated cash receipts for us of $23,681 related to incentive fees and $22,679 related to disposition fees. In January 2004, we received $5,978 from the annual installment of deferred acquisition fees. The next install- ment of deferred acquisition fees was paid in January 2005 and approximated $8,950. The installments are sub- ject to certain subordination provisions. CPA®:16 – Global has not yet met the subordination provisions and is not expected to pay any deferred amounts in 2005. Our real estate operations provided cash ﬂows (contractual lease revenues, net of property-level debt service) of approximately $47,800. Annual cash ﬂow from operations is projected to continue to fund distributions; however, operating cash ﬂow ﬂuctuates on a quarterly basis due to the timing of certain compensation costs that are paid and receipt of the annual installment of deferred acquisi- tion fees and interest thereon in the ﬁrst quarter and the timing of the receipt of transaction-related fees. i n v e s t i n g a c t i v i t i e s Our investing activities are generally comprised of real estate transactions (purchases and sales) and capitalized property related costs. During the year, we used $111,230 to purchase 17 properties from CIP®. Substantially all cash used for this purchase came from borrowings under our credit facility and fees received from the merger. In connection with this purchase, we also assumed existing limited recourse mortgages on the properties of $27,003. Other investing activities included $4,094 to fulﬁll obligations related to the November 2003 purchase of our 22.5% interest in the eight Carrefour, S.A. properties in France and $1,596 of capital expenditures at several existing properties. In January 2004, we paid our annual installment of deferred acquisition fees of $524 to our former management company relating to 1998 and 1999 property acquisitions. The remaining obligation is $1,709. We intend to use cash from operations to fund the remaining obligation. Cash proceeds from investing activities in 2004 included the receipt of $7,185 in June 2004 related to the release of an escrow account in connection with a property sale in 2003 and $6,548 from the sales of seven properties. Over the past several years, we have pursued a strategy of selling our smaller properties as well as properties that do not generate signiﬁcant cash ﬂow and require more intensive asset management services. During 2004, we sold properties located in Toledo, Ohio; Kenbridge, Virginia; McMinnville, Tennessee; w w w . w p c a r e y . c o m 31 Panama City, Florida; Leeds, Alabama and Garland, Texas, all of which required intensive asset management services. As of December 31, 2004, we have classiﬁed four additional properties as held for sale. f i n a n c i n g a c t i v i t i e s During 2004 we paid dividends of $65,073, an increase over prior year dividends paid. We entered into a new $225,000 credit facility in 2004 (see Cash Resources below). Gross borrowings under the new credit facility approximated $203,000 and were used primarily to fund the acquisition of 17 properties from CIP® ($70,000), pay taxes related to management fees earned in connection with the Merger ($25,000), pay down the prior credit facility ($30,000), which expired in 2004, and for several other purposes in the normal course of business, such as other loan payments and dividend payments. During 2004, we made repayments of $130,000 on outstanding credit facility balances. The majority of the repayments were made using cash received in the normal course of busi- ness, with the remainder coming from the new facility to pay down the prior facility and cash receipts of $11,000 from the sales of various properties. We also used $9,962 to satisfy the limited recourse mortgage ﬁnancing on our Erlanger, Kentucky properties, and also paid down $9,428 on existing principal balances. In addition, we raised $6,649 from the issuance of shares primarily through our Distribution Reinvestment and Share Purchase Plan. In the case of limited recourse mortgage ﬁnancing that does not fully amortize over its term or is currently due, we are responsible for the balloon payment only to the extent of our interest in the encumbered property because the holder has recourse only to the collateral. In the event that balloon payments come due, we may seek to reﬁnance the loans, restructure the debt with the existing lenders or evaluate our ability to satisfy the obliga- tion from our existing resources including our revolving line of credit. To the extent the remaining initial lease term on any property remains in place for a number of years beyond the balloon payment date, we believe that the ability to reﬁnance balloon payment obligations is enhanced. We also evaluate all our outstanding loans for opportunities to reﬁnance debt at lower interest rates that may occur as a result of decreasing interest rates or improvements in the credit rating of tenants. We believe we have sufﬁcient resources to pay off the loans in the event they are not reﬁnanced. In addition, approximately 72% of our outstanding mortgage debt has ﬁxed rates of interest so that debt service obligations will not signiﬁcantly increase from increases in interest rates. c a s h r e s o u r c e s As of December 31, 2004, we have $16,715 in cash and cash equivalents, which can be used for working capital needs and other commitments and may be used for future real estate purchases. We entered into a new credit facility in May 2004, which is also available to meet working capital needs and other commitments. In addition, debt may be incurred on unleveraged properties with a carrying value of $370,381 as of December 31, 2004 and any proceeds may be used to ﬁnance future real estate purchases. In May 2004, we entered into a credit facility for a $175,000 revolving line of credit with J.P. Morgan Chase Bank and eight other banks. The line of credit, which matures in May 2007, provides us a one-time right to increase the amount available under the line of credit to $225,000. Advances are prepayable at any time. Advances from the line of credit bear interest at an annual rate indexed to either (i) the one, two, three or six- month London Inter-Bank Offered Rate, as deﬁned, plus a spread which ranges from 0.6% to 1.45% depending on leverage or corporate credit rating or (ii) the greater of the bank’s Prime Rate and a rate indexed to the Federal Funds Effective Rate. The revolving credit agreement has ﬁnancial covenants that require us, among c l l . o c & y e r a c . p . w 32 other things, to maintain a minimum equity value and to meet or exceed certain operating and coverage ratios. We are in compliance with these covenants as of December 31, 2004. Credit Facility December 31, 2004 December 31, 2003 Maximum Available $225,000 Outstanding Balance $102,000 Maximum Outstanding Balance Available $225,000 $29,000 c a s h r e q u i r e m e n t s During the next twelve months, cash requirements will include paying dividends to shareholders, scheduled mortgage principal payments, making distributions to minority partners as well as other normal recurring oper- ating expenses. In addition, there is $4,893 in scheduled balloon payments on our share of limited recourse mortgage loans due during 2005. We may also seek to use our cash to purchase new properties or other investments to further diversify our portfolio and maintain cash balances sufﬁcient to meet working capital needs. We may issue additional shares in connection with purchases of real estate when it is consistent with the objectives of the seller. We have budgeted capital expenditures of up to approximately $3,575 at various properties during 2005. The capital expenditures will primarily be for tenant and property improvements in order to enhance a proper- ty’s cash ﬂow or marketability for re-leasing or sale. This includes expected environmental remediation costs of $1,500 to be funded to prepare the Red Bank property for sale to a third party. We have received a grant from an agency of the State of Ohio, which will reimburse us for certain environmental costs at Red Bank. In addition, we have entered into an agreement to share certain other of the expected environmental costs with a third party which operated a business at the property prior to our ownership. Additionally, we have commenced negotiating a property improvement plan in connection with renewing the franchise license with Holiday Inn at the Livonia hotel. We currently estimate that we may spend less than $1,000 over the next two years if we intend to continue to operate the hotel under the Holiday Inn brand. We expect to meet our capital requirements to fund future property acquisitions, construction costs on build- to-suit transactions, any capital expenditures on existing properties and scheduled debt maturities on limited recourse mortgages through use of our cash reserves or unused amounts on its credit facility. Off-Balance Sheet and Aggregate Contractual Agreements The table below summarizes our contractual obligations as of December 31, 2004 and the effect that such obliga- tions are expected to have on our liquidity and cash ﬂow in future periods. Total Limited recourse mortgage notes payable(1) $251,156 Unsecured note payable(1) 110,720 Deferred acquisition fees(1) 1,931 Development project(2) 2,000 8,086 Operating leases(3) $373,893 (1) Amounts are inclusive of principal and interest. Less than 1 Year $26,856 — 627 2,000 646 $30,129 1-3 Years $ 71,342 110,720 1,159 — 1,513 $184,734 3-5 Years More than 5 years $64,566 — 145 — 1,535 $66,246 $88,392 — — — 4,392 $92,784 (2) We have provided a guarantee of $2,000 related to the development project in Los Angeles. (3) Operating lease obligations consist primarily of our share of minimum rents payable under an ofﬁce cost-sharing agreement. Amounts related to our foreign operations are based on the exchange rate of the Euro as of December 31, 2004. w w w . w p c a r e y . c o m 33 As of December 31, 2004, we have no material capital lease obligations, either individually or in the aggregate. We and Carey Financial Corporation (“Carey Financial”), our wholly-owned broker-dealer subsidiary, are cur- rently subject to an SEC investigation into payments made to third party broker dealers in connection with the distribution of REITs managed by us and other matters. Although no regulatory action has been initiated against us or Carey Financial in connection with the matters being investigated, it is possible that the Commission may pursue an action in the future. The potential timing of any such action and the nature of the relief or remedies the Commission may seek cannot be predicted at this time. If such an action is brought, it could materially affect our cash requirements. 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 such 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 speciﬁ- cally addressing environmental matters. The leases generally include provisions that allow for periodic environ- mental 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 estima- tion, in excess of speciﬁed amounts. Accordingly, we believe that the ultimate resolution of environmental mat- ters should not have a material adverse effect on our ﬁnancial condition, liquidity or results of operations. Critical Accounting Estimates A summary of our signiﬁcant accounting policies is 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 assump- tions 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. c l a s s i f i c a t i o n o f r e a l e s t a t e a s s e t s We classify our directly owned leased assets for ﬁnancial reporting purposes as either real estate leased under the operating method or net investment in direct ﬁnancing leases at the inception of a lease. This classiﬁcation is based on several criteria, including, but not limited to, estimates of the remaining economic life of the leased assets and the calculation of the present value of future minimum rents. In determining the classiﬁcation of a lease, we use estimates of remaining economic life provided by third party appraisals of the leased assets. The cal- culation of the present value of future minimum rents includes determining a lease’s implicit interest rate, which c l l . o c & y e r a c . p . w 34 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 ﬁnan- cial 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 and, therefore, the classiﬁcation of assets may have a signiﬁcant impact on net income even though it has no effect on cash ﬂows. i d e n t i f i c a t i o n o f t a n g i b l e a n d i n t a n g i b l e a s s e t s i n c o n n e c t i o n w i t h r e a l e s t a t e a c q u i s i t i o n s 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, build- ings 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 value 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 discount 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 cer- tain 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 assess- ment of the risk associated with the lease acquired. We acquire properties subject to net leases and consider the credit of the lessee in negotiating the initial rent. The total amount of other intangibles is allocated to in-place lease values and tenant relationship intangible values based on our evaluation of the speciﬁc characteristics of each tenant’s lease and our overall relationship with each tenant. Characteristics we consider in allocating these values include the nature and extent of the exist- ing relationship with the tenant, prospects for developing new business with the tenant, the tenant’s credit quality and the expectation of lease renewals, 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 w w w . w p c a r e y . c o m 35 taxes, insurance, other property operating costs and estimates of lost rentals at market rates during the hypothet- ical 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. i m p a i r m e n t s 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. 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 such 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 cir- cumstances. 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 noncash writedowns and impact the gain or loss ultimately real- ized upon sale of the assets. We perform a review of our estimate of residual value of our direct ﬁnancing leases at least annually to deter- mine 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 the operating method 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 termi- nation of a lease. We may also assess properties for impairment because a lessee is experiencing ﬁnancial difﬁcul- ty and because management expects that there is a reasonable probability that the lease will be terminated in a bankruptcy organization or a property remains vacant for a period that exceeds the period anticipated in a prior impairment evaluation. We accounted for our acquisition of business operations of Carey Management LLC in 2000 as a purchase. The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill. We evalu- ate goodwill for possible impairment at least annually using a two-step process. To identify any impairment, we c l l . o c & y e r a c . p . w 36 ﬁrst compare the estimated fair value of the reporting unit (management services segment) with our carrying amount, including goodwill. We calculate the estimated fair value of the management services segment by apply- ing a multiple, based on comparable companies, to earnings. If the fair value of the management services seg- ment exceeds its carrying amount, goodwill is considered not impaired and no further analysis is required. If the carrying amount of the management services unit exceeds its estimated fair value, then the second step is per- formed to measure the amount of the impairment charge. For the second step, we would determine the impairment charge by comparing the implied fair value of the goodwill with its carrying amount and record an impairment charge equal to the excess of the carrying amount over the fair value. The implied fair value of the goodwill is determined by allocating the estimated fair value of the management services segment to its assets and liabilities. The excess of the estimated fair value of the man- agement services segment over the amounts assigned to its assets and liabilities is the implied fair value of the goodwill. We have performed our annual test for impairment of our management services segment, the reportable unit of measurement, and concluded that the goodwill is not impaired. Investments in unconsolidated joint ventures are accounted for under the equity method and are recorded ini- tially at cost, as equity investments 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 may be impaired and whether or not that impairment is other than temporary. To the extent impairment has occurred, the charge shall be measured as the excess of the carrying amount of the investment over the fair value of the investment. When we identify assets as held for sale, we discontinue depreciating the assets and estimate the sales price, net of selling costs, of such assets. If in our opinion, the net sales price of the assets, which have been identiﬁed for sale, is less than the net book value of the assets, an impairment charge is recognized and a valuation allowance is established. To the extent that a purchase and sale agreement has been entered into, the allowance is based on the negotiated sales price. To the extent that we have adopted a plan to sell an asset but have not entered into a sales agreement, we will make judgments of the net sales price based on current market information. Accordingly, the initial assessment may be greater or less than the purchase price subsequently committed to and may result in a further adjustment to the fair value of the property. If circumstances arise that previously were considered unlikely and, as a result, we decide not to sell a property previously classiﬁed as held for sale, the property is reclassiﬁed as held and used. A property that is reclassiﬁed is measured and recorded individually at the lower of (a) its carrying amount before the property was classiﬁed as held for sale, adjusted for any depreciation expense that would have been recognized had the property been continuously classiﬁed as held and used, (b) the fair value at the date of the subsequent decision not to sell, or (c) the current carrying value. p r o v i s i o n f o r u n c o l l e c t e d a m o u n t s f r o m l e s s e e s On an ongoing basis, we assess our ability to collect rent and other tenant-based receivables and determine an appropriate allowance for uncollected amounts. Because our real estate operations have a limited number of lessees (fewer than 30 lessees represent more than 75% of annual rental income), 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 use statistical methods. We generally recognize a provision for uncollected rents and other tenant receivables that typi- cally range between 0.5% and 2% of lease revenues (rental income and interest income from direct ﬁnancings w w w . w p c a r e y . c o m 37 leases) and will measure our allowance against actual rent arrearages and adjust the percentage applied. For amounts in arrears, we make subjective judgments based on our knowledge of a lessee’s circumstances and may reserve for the entire receivable amount from a lessee because there has been signiﬁcant or continuing deterioration in the lessee’s ability to meet its lease obligations. Based on actual experience during 2004, we did not record a provision, as it was determined that our current allowance for uncollectible accounts was sufﬁcient. d e t e r m i n a t i o n o f c e r t a i n a s s e t b a s e d m a n a g e m e n t a n d p e r f o r m a n c e f e e s We earn asset-based management and performance fees for providing property management, leasing, advisory and other services to the CPA® REIT’s. For certain CPA® REIT’s, these fees are based on third party annual valua- tions 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 assump- tions 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. i n c o m e t a x e s Signiﬁcant judgment is required in developing our provision for income taxes, including (i) the determination of partnership-level state and local taxes and foreign taxes, and (ii) for our taxable subsidiaries, estimating deferred tax assets and liabilities and any valuation allowance that might be required against the deferred tax assets. A val- uation allowance is required if it is more likely than not that a portion or all of the deferred tax assets will not be realized. We have not recorded a valuation allowance based on our current belief that operating income of the taxable subsidiaries will be sufﬁcient to realize the beneﬁt of these assets over time. For interim periods, income tax expense for taxable subsidiaries is determined, in part, by applying an effective tax rate, which takes into account statutory federal, state and local tax rates. Recent Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (“FAS 123R”), which requires that the fair value of all stock and other equity-based compensation be treated as an expense that is reﬂected in the income statement. Note 1 to the consolidated ﬁnancial statements of this Annual Report on Form 10-K contains pro forma disclosures regarding the effect on net income and earnings per share as if we had applied the fair value method of accounting for stock-based compensation. Depending on the model used to calculate stock-based compensation expense in the future and other requirements of FAS 123R, the pro forma disclosure may not be indicative of the stock-based compensation expense that will be recognized in our future ﬁnancial statements. FAS 123R is effective for periods beginning after June 15, 2005, and allows two different methods of transition. We expect to implement FAS 123R beginning with the third quarter of ﬁscal 2005, which begins on July 1, 2005. We are currently evaluating this new standard and models that may be used to calculate future stock-based compensation expense. In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” (“FAS 148”) which amends SFAS No. 123, Accounting for Stock Based Compensation. FAS No. 148 c l l . o c & y e r a c . p . w 38 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, FAS No. 148 does not permit the use of the original FAS No. 123 prospective method of tran- sition 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 FAS No. 123 to require prominent disclosures in both annual and interim ﬁnancial statements about the method of accounting for stock based employee com- pensation, description of transition method utilized and the effect of the method used on reported results. The annual disclosure provisions of FAS No. 148 have been adopted. In May 2003, the FASB issued SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liability and Equity” (“FAS 150”). FAS 150 establishes standards to classify as liabilities certain ﬁnancial instruments that are mandatorily redeemable or include an obligation to repurchase and expands ﬁnancial state- ment disclosure requirements. Such ﬁnancial instruments will be measured at fair value with changes in fair value included in the determination of net income. FAS 150 was effective for ﬁnancial instruments entered into or modiﬁed after May 31, 2003, and otherwise effective at the beginning of the ﬁrst interim period beginning after June 15, 2003. In November 2003, the FASB issued FASB Staff Position 150-3 (“FSP 150-3”), which defers the classiﬁcation and measurement provisions of FAS 150 indeﬁnitely as they apply to mandatorily redeemable non-controlling interests associated with ﬁnite-lived entities. We have interests in ﬁve 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 FSP 150-3. As a result of the deferral provisions of FSP 150-3, these minority interests have not been reﬂected as liabilities. The carrying value of these minority interests approximates their estimated fair value as of December 31, 2004. We adopted FAS 150 in July 2003 and it did not have a signiﬁcant impact on our consolidated ﬁnancial statements. w w w . w p c a r e y . c o m 39 r e p o r t o f i n d e p e n d e n t r e g i s t e r e d p u b l i c a c c o u n t i n g f i r m To the Board of Directors and Shareholders of W. P. Carey & Co. LLC: We have completed an integrated audit of W. P. Carey & Co. LLC’s 2004 consolidated ﬁnancial statements and of its internal control over ﬁnancial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated ﬁnancial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below. c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareholders’ equity and cash ﬂows present fairly, in all material respects, the ﬁnancial position of W. P. Carey & Co. LLC and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash ﬂows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These ﬁnancial statements are the responsibility of the Company’s man- agement. Our responsibility is to express an opinion on these ﬁnancial statements based on our audits. We con- ducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the ﬁnancial statements are free of material misstatement. An audit of ﬁnancial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁnancial statements, assessing the accounting principles used and signiﬁcant estimates made by management, and evaluating the overall ﬁnancial statement presentation. We believe that our audits provide a reasonable basis for our opinion. i n t e r n a l c o n t r o l o v e r f i n a n c i a l r e p o r t i n g Also, in our opinion, management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that the Company maintained effective internal control over ﬁnancial report- ing as of December 31, 2004 based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all mate- rial respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over ﬁnancial reporting as of December 31, 2004, based on criteria established in Internal Control – Integrated Framework issued by the COSO. The Company’s management is responsible for c l l . o c & y e r a c . p . w 40 maintaining effective internal control over ﬁnancial reporting and for its assessment of the effectiveness of inter- nal control over ﬁnancial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over ﬁnancial reporting based on our audit. We conducted our audit of internal control over ﬁnancial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over ﬁnancial reporting was maintained in all material respects. An audit of internal control over ﬁnancial reporting includes obtaining an understanding of internal control over ﬁnancial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company’s 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 company’s internal control over ﬁnancial report- ing 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) pro- vide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposi- tion of the company’s 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 mis- statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that con- trols may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. New York, New York March 15, 2005 w w w . w p c a r e y . c o m 41 w . p . c a r e y & c o . l l c Consolidated Balance Sheets (In thousands except share amounts) Assets Real estate leased to others: Accounted for under the operating method, net of accumulated depreciation of $53,914 and $45,021 at December 31, 2004 and 2003 Net investment in direct ﬁnancing leases Real estate leased to others Operating real estate, net of accumulated depreciation of $6,983 and $5,805 at December 31, 2004 and 2003 Real estate under construction and redevelopment Equity investments Assets held for sale Cash and cash equivalents Due from afﬁliates Goodwill Intangible assets, net of accumulated amortization of $35,610 and $25,262 at December 31, 2004 and 2003 Other assets, net of accumulated amortization of $1,494 and $2,716 and reserve for uncollected rent of $2,601 and $2,600 at December 31, 2004 and 2003 Total assets Liabilities, Minority Interest and Members’ Equity Liabilities: Mortgage notes payable Notes payable Accrued interest Dividends payable Due to afﬁliates Accounts payable and accrued expenses Prepaid rental income and security deposits Accrued income taxes Deferred income taxes, net Other liabilities Total liabilities Minority interest Commitments and contingencies Members’ Equity: Listed shares, no par value, 37,523,462 and 36,745,027 shares issued and outstanding at December 31, 2004 and 2003 Dividends in excess of accumulated earnings Unearned compensation Accumulated other comprehensive income Total members’ equity Total liabilities, minority interest and members’ equity The accompanying notes are an integral part of the consolidated ﬁnancial statements. c l l . o c & y e r a c . p . w 42 2004 December 31, 2003 $ 476,365 190,644 $ 400,717 182,452 667,009 583,169 9,140 — 110,379 12,802 16,715 63,471 63,607 16,147 4,679 82,800 13,609 24,359 50,917 63,607 50,501 38,528 19,915 28,690 $1,013,539 $ 906,505 $ 190,698 102,000 1,389 16,626 2,033 19,838 4,881 3,909 40,349 11,748 393,471 1,407 $ 180,193 29,000 1,163 15,987 20,444 16,249 4,267 1,810 29,532 11,221 309,866 1,852 734,658 (114,431) (5,366) 3,800 709,724 (112,570) (4,863) 2,496 618,661 594,787 $1,013,539 $ 906,505 w . p . c a r e y & c o . l l c Consolidated Statements of Income (In thousands except share and per share amounts) Revenues Management income from afﬁliates Incentive and subordinated disposition fees Rental income Interest income from direct ﬁnancing leases Other operating income Revenues of other business operations Operating Expenses Depreciation Amortization General and administrative Property expenses Impairment charge on real estate and investments and loan losses Operating expenses of other business operations Income from continuing operations before other interest income, minority interest, equity investments, interest expense, gains and losses and income taxes Other interest income Minority interest in (income) loss Income (loss) from equity investments Interest expense Gain on foreign currency transactions and sale of securities Income from continuing operations before income taxes and gain on sale of real estate Provision for income taxes Income from continuing operations before gain on sale of real estate Discontinued operations: Income from operations of discontinued properties Gain on sale of real estate Impairment charges on properties held for sale (Loss) income from discontinued operations Gain on sale of real estate Net income 2004 For the Year Ended December 31, 2002 2003 $ 106,362 42,095 46,472 21,322 5,798 5,725 227,774 11,311 10,074 50,985 5,893 14,548 6,261 99,072 128,702 3,127 (1,499) 5,308 (14,838) 1,222 $ $ 88,060 — 43,992 20,655 5,233 1,298 84,255 — 44,304 22,298 1,258 289 159,238 152,404 10,432 7,296 43,698 5,929 1,480 — 68,835 90,403 2,571 (370) 4,008 (14,982) 48 9,767 9,208 42,592 5,945 20,510 — 88,022 64,382 1,640 120 (443) (15,893) 94 122,022 81,678 49,900 (52,974) (19,116) (18,083) 69,048 62,562 31,817 2,263 90 (7,550) (5,197) — 2,038 1,238 (2,960) 316 — $ 63,851 $ 62,878 $ 8,657 2,694 (8,901) 2,450 12,321 46,588 w w w . w p c a r e y . c o m 43 w . p . c a r e y & c o . l l c Consolidated Statements of Income (continued) (In thousands except share and per share amounts) Basic earnings (loss) per share: Income from continuing operations (Loss) income from discontinued operations Net income Diluted earnings (loss) per share: Income from continuing operations (Loss) income from discontinued operations Net income Weighted average shares outstanding: Basic Diluted The accompanying notes are an integral part of the consolidated ﬁnancial statements. 2004 For the Year Ended December 31, 2002 2003 $ 1.85 (.14) $ 1.71 $ 1.77 (.13) $ 1.64 $ $ $ $ 1.71 .01 1.72 1.64 .01 1.65 $ $ $ $ 1.24 .07 1.31 1.21 .07 1.28 37,417,918 36,566,338 35,530,334 38,904,725 38,008,762 36,265,230 c l l . o c & y e r a c . p . w 44 w . p . c a r e y & c o . l l c Consolidated Statements of Members’ Equity For the years ended December 31, 2001, 2002 and 2003 (In thousands except share and per share amounts) Balance at December 31, 2001 34,742,436 $664,751 $ (97,200) $(4,454) Dividends in Excess of Paid-in Accumulated Capital Unearned Earnings Compensation Shares Cash proceeds on issuance of shares, net Shares issued in connection with services rendered Shares issued in connection with prior acquisition Shares and options issued under share incentive plans Forfeitures Dividends declared Tax beneﬁt – share incentive plans Amortization of unearned compensation Net income Other comprehensive income: Change in unrealized gains on marketable securities Foreign currency translation adjustment Comprehensive income: 528,479 5,755 500,000 170,768 (3,328) 10,086 390 10,440 3,913 (70) 1,084 (3,913) 70 2,626 (61,358) 46,588 Balance at December 31, 2002 35,944,110 $690,594 $(111,970) $(5,671) Cash proceeds on issuance of shares, net Shares issued in connection with services rendered and properties acquired Shares issued in connection with prior acquisition Shares and options issued under share incentive plans Forfeitures Dividends declared Tax beneﬁt – share incentive plans Amortization of unearned compensation Repurchase of shares Net income Other comprehensive income: Change in unrealized gains on marketable securities Foreign currency translation adjustment Comprehensive income: Balance at December 31, 2003 Cash proceeds on issuance of shares, net Shares issued in connection with services rendered Shares issued in connection with prior acquisition Shares and options issued under share incentive plans Forfeitures Dividends declared Tax beneﬁt – share incentive plans Amortization of unearned compensation Repurchase and retirement of shares Net income Other comprehensive income: Change in unrealized gains on marketable securities Foreign currency translation adjustment Comprehensive income: 412,012 7,789 5,846 400,000 47,550 (9,726) 160 8,909 1,212 (132) 2,700 (54,765) (1,508) (2,827) 99 3,536 (63,478) 62,878 36,745,027 $709,724 $(112,570) $(4,863) 274,262 8,938 500,000 118,683 (32,869) 6,649 271 13,734 3,538 (138) 3,423 (90,579) (2,543) (4,409) 138 3,768 (65,712) 63,851 Balance at December 31, 2004 37,523,462 $734,658 $(114,431) $(5,366) w w w . w p c a r e y . c o m 45 w . p . c a r e y & c o . l l c Consolidated Statements of Members’ Equity (continued) For the years ended December 31, 2001, 2002 and 2003 (In thousands except share and per share amounts) Balance at December 31, 2001 Cash proceeds on issuance of shares, net Shares issued in connection with services rendered Shares issued in connection with prior acquisition Shares and options issued under share incentive plans Forfeitures Dividends declared Tax beneﬁt – share incentive plans Amortization of unearned compensation Net income Other comprehensive income: Change in unrealized gains on marketable securities Foreign currency translation adjustment Comprehensive income: Balance at December 31, 2002 Cash proceeds on issuance of shares, net Shares issued in connection with services rendered and properties acquired Shares issued in connection with prior acquisition Shares and options issued under share incentive plans Forfeitures Dividends declared Tax beneﬁt – share incentive plans Amortization of unearned compensation Repurchase of shares Net income Other comprehensive income: Change in unrealized gains on marketable securities Foreign currency translation adjustment Comprehensive income: Balance at December 31, 2003 Cash proceeds on issuance of shares, net Shares issued in connection with services rendered Shares issued in connection with prior acquisition Shares and options issued under share incentive plans Forfeitures Dividends declared Tax beneﬁt – share incentive plans Amortization of unearned compensation Repurchase and retirement of shares Net income Other comprehensive income: Change in unrealized gains on marketable securities Foreign currency translation adjustment Comprehensive income: Balance at December 31, 2004 The accompanying notes are an integral part of the consolidated ﬁnancial statements. c l l . o c & y e r a c . p . w 46 Comprehensive Income (Loss) Accumulated Other Comprehensive Income (Loss) Total $(3,432) $559,665 10,086 390 10,440 (61,358) 1,084 2,626 46,588 1,367 1,367 $(2,065) $570,888 7,789 160 8,909 (1,615) (33) (63,478) 2,700 3,536 (1,508) 62,878 4,561 4,561 $ 2,496 $594,787 6,649 271 13,734 (871) (65,712) 3,423 3,768 (2,543) 63,851 1,304 1,304 $ 3,800 $618,661 $46,588 12 1,355 1,367 $47,955 $62,878 2,567 1,994 4,561 $67,439 $63,851 1,467 (163) 1,304 $65,155 w . p . c a r e y & c o . l l c Consolidated Statements of Cash Flows (In thousands except share and per share amounts) Cash ﬂows from operating activities: Net income Adjustments to reconcile net income to net cash provided by continuing operating activities: Loss (income) from discontinued operations, including impairment charges and gain on sale Depreciation and amortization of intangibles assets and deferred ﬁnancing costs Equity income in excess of distributions Loss (gain) on sales of real estate and securities, net Minority interest in income (loss) Straight-line rent adjustments and amortization of deferred income and rent related intangibles Management income received in shares of afﬁliates Unrealized gain on foreign currency transactions Impairment charges on securities and real estate and loan losses Deferred income tax provision Realized gain on foreign currency transaction Costs paid by issuance of shares Increase (decrease) in accrued taxes payable Tax beneﬁt – share incentive plans Amortization of unearned compensation Deferred acquisition fees received Increase in structuring fees receivable Net changes in operating assets and liabilities Net cash provided by continuing operations Net cash provided by discontinued operations Net cash provided by operating activities Cash ﬂows from investing activities: Distributions received from equity investments in excess of equity income Capital distributions from equity investment Purchases of real estate and contributions to equity investments Additional capital expenditures Payment of deferred acquisition fees to afﬁliate Release of funds from escrow in connection with the sale of a property Proceeds from sales of real estate and investments Cash acquired on acquisition of subsidiary Net cash (used in) provided by investing activities Cash ﬂows from ﬁnancing activities: Dividends paid Payment of accrued preferred distributions Contributions from minority interest Distributions to minority interests Payments of mortgage principal Proceeds from mortgages and credit facility Prepayments of mortgage principal and credit facility Payment of ﬁnancing costs Proceeds from issuance of shares Retirement of shares Net cash used in ﬁnancing activities Effect of exchange rate changes on cash Net (decrease) increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year 2004 For the Year Ended December 31, 2002 2003 $ 63,851 $ 62,878 $ 46,588 5,197 22,096 (793) — 1,499 1,732 (20,999) (790) 14,548 10,817 (430) 168 2,099 3,423 3,768 5,978 (14,860) (372) 96,932 1,917 98,849 6,933 — (115,522) (1,596) (524) 7,185 6,548 — (96,976) (65,073) — — (1,101) (9,428) 170,000 (106,962) (1,238) 6,649 (2,543) (9,696) 179 (7,644) 24,359 $ 16,715 (316) 18,589 (23) 578 370 925 (18,599) (130) 1,480 9,769 (556) 215 (3,475) 2,700 3,536 1,495 (13,424) (655) 65,357 1,938 67,295 3,503 6,582 (8,184) (2,843) (524) — 24,395 1,300 24,229 (62,978) — — — (8,548) 82,683 (107,854) (391) 7,789 — (89,299) 830 3,055 21,304 $ 24,359 (2,450) 19,811 (54) (12,415) (120) (719) (13,439) — 20,510 13,155 — 500 2,265 1,084 2,626 916 (18,529) 8,004 67,733 8,163 75,896 5,560 1,255 (13,172) (811) (524) 9,366 50,247 — 51,921 (60,708) (1,423) 636 — (8,428) 79,200 (134,316) (308) 10,086 — (115,261) (122) 12,434 8,870 $ 21,304 w w w . w p c a r e y . c o m 47 w . p . c a r e y & c o . l l c Consolidated Statements of Cash Flows (continued) (In thousands except share and per share amounts) Noncash operating, investing and ﬁnancing activities: A. In connection with the acquisition of Carey Management LLC in June 2000, the Company had an obligation to issue up to an additional 2,000,000 shares over four years if speciﬁed performance criteria were achieved. As of December 31, 2004, 1,900,000 shares have been issued and our obligation has been satisﬁed. Based on the performance criteria 500,000 shares were issued for the years ended December 31, 2003, 2001 and 2000 ($13,734, $10,440 and $8,145, respectively). For the year ended December 31, 2002, the Company met one criterion and 400,000 shares ($8,910) were issued. The amounts attributable to the 1,900,000 shares are included in goodwill. Accounts payable to afﬁliates as of December 31, 2003 includes $13,734 for shares that were issued in 2004. B. The Company issued 8,938, 5,846 and 5,755 restricted shares valued at $271 in 2004, $160 in 2003 and $134 in 2002, to certain directors, ofﬁcers, and employees and afﬁliates in consideration of service rendered. Restricted shares and stock options valued at $3,538, $3,697 and $3,913 in 2004, 2003 and 2002, respectively, issued to ofﬁcers and employees and was recorded as unearned compensation of which $138, $99 and $70, respectively, was forfeited in 2004, 2003 and 2002. Included in compensation expense for the years ended December 31, 2004, 2003 and 2002 were $3,768, $3,536 and $2,626, respectively, relating to equity awards from the Company’s share incentive plans. C. During 2004, the Company acquired interests in 17 properties from Carey Institutional Properties Incorpor- ated with a fair value of $142,161, for approximately $115,158 in cash and the assumption of approximately $27,003 in limited recourse mortgage notes payable. The fair value of the assumed mortgages was $27,756. D. As partial consideration for the sale of a property in 2003, the Company received notes receivable with a fair value of $2,250. During 2004, $7,185 was released from an escrow account from the sale of a property in 2003. During 2002, $9,366 was released from an escrow account from the sale of a property in 2001. E. In 2002, the Company contributed its tenancy-in-common interest in properties leased to Learning Care Group, Inc. to a limited partnership which is accounted for under the equity method. Assets and liabilities were contributed to the limited partnerships as follows: Land Net investment in direct ﬁnancing lease Other assets, net Mortgage payable Equity investment c l l . o c & y e r a c . p . w 48 $ 1,674 2,413 1 (1,134) $ 2,954 w . p . c a r e y & c o . l l c Consolidated Statements of Cash Flows (continued) In thousands except share and per share amounts F. During 2001 the Company purchased an equity interest in an afﬁliate, W. P. Carey International LLC (“WPCI”), in consideration for issuing a promissory note of $1,000. The promissory note was satisﬁed in 2002 through the issuance of 54,765 shares of the Company to WPCI. In April 2003, the Company’s ownership interest in WPCI increased from 10% to 100% at which time WPCI transferred the 54,765 shares back to the Company and WPCI redeemed the interests of William P. Carey, Chairman and Co-Chief Executive Ofﬁcer of the Company, who had owned a 90% interest in WPCI. As a result of increasing its interest in WPCI to 100%, the Company acquired assets and liabilities of WPCI as follows: (see Note 3) Intangible assets (management contracts) Equity investments Due to afﬁliates (including $1,898 due to William P. Carey) Other assets and liabilities, net Net cash acquired Supplemental cash ﬂows information: Interest paid, net of amounts capitalized Income taxes paid Interest capitalized The accompanying notes are an integral part of the consolidated ﬁnancial statements. $ 679 324 (2,559) 256 $ 1,300 2 0 0 4 2 0 0 3 2 0 0 2 $13,901 $36,944 $ – $14,395 $ 9,074 $ 22 $16,400 $ 1,695 $ 216 w w w . w p c a r e y . c o m 49 w . p . c a r e y & c o . l l c n o t e s t o c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s (In thousands except share and per share amounts) 1 . o r g a n i z a t i o n W. P. Carey & Co. LLC (the “Company”) is a real estate investment, management and advisory company that invests in commercial properties leased to companies domestically and internationally, and earns fees as the advi- sor to afﬁliated real estate investment trusts (“CPA® REITs”) that each make similar investments. Under the advi- sory agreements with the CPA® REITs, the Company performs services related to the day-to-day management of the CPA® REITs and transaction-related services. The Company owns and manages commercial and industrial properties located in 34 states and Europe, net leased to more than 107 tenants. As of December 31, 2004, the Company’s portfolio consisted of 168 properties in the United States and 15 properties in Europe and totaled more than 19.4 million square feet. In addition, the Company manages over 765 net leased properties on behalf of the CPA® REITs: Corporate Property Associates 12 Incorporated (“CPA®:12”), Corporate Property Associates 14 Incorporated (“CPA®:14”), Corporate Property Associates 15 Incorporated (“CPA®:15”), Corporate Property Associates 16 – Global Incorporated (“CPA®:16 – Global”) and Carey Institutional Properties Incorporated (“CIP®”) until its merger into CPA®:15 during 2004. The Company commenced operations on January 1, 1998 by combining the limited partnership interests in nine CPA® Partnerships, at which time the Company listed on the New York Stock Exchange. On June 28, 2000, the Company acquired the net lease real estate management operations of Carey Management from William P. Carey (“Carey”), Chairman and Co-Chief Executive Ofﬁcer of the Company, subsequent to receiving shareholder approval. The assets acquired included the advisory agreements with four afﬁliated CPA® REITs, the Company’s 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 Manage- ment. The purchase price consisted of the initial issuance of 8,000,000 shares with an additional 2,000,000 shares issuable over four years if speciﬁed performance criteria were achieved through a period ended December 31, 2004 (of which 1,900,000 shares were issued representing an aggregate value of $41,229). The initial 8,000,000 shares issued were restricted from resale for a period of up to three years and the additional shares are subject to Section 144 regulations. The acquisition of the interests in Carey Management was accounted for as a purchase and was recorded at the fair value of the initial 8,000,000 shares issued. The total initial purchase price was approximately $131,300 including the issuance of 8,000,000 shares, transaction costs of $2,605, the acquisition of Carey Management’s minority interests in the CPA® partnerships and the value of restricted shares and options issued in respect of the interests of certain ofﬁcers in a non-qualiﬁed deferred compensation plan of Carey Management. c l l . o c & y e r a c . p . w 50 The purchase price was allocated to the assets and liabilities acquired based upon their fair market values. Intangible assets acquired, including the advisory agreements with the CPA® REITs, the Company’s management agreement, the trade name, and workforce (reclassiﬁed to goodwill on January 1, 2002), were determined pur- suant to a third party valuation. The value of the advisory agreements and the management agreement were based on a discounted cash ﬂow analysis of the projected fees. The excess of the purchase price over the fair val- ues of the identiﬁed tangible and intangible assets has been recorded as goodwill. The value of additional shares issued under the acquisition agreement is recognized as additional purchase price and recorded as goodwill. Issuances based on performance criteria are valued based on the market price of the shares on the date when the performance criteria are achieved. 2 . s u m m a r y o f s i g n i f i c a n t a c c o u n t i n g p o l i c i e s Basis of Consolidation The consolidated ﬁnancial statements include the Company, its wholly owned and majority owned controlled subsidiaries and a variable interest entity (“VIE”) in which it is the primary beneﬁciary. All material inter-entity transactions have been eliminated. For acquisitions of an interest in an entity, the Company evaluates the entity to determine if the entity is deemed a VIE, and if the Company is deemed to be the primary beneﬁciary, in accordance with FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities” (“FIN 46(R)”). Entities that meet one or more of the criteria listed below are considered VIEs. ■ The Company’s equity investment is not sufﬁcient to allow the entity to ﬁnance its activities without additional third party ﬁnancing; ■ The Company does not have the direct or indirect ability to make decisions about the entity’s business; ■ The Company is not obligated to absorb the expected losses of the entity; ■ The Company does not have the right to receive the expected residual returns of the entity; and ■ The Company’s voting rights are not proportionate to its economic interests, and substantially all of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights. The Company consolidates the entities that are VIEs and the Company is deemed to be the primary beneﬁci- ary of the VIE. For entities where the Company is not deemed to be the primary beneﬁciary or the entity is not deemed a VIE and the Company’s ownership is 50% or less and has the ability to exercise signiﬁcant inﬂuence as well as jointly-controlled tenancy-in-common interests are accounted for under the equity method, i.e. at cost, increased or decreased by the Company’s share of earnings or losses, less distributions. The Company will recon- sider its determination of whether an entity is a VIE and who the primary beneﬁciary is if certain events occur that are likely to cause a change in the original determinations. Beginning in 2004, the Company accounts for its interest in CPA®:16 – Global under the equity method. For 2003, the accounts of CPA®:16 – Global, which was formed in June 2003, were included in the Company’s consolidated ﬁnancial statements, as the Company owned all of CPA®:16 – Global’s outstanding common stock. Effective December 12, 2003, CPA®:16 – Global commenced a “best efforts” public offering for up to 1,100,000 shares. CPA®:16 – Global temporarily suspended this offering in December 2004 and subsequently withdrew it. w w w . w p c a r e y . c o m 51 The consolidated ﬁnancial statements also include the accounts of Corporate Property Associates International Incorporated (“CPAI”), which was formed in July 2003. The Company owns all of CPAI’s outstanding common stock. CPAI has ﬁled a registration statement with the Securities and Exchange Commission (“SEC”) for a public offering to sell up to 27,500,000 shares of common stock. 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 Certain prior year amounts have been reclassiﬁed to conform to the current year ﬁnancial statement presentation. Purchase Price Allocation In connection with the Company’s acquisition of properties, purchase costs are allocated to the tangible and intan- gible 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 rela- tive fair values. Below-market value of leases are also recorded at their relative fair values and are recorded as liabilities in the accompanying 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 prop- erties and (ii) management’s estimate of fair market lease rates for the property or equivalent property, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease value is amortized as a reduction of rental income over the remaining non-cancelable term of each lease. The capitalized below-market lease value is amortized as an increase to rental income over the initial term and any ﬁxed rate renewal periods in the respective leases. The total amount of other intangibles are allocated to in-place lease values and tenant relationship intangible values based on management’s evaluation of the speciﬁc characteristics of each tenant’s lease and the Company’s 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 tenant’s credit quality and the expectation of lease renewals among other factors. Third party appraisals or management’s 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. 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, is charged to expense. Factors considered in the analysis include the estimated carrying costs of the property during a hypothetical expected lease-up period, current market conditions and costs to execute similar leases. The Company also considers information c l l . o c & y e r a c . p . w 52 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 hypotheti- cal expected lease-up periods, based on management’s assessment of speciﬁc market conditions. Estimated costs to exe- cute 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 are amortized to expense over the remaining initial term of each lease. The value of tenant relationship intangibles are 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, includ- ing real estate taxes, are capitalized rather than expensed and rentals received are recorded as a reduction of capitalized project (i.e., construction) costs. Interest is capitalized by applying the interest rate applicable to outstanding borrow- ings to the average amount of accumulated expenditures for properties under construction during the period. Cash Equivalents The Company considers all short-term, highly liquid investments that are both readily convertible to cash and have a maturity of three months or less at the time of purchase to be cash equivalents. Items classiﬁed as cash equivalents include money market funds. Substantially all of the Company’s cash and cash equivalents at December 31, 2004 and 2003 were held in the custody of three ﬁnancial institutions and which balances, at times, exceed federally insurable limits. The Company mitigates this risk by depositing funds with major ﬁnancial institutions. Due to Affiliates Included in due to afﬁliates are deferred acquisition fees and amounts related to issuable shares for meeting the performance criteria in connection with the acquisition of Carey Management LLC (“Carey Management”). Deferred acquisition fees are payable for services provided by Carey Management prior to the termination of the management contract, relating to the identiﬁcation, evaluation, negotiation, ﬁnancing and purchase of proper- ties. The fees are payable in eight equal annual installments each January 1 following the ﬁrst anniversary of the date a property was purchased. 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, accounts payable and accrued expenses, security deposits and other amounts held on behalf of tenants, deferred rent, deferred revenue, including unamortized below-market rent intangibles, w w w . w p c a r e y . c o m 53 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 method leases between scheduled rents which vary during the lease term and rent recognized on a straight-line basis. Minority interests subject to redemption are recorded at fair value based on a cash ﬂow model with changes in fair value reﬂected in the determination of net income. Marketable securities are classiﬁed as available-for-sale securities and reported at fair value with the Company’s interest in unrealized gains and losses on these securities reported as a component of other comprehensive income until realized. Accumulated Other Comprehensive Income As of December 31, 2004 and 2003, accumulated other comprehensive income reﬂected in the members’ equity is comprised of the following: Unrealized gains on marketable securities Foreign currency translation adjustment Accumulated other comprehensive income As of December 31, 2003 2004 $3,285 515 $3,800 $1,818 678 $2,496 Real Estate Leased to Others Certain of the Company’s 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, 2004, lessees were responsible for the direct payment of real estate taxes of approximately $7,119. The Company diversiﬁes its real estate investments among various corporate tenants engaged in different industries, by property type and geographically. No lessee currently represents 10% or more of total leasing rev- enues. Substantially all of the Company’s leases provide for either scheduled rent increases, periodic rent increases based on formulas indexed to increases in the Consumer Price Index (“CPI”) or sales overrides. Rents from sales overrides (percentage rents) are recognized as reported by the lessees, that is, after the level of sales requiring a rental payment to the Company is reached. The leases are accounted for under either the direct ﬁnancing or operating methods. Such methods are described below: Direct ﬁnancing method – Leases accounted for under the direct ﬁnancing method are recorded at their net investment (see Note 5). Unearned income is deferred and amortized to income over the lease terms so as to produce a constant periodic rate of return on the Company’s net investment in the lease. Operating method – Real estate is recorded at cost less accumulated depreciation, minimum rental revenue is recognized on a straight-line basis over the term of the related leases and expenses (including depreciation) are charged to operations as incurred (see Note 4). c l l . o c & y e r a c . p . w 54 On an ongoing basis, the Company assesses its ability to collect rent and other tenant-based receivables and determines an appropriate allowance for uncollected amounts. Because the real estate operations has a limited number of lessees, the Company believes that it is necessary to evaluate the collectibility of these receivables based on the facts and circumstances of each situation rather than solely use statistical methods. The Company generally recognizes a provision for uncollected rents and other tenant receivables that typically ranges between 0.5% and 2% of lease revenues (rental income and interest income from direct ﬁnancings leases) and will meas- ure its allowance against actual rent arrearages and adjust the percentage applied. For amounts in arrears, the Company makes subjective judgments based on its knowledge of a lessee’s circumstances and may reserve for the entire receivable amount from a lessee because there has been signiﬁcant or continuing deterioration in the lessee’s ability to meet its lease obligations. Revenue Recognition The Company earns transaction and asset-based fees. Structuring and ﬁnancing fees 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 publicly registered real estate investment trusts formed by the Company (the “CPA® REITs”). Asset-based fees consist of property manage- ment, leasing and advisory fees and reimbursement of certain expenses in accordance with the separate manage- ment agreements with each CPA® REIT for administrative services provided for operation of such CPA® REIT. Receipt of the incentive fee portion of the management fee, however, is subordinated to the achievement of spec- iﬁed cumulative return requirements by the shareholders of the CPA® REITs. The incentive portion of manage- ment fees (the “performance fees”) may be collected in cash or shares of the CPA® REIT at the option of the Company. During 2004, 2003 and 2002, the Company elected to receive its earned performance fees in CPA® REIT shares. Performance fees of CIP® in the amount of $1,494 were received in cash in 2004. All fees are recognized as earned. Transaction fees are earned upon the consummation of a transaction and management fees are earned when services are performed. Fees subject to subordination are recognized only when the contingencies affecting the payment of such fees are resolved, that is, when the performance criteria of the CPA® REIT is achieved and contractual limitations are not exceeded. As of December 31, 2004, $800 of trans- action fees are recorded as deferred revenue in other liabilities, as a limitation which provides that certain trans- action fees cannot exceed 4.5% of the aggregate cost of properties of a CPA® REIT was exceeded. In addition, CPA®:16 – Global did not meet the preferred return criterion, as deﬁned in the Advisory Agreements, and there- fore, the Company’s recognition of performance fees of $819 and deferred acquisition fees of $7,535 were not recognized and has been deferred until the preferred return criterion is met. The Company also receives reimbursement of certain marketing costs in connection with the sponsorship of a CPA® REIT that is conducting a “best efforts” public offering. Reimbursement income is recorded as the expenses are incurred, subject to limitations on a CPA® REIT’s ability to incur offering costs. Depreciation Depreciation is computed using the straight-line method over the estimated useful lives of the properties (gener- ally forty years) and for furniture, ﬁxtures and equipment (generally up to seven years). w w w . w p c a r e y . c o m 55 Impairments When events or changes in circumstances indicate that the carrying amount may not be recoverable, the Company assesses the recoverability of its long-lived assets and certain intangible assets based on projections of undiscounted cash ﬂows, without interest charges, over the life of such assets. In the event that such cash ﬂows are insufﬁcient, the assets are adjusted to their estimated fair value. The Company performs a review of its estimate of residual value of its direct ﬁnancing leases at least annually to determine whether there has been an other than temporary decline in the Company’s current estimate of residual value of the underlying real estate assets (i.e., the estimate of what the Company could realize upon sale of the property at the end of the lease term). If the review indicates a decline in residual value that is other than temporary, a loss is recognized and the accounting for the direct ﬁnancing lease will be revised to reﬂect the decrease in the expected yield using the changed estimate, that is, a portion of the future cash ﬂow from the lessee will be recognized as a return of principal rather than as revenue. The Company tests goodwill for impairment at least annually using a two-step process. To identify any impair- ment, the Company ﬁrst compares the estimated fair value of the reporting unit (management services segment) with its carrying amount, including goodwill. The Company calculates the estimated fair value of the management services segment by applying a multiple, based on comparable companies, to earnings. If the fair value of the man- agement services segment exceeds its carrying amount, goodwill is considered not impaired. If the carrying amount of the management services unit exceeds its estimated fair value, then the second step is performed to measure the amount of impairment loss. For the second step, the Company would 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 management services segment to its assets and liabilities. The excess of the estimated fair value of the management services segment over the amounts assigned to its assets and liabilities is the implied fair value of the goodwill. In accordance with the requirements of Statement of Financial Accounting Standards (“FAS”) No. 142, “Goodwill and Other Intangibles,” the Company performed its annual tests for impairment of its management services segment, the reportable unit of measurement, and concluded that the goodwill is not impaired. Investments in unconsolidated joint ventures are accounted for under the equity method and are recorded initially at cost, and subsequently adjusted for 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 may be impaired and whether or not that impairment is other than temporary. To the extent impairment has occurred, the charge shall be measured as the excess of the carrying amount of the investment over the fair value of the investment. When the Company identiﬁes assets as held for sale, it discontinues depreciating the assets and estimates the sales price, net of selling costs, of such assets. If in the Company’s opinion, the net sales price of the assets, which have been identiﬁed for sale, is less than the net book value of the assets, an impairment charge is recognized and a valuation allowance is established. To the extent that a purchase and sale agreement has been entered into, the allowance is based on the negotiated sales price. To the extent that the Company has adopted a plan to sell an asset but has not entered into a sales agreement, it will make judgments of the net sales price based on current market information. Accordingly, the initial assessment may be greater or less than the purchase price subsequently com- mitted to and may result in a further adjustment to the fair value of the property. If circumstances arise that previ- ously were considered unlikely and, as a result, the Company decides not to sell a property previously classiﬁed as c l l . o c & y e r a c . p . w 56 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, (b) the fair value at the date of the subsequent decision not to sell, or (c) the current carrying value. Stock Based Compensation The Company accounts for stock-based compensation using the intrinsic value method prescribed in Account- ing Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations (“APB No. 25”). Under APB No. 25, compensation cost for ﬁxed plans is measured as the excess, if any, of the quoted market price of the Company’s shares at the date of grant over the exercise price of the option granted. The Company has granted restricted shares and stock options to substantially all employees. Shares were awarded in the name of the employee, who has all the rights of a shareholder, subject to certain restrictions of transferability and a risk of forfeiture. The forfeiture provisions on the awards expire annually, over their respec- tive vesting periods. Shares and stock options subject to forfeiture provisions have been recorded as unearned compensation and are presented as a separate component of members’ equity. Compensation cost for stock options and restricted stock, if any, is recognized over the applicable vesting periods. Grants of restricted stock and options of a subsidiary were awarded to certain of its ofﬁcers. The awards are sub- ject to redemption in 2012 and, therefore are being accounted for as a variable plan. The awards were initially recorded in unearned compensation and changes in fair value subsequent to the grant date are included in the determination of net income (see below). The unearned compensation is being amortized over the vesting periods. All transactions with non-employees in which the Company issues stock as consideration for services received are accounted for based on the fair value of the stock issued or services received, whichever is more reliably determinable. The Company has elected to adopt the disclosure only provisions of FAS No. 123. If stock-based compensa- tion cost had been recognized based upon fair value at the date of grant for options and restricted stock awarded under the Company’s share incentive plans and amortized to expense over their respective vesting periods in accordance with the provisions of FAS No. 123, pro forma net income would have been as follows: Net income as reported Add: Stock based compensation included in net income, as reported, net of related tax effects Less: Stock based compensation determined under fair value based methods for all awards, net of related tax effects Pro forma net income Earnings per common share as reported: Basic Diluted Pro forma earnings per common share: Basic Diluted For the Year Ended December 31, 2002 2003 2004 $63,851 $62,878 $46,588 2,264 2,282 1,709 (2,853) (3,144) (2,887) $63,262 $62,016 $45,410 $ 1.71 $ 1.64 $ 1.69 $ 1.63 $ 1.72 $ 1.65 $ 1.70 $ 1.63 $ 1.31 $ 1.28 $ 1.28 $ 1.25 w w w . w p c a r e y . c o m 57 The per share weighted average fair value of share options and warrants granted during 2004 under the Company’s Incentive Plan were estimated to range from $1.96 to $2.47 using a Black-Scholes option pricing for- mula based on the date of grant. The more signiﬁcant assumptions underlying the determination of the weighted average fair values included risk-free interest rates ranging from 3.63% to 3.92%, volatility factors ranging from 20.66% to 21.56%, dividend yields ranging from 7.79% to 8.19% and expected lives ranging from 7 to 7.13 years. The per share weighted average fair value of share options and warrants granted during 2003 under the Company’s Incentive Plan were estimated to range from $1.51 to $2.28 using a Black-Scholes option pricing for- mula based on the date of grant. The more signiﬁcant assumptions underlying the determination of the weighted average fair values included risk-free interest rates ranging from 2.60% to 3.69%, volatility factors ranging from 21.35% to 21.89%, dividend yields ranging from 8.26% to 8.51% and expected lives ranging from 4.56 to 7.5 years. The per share weighted average fair value of share options and warrants granted during 2002 under the Company’s Incentive Plan were estimated to be $1.26 using a Black-Scholes option pricing formula. The more signif- icant assumptions underlying the determination of the weighted average fair value include a risk-free interest rate of 1.73%, a volatility factor of 21.83%, a dividend yield of 8.59% and an expected life of 2.99 years. The Company’s non-qualiﬁed deferred compensation plan provides that each participating ofﬁcer’s cash com- pensation in excess of designated amounts is deferred and he or she is awarded an interest that is intended to correspond to the per share value of a CPA® REIT designated at the time of such award. The value of the award is adjusted at least annually to reﬂect changes based on the underlying appraised value of a share of common stock of the CPA® REIT. The deferred compensation plan is a variable plan and changes in the fair value of the interests are included in the determination of net income. Foreign Currency Translation The Company owns interests in several real estate investments in France. The functional currency for these invest- ments is the Euro. The translation from the Euro to U. S. Dollars is performed for assets and liabilities using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. The gains and losses resulting from such translation are reported as a component of other comprehensive income as part of members’ equity. The cumulative translation adjustment as of Decem- ber 31, 2004 and 2003 were gains of $515 and $678, 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 cur- rency 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 transac- tions that are (i) designated as, and are effective as, economic hedges of a net investment and (ii) inter-company for- eign currency transactions that are of a long-term nature (that is, settlement is not planned or anticipated in the foreseeable future), when the entities to the transactions are consolidated or accounted for by the equity method in the Company’s ﬁnancial statements will not be included in determining net income but will be accounted for in the same c l l . o c & y e r a c . p . w 58 manner as foreign currency translation adjustments and reported as a component of other comprehensive income as part of shareholder’s equity. The contributions to the equity investments 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, 2004 and 2003, the Company recognized unrealized gains of $790 and $130, respectively, from such transactions. In 2004 and 2003, the Company recognized realized gains of $430 and $556, respectively, on foreign currency transactions in connection with the transfer of cash from foreign operating subsidiaries to the parent company. Income Taxes The Company has elected to be treated as a partnership for federal income tax purposes. The Company’s real estate operations are conducted through partnership or limited liability companies electing to be treated as partnerships for Federal income tax purposes. As partnerships, the Company and its partnership subsidiaries are generally not directly subject to tax and the taxable income or loss of these operations are included in the income tax returns of the members; accordingly, no provision for income tax expense or beneﬁt is reﬂected in the accompanying ﬁnancial statements. These operations are subject to certain state, local and foreign taxes. The Company conducts its management services operations though a wholly owned taxable corporation. These operations are subject to federal, state, local and foreign taxes as applicable. The Company’s ﬁnancial state- ments 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 com- puted under the asset and liability method. The asset and liability method requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between tax bases and ﬁnancial bases of assets and liabilities (see Note 17). Assets Held for Sale Assets held for sale are accounted for at the lower of carrying value or fair value less costs to dispose. Assets are classiﬁed as held for sale when the Company has committed to a plan to actively market a property for sale and expects that a sale will be completed within one year. The results of operations and the related gain or loss on sale of properties classiﬁed as held for sale are included in discontinued operations (see Note 7). If circumstances arise that previously were considered unlikely and, as a result, the Company decides not to sell a property previously classiﬁed as held for sale, the property is reclassiﬁed as held and used. A property that is reclassiﬁed is measured and recorded individually at the lower of (a) its carrying amount before the property was classiﬁed as held for sale, adjusted for any depreciation expense that would have been recognized had the pro- perty been continuously classiﬁed as held and used, (b) the fair value at the date of the subsequent decision not to sell, or (c) the current carrying value. The Company recognizes gains and losses on the sale of properties when among other criteria, the parties are bound by the terms of the contract, all consideration has been exchanged and all conditions precedent to closing w w w . w p c a r e y . c o m 59 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. Earnings Per Share The Company presents both basic and diluted earnings per share (“EPS”). Basic EPS excludes dilution and is com- puted by dividing net income available to shareholders by the weighted average number of shares outstanding for the period. Diluted EPS reﬂects the potential dilution that could occur if securities or other contracts to issue shares were exercised or converted into common stock, where such exercise or conversion would result in a lower EPS amount. Basic and diluted earnings per share were calculated as follows: Net income Weighted average shares – basic Effect of dilutive securities – stock options and warrants Weighted average shares – diluted 2004 For the Year Ended December 31, 2002 2003 $ 63,851 $ 62,878 $ 46,588 37,417,918 1,486,807 36,566,338 1,442,424 35,530,334 734,896 38,904,725 38,008,762 36,265,230 Recent Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (“FAS 123R”), which requires that the fair value of all stock and other equity-based compensation be treated as an expense that is reﬂected in the income statement. Depending on the model used to calculate stock-based compensation expense in the future and other requirements of FAS 123R, the pro forma disclosure may not be indicative of the stock- based compensation expense that will be recognized in our future ﬁnancial statements. FAS 123R is effective for periods beginning after June 15, 2005, and allows two different methods of transition. We expect to implement FAS 123R beginning with the third quarter of ﬁscal 2005, which begins on July 1, 2005. We are currently evaluat- ing this new standard and models that may be used to calculate future stock-based compensation expense. In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” (“FAS 148”) which amends SFAS No. 123, Accounting for Stock Based Compensation. FAS 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, FAS No. 148 does not permit the use of the original FAS No. 123 prospective method of transi- tion 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 FAS No. 123 to require prominent disclosures in both annual and interim ﬁnancial statements about the method of accounting for stock based employee compensation, descrip- tion of transition method utilized and the effect of the method used on reported results. The annual disclosure pro- visions of FAS No. 148 have been adopted. In May 2003, the FASB issued SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liability and Equity” (“FAS 150”). FAS 150 establishes standards to classify as liabilities certain ﬁnancial instruments that are mandatorily redeemable or include an obligation to repurchase and expands ﬁnancial state- ment disclosure requirements. Such ﬁnancial instruments will be measured at fair value with changes in fair c l l . o c & y e r a c . p . w 60 value included in the determination of net income. FAS 150 was effective for ﬁnancial instruments entered into or modiﬁed after May 31, 2003, and otherwise effective at the beginning of the ﬁrst interim period beginning after June 15, 2003. In November 2003, the FASB issued FASB Staff Position 150-3 (“FSP 150-3”), which defers the classiﬁcation and measurement provisions of FAS 150 indeﬁnitely as they apply to mandatorily redeemable non-controlling interests associated with ﬁnite-lived entities. We have interests in ﬁve joint ventures that are consolidated and have minority interests that have ﬁnite lives and were considered mandatorily redeemable non-controlling inter- ests prior to the issuance of FSP 150-3. As a result of the deferral provisions of FSP 150-3, these minority inter- ests have not been reﬂected as liabilities. We adopted FAS 150 in July 2003 and it did not have a signiﬁcant impact on our consolidated ﬁnancial statements. 3 . t r a n s a c t i o n s w i t h r e l a t e d p a r t i e s The Company earns fees as the advisor (“Advisor”) to CPA®:12, CPA®:14, CPA®:15, CPA®:16 – Global and through September 1, 2004, CIP®. Effective September 1, 2004, CIP® was merged into CPA®:15. Under the advisory agree- ments with the CPA® REITs, the Company performs various services, including but not limited to the day-to-day management of the CPA® REITs and transaction-related services. The Company earns an asset management fee of 1/2 of 1% per annum of average invested assets, as deﬁned in the advisory agreements, for each CPA® REIT and, based upon speciﬁc performance criteria for each REIT, may be entitled to receive performance fees, calculated on the same basis as the asset management fee, and is reimbursed for certain costs, primarily the cost of personnel. Effective in 2005, the advisory agreement was amended to allow the Company to elect to receive restricted stock for any fee due from each CPA® REIT. For the years ended December 31, 2004, 2003 and 2002, asset-based fees and reimbursements earned were $61,193, $53,103 and $37,250, respectively. For the year ended December 31, 2004, CPA®:16 – Global did not meet the preferred return criterion (a non-compounded cumulative distribution return of 6%), as deﬁned in the Advisory Agreements, and therefore, the Company’s recognition of performance fees of $819 will only be recorded if the preferred return criterion is met. In connection with structuring and negotiating acquisitions and related mortgage ﬁnancing for the CPA® REITs, the advisory agreements provide for transaction fees based on the cost of the properties acquired. A portion of the fees are payable in equal annual installments ranging from three to eight years, subject to each CPA® REIT meeting its “preferred return.” Unpaid installments bear interest at annual rates ranging from 5% to 7%. The Company may also earn fees related to the disposition of properties, subject to subordination provisions and will only be recognized as such subordination provisions are achieved. For the years ended December 31, 2004, 2003 and 2002, the Company earned transaction fees of $33,677, $34,957 and $47,005, respectively. CPA®:16 – Global has not met its preferred return and for year ended December 31, 2004, cumulative deferred acquisition fees of $7,535 and interest thereon of $171, were not recognized, and will be recognized if CPA®:16 – Global meets the preferred return criterion. In July 2004, the boards of directors of CIP® and CPA®:15 each approved a deﬁnitive agreement under which CPA®:15 would acquire CIP®’s business in a stock-for-stock merger (the “Merger”). The Merger was approved by the shareholders of CIP® and CPA®:15 in August 2004, and completed on September 1, 2004. In connection with providing a liquidity event for CIP® shareholders, CIP® paid the Company incentive fees of $23,681 and disposi- tion fees of $22,679. Disposition fees relating to the interests in the properties acquired by the Company of $4,265 were not earned and have been applied, for ﬁnancial reporting purposes, as a reduction in the cost basis of such w w w . w p c a r e y . c o m 61 interests. The Company also recognized transaction fees of $11,493 in connection with CPA®:15’s acquisition of properties in connection with the Merger. Prior to the Merger, the Company acquired interests in 17 properties from CIP® with a fair value of $142,161 for $115,158 in cash and the assumption of $27,003 in limited recourse mortgage notes payable, (the “Acquisition”). The amounts are inclusive of the Company’s pro rata share of equity interests acquired in the transaction. The fair value of the assumed mortgages was $27,756. The purchase price of the properties was based on a third party valua- tion of each of CIP®’s properties. The properties are primarily single tenant net-leased properties, with remaining lease terms ranging from 19 months to over ten years. Seven of the properties are encumbered with limited recourse mortgage ﬁnancing with ﬁxed rates of interest ranging from 7.5% to 10% and maturity dates ranging from December 2007 to June 2012. The Company owns interests in entities, which range from 22.50% to 50%, a jointly-controlled 36% tenancy- in-common interest in two properties subject to a net lease with the remaining interests held by afﬁliates and owns common stock in each of the CPA® REITs. The Company has a signiﬁcant inﬂuence in these investments, which are accounted for under the equity method of accounting. The Company is the general partner in a limited partnership that leases the Company’s home ofﬁce spaces and participates in an agreement with certain afﬁliates, including the CPA® REITs for the purpose of leasing ofﬁce space used for the administration of the Company and other afﬁliated real estate entities and sharing the associated costs. Pursuant to the terms of the agreement, the Company’s share of rental, occupancy and leasehold improvement costs is based on gross revenues. Expenses incurred were $531, $529 and $545 in 2004, 2003 and 2002, respectively. The Company’s share of minimum lease payments on the ofﬁce lease as of December 31, 2004 is $7,137 through 2016. Prior to the termination of the management agreement, Carey Management performed certain services for the Company and earned transaction fees in connection with the purchase and disposition of properties. The Company is obligated to pay deferred acquisition fees in equal annual installments over a period of no less than eight years. As of December 31, 2004 and 2003, unpaid deferred acquisition fees were $1,709 and $2,234, respectively, and bear interest at an annual rate of 6%. Installments of $524, were paid in 2004, 2003 and 2002. A person who serves as a director and an ofﬁcer of the Company is the sole shareholder of Livho, Inc. (“Livho”), a lessee of the Company. Effective December 31, 2003, the Company consolidates the accounts of Livho in its consolidated ﬁnancial statements in accordance with FIN 46(R). An independent director of the Company has an ownership interest in companies that own the minority interest in the Company’s French majority-owned subsidiaries. The director’s ownership interest is subject to the same terms as all other ownership interests in the subsidiary companies. Prior to April 1, 2003, the Company owned a 10% interest in WPCI, a company that structures net lease transactions on behalf of the CPA® REITs outside of the United States of America. The remaining 90% interest in WPCI was owned by Carey. The Company’s Board of Directors approved a transaction, which resulted in the Company’s acquisition of 100% of the ownership of WPCI through the redemption of Carey’s interest on April 1, 2003. WPCI distributed 492,881 shares of the Company and $1,898 of cash to Carey, equivalent to his contributions to WPCI. The Company accounted for the acquisition as a purchase and reﬂected the assets acquired and liabilities assumed at their estimated fair value. Prior to the redemption, the Company accounted for its investment in WPCI under the equity method of accounting. As a result of this transaction, the Company c l l . o c & y e r a c . p . w 62 through WPCI has acquired exclusive rights to structure net lease transactions outside of the United States of America on behalf of the CPA® REITs. The following consolidated pro forma ﬁnancial information has been presented as if acquisition of interests in 16 properties from CIP® by the Company had occurred on January 1, 2004 and 2003 for the years ended December 31, 2004 and 2003, respectively. No pro forma effect is given to a property acquired which is currently held for sale and included in discontinued operations. The pro forma ﬁnancial information is not necessarily indicative of what the actual results would have been, nor does it purport to represent the results of operations for future periods. Pro forma total revenues Pro forma net income Pro forma earnings per share: Basic Diluted For the Year Ended December 31, 2003 2004 (Unaudited) (Unaudited) $234,870 64,616 $ $ 1.73 1.66 $170,147 64,614 $ $ 1.77 1.70 4 . r e a l e s t a t e l e a s e d t o o t h e r s a c c o u n t e d f o r u n d e r t h e o p e r a t i n g m e t h o d Real estate leased to others, at cost, and accounted for under the operating method is summarized as follows: Land Buildings and improvements Less: Accumulated depreciation As of December 31, 2003 2004 $ 93,926 436,353 530,279 53,914 $ 77,170 368,568 445,738 45,021 $476,365 $400,717 The scheduled future minimum rents, exclusive of renewals and expenses paid by tenants, under non-cancelable operating leases are as follows: Year Ended December 31, 2005 2006 2007 2008 2009 Thereafter through 2021 $ 49,941 47,513 41,319 35,727 31,298 104,477 Contingent rentals (including percentage rents and CPI-based increases) were $2,137, $1,427 and $1,550 in 2004, 2003 and 2002, respectively. w w w . w p c a r e y . c o m 63 5 . n e t i n v e s t m e n t i n d i r e c t f i n a n c i n g l e a s e s Net investment in direct ﬁnancing leases is summarized as follows: Minimum lease payments receivable Unguaranteed residual value Less: Unearned income As of December 31, 2003 2004 $ 158,864 162,724 321,588 (130,944) $ 173,120 179,869 352,989 (170,537) $ 190,644 $ 182,452 Scheduled future minimum rents, exclusive of renewals and expenses paid by tenants, under noncancelable direct ﬁnancing leases are as follows: Year Ended December 31, 2005 2006 2007 2008 2009 Thereafter through 2022 $21,822 20,381 18,510 16,636 15,873 65,642 Contingent rentals (including percentage rents and CPI-based increases) were approximately $2,382, $2,189 and $2,710 in 2004, 2003 and 2002, respectively. 6 . e q u i t y i n v e s t m e n t s The Company owns equity interests as a limited partner in two limited partnerships, four limited liability compa- nies and a jointly-controlled 36% tenancy-in-common interest in two properties subject to a master lease with the remaining interests owned by afﬁliates and all of which net lease real estate on a single-tenant basis. In connection with the Acquisition, the Company increased its 18.54% interest in a limited partnership, which leases property to Titan Corporation, to 100%. The Company accounted for its 18.54% interest as an equity investment, and as a result of acquiring the controlling ownership interest as of September 1, 2004, the Company consolidates this interest as of such date. The Company also acquired CIP®’s 50% noncontrolling interest in a limited partnership, which leases property to Sicor, Inc., and is accounting for this interest under the equity method of accounting. The Company also owns common stock in four CPA® REITs with which it has advisory agreements. The interests in the CPA® REITs are accounted for under the equity method due to the Company’s ability to exercise signiﬁcant inﬂuence as the Advisor to the CPA® REITs. The CPA® REITs are publicly registered and their audited consolidated ﬁnancial statements are ﬁled with the SEC in Annual Reports on Form 10-K. In connection with earning perform- ance fees, the Company has elected to receive restricted shares of common stock in the CPA® REITs rather than cash in consideration for such fees. In connection with the Merger, the Company elected to receive 1,098,367 shares of common stock in CPA®:15, in exchange for its CIP® shares, a portion of which are still restricted. c l l . o c & y e r a c . p . w 64 As of December 31, 2004, the Company’s ownership in the CPA® REITs is as follows: CPA®:12 CPA®:14 CPA®:15 CPA®:16 – Global Shares % of outstanding Shares 1,242,519 2,465,236 2,129,361 20,000 3.91% 3.57% 1.69% 0.04% Combined ﬁnancial information of the afﬁliated equity investees is summarized as follows: Assets (primarily real estate) Liabilities (primarily mortgage notes payable) Owner’s equity Company’s share of equity investees’ net assets Revenue (primarily rental income and interest income from direct ﬁnancing leases) Expenses (primarily depreciation and property expenses) Other interest income Minority interest in income Income from equity investments Interest expense Gain (loss) on sales Income from continuing operations (Loss) income from discontinued operations Gain on sale of real estate Impairment charge on real estate Net income As of December 31, 2003 2004 $5,189,736 2,372,468 $3,535,954 1,719,459 $2,817,268 $1,816,495 $ 110,379 $ 82,800 2004 For the Year Ended December 31, 2002 2003 $ 349,023 (145,194) 7,927 (12,986) 38,439 (130,302) 7,464 114,371 (483) 2,232 (5,150) $ 263,719 (141,964) 6,204 (5,720) 30,650 (95,128) 9,316 67,077 (114) — (1,000) $175,031 (68,237) 4,832 (3,286) 12,354 (65,136) (92) 55,466 1,753 333 — $ 110,970 $ 65,963 $ 57,552 Company’s share of net income (loss) from equity investments $ 5,308 $ 4,008 $ (443) Until January 1, 2003, the Company owned interests in the operating partnership (“OP units”) of MeriStar Hospitality Corporation (“MeriStar”), a publicly traded real estate investment trust accounted as an equity invest- ment. Effective January 1, 2003, the OP units were converted to shares of MeriStar common stock at which time the Company started accounting for its interest as an available-for-sale security. For the year ended December 31, 2002, MeriStar reported revenues of $865,693 expenses of $799,278 and a net loss of $161,248. The Company’s share of the loss for 2002 was $3,019. w w w . w p c a r e y . c o m 65 7 . a s s e t s h e l d f o r s a l e a n d d i s c o n t i n u e d o p e r a t i o n s In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS 144”), effective for ﬁnancial statements issued for ﬁscal years beginning after December 15, 2001, the results of operations, impairments and gain or loss on sales of real estate for properties sold or held for sale are to be reﬂected in the consolidated statements of operations as “Discontinued Operations” for all periods presented. The provisions of FAS 144 are effective for disposal activities initiated by the Company’s commitment to a plan of disposition after the date it is initially applied (January 1, 2002). Properties held for sale as of December 31, 2001 are not included in “Discontinued Operations”. The results of operations and the related gain or loss on sale of properties sold in 2002 (see Note 14) that were held for sale as of December 31, 2001 are not included in “Discontinued Operations.” Property sales and impairment charges in 2004, 2003 and 2002 that are included in “Discontinued Operations” are as follows: 2 0 0 4 In July 2004, the Company sold its Leeds, Alabama and Toledo, Ohio properties for $4,625. The Company previ- ously recognized an impairment charge on properties held for sale of $690 in 2003 to write down the Leeds prop- erty to the estimated net sales proceeds from the anticipated sale. The $4,700 impairment charge recorded in 2004 on the Toledo property is described in Note 13. The results of operations from the Leeds and Toledo properties are included in discontinued operations. In December 2004, the Company entered into an agreement with an auctioneer to sell its Frankenmuth, Michigan property, at auction. In March 2005, the Company sold this property to a third party for $1,700. The Company recog- nized an impairment charge of $1,000 to write down the property value to the estimated net sales proceeds anticipat- ed from the sale (see Note 13). The property has been classiﬁed as held for sale as of December 31, 2004, and the results of its operations have been included in discontinued operations. During 2004, the Company sold properties in Kenbridge, Virginia; McMinnville, Tennessee; Panama City, Florida and Garland, Texas for $2,256 and recognized net gain on sales of $85. 2 0 0 3 During 2003, the Company sold properties in Broomall, Pennsylvania; Cuyahoga Falls, Ohio; Canton, Michigan; Alpena, Michigan; Apache Junction, Arizona and Schiller Park, Illinois for net sales proceeds of $12,986 and rec- ognized net gain on sales of $807. In July 2003, the Company sold a property in Lancaster, Pennsylvania for $5,000 and recognized a loss on sale of $29. Prior to the sale, the property value was written down to reﬂect the estimated net sales proceeds and an impairment charge on properties held for sale of $1,430 was recognized and included in discontinued operations for the year ended December 31, 2003. In connection with the anticipated sale of the Company’s McMinnville, Tennessee property the Company recog- nized an impairment charge on properties held for sale of $550 on the writedown of the property to its anticipated sales price, less estimated costs to sell, for the period ended December 31, 2003. The property was sold in July 2004. The Company incurred other charges of $690 during 2003 in connection with a property’s decline in value and a $290 charge related to the early retirement of a mortgage obligation. c l l . o c & y e r a c . p . w 66 2 0 0 2 In July 2002, the Company sold six properties leased to Saint-Gobain Corporation located in New Haven, Connec- ticut; Mickelton, NJ; Aurora, Ohio; Mantua, Ohio and Bristol, Rhode Island for $26,000 and recognized a gain on sale of $1,796. The sales proceeds were placed in an escrow account for the purposes of entering into a Section 1031 noncash exchange, which was completed as a result of purchasing replacement properties in September and December 2002. During 2002, the Company also sold properties in Petoskey, Michigan; Colville, Washington; McMinnville, Tennessee; College Station, Texas and Glendale, Arizona for an aggregate of $4,743 and recognized a net gain on sales of $568. o t h e r i n f o r m a t i o n The effect of suspending depreciation expense as a result of the classiﬁcation of certain properties as held for sale was $381, $259 and $116 for the years ended December 31, 2004, 2003 and 2002, respectively. As of December 31, 2004, the operations of ten properties, which have been sold during 2004 or are held for sale as of December 31, 2004, are included as “Discontinued Operations.” Amounts reﬂected in Discontinued Operations for the years ended December 31, 2004, 2003 and 2002 are as follows: Revenues Rental income Interest income from direct ﬁnancing leases Revenues of other business operations Other income Expenses Depreciation and amortization Property expenses General and administrative Provision for income taxes – state and local Operating expenses of other business operations Impairment charge on real estate (Loss) income before other interest income, gains on sale and interest expense Other interest income Gains on sale of real estate Interest expense 2004 For the Year Ended December 31, 2002 2003 $ 1,248 42 — 2,767 4,057 $ 3,240 665 1,694 915 6,514 $ 6,070 3,705 4,769 2,250 16,794 200 1,559 — — 35 7,550 9,344 (5,287) — 90 — 751 2,634 — 35 1,489 2,960 7,869 (1,355) 567 1,238 (134) 1,552 1,192 48 117 4,209 8,901 16,019 775 89 2,694 (1,108) (Loss) income from discontinued operations $(5,197) $ 316 $ 2,450 In March 2005, the Company sold its Denton, Texas property for $2,000 which approximated the property’s w w w . w p c a r e y . c o m 67 carrying value. The Property had been classiﬁed as held for sale as of December 31, 2004 in the accompanying ﬁnancial statements. 8 . g o o d w i l l a n d i n t a n g i b l e s In connection with its acquisition of properties, the Company has recorded above-market rent, in-place lease and tenant relationship intangibles of $22,321. Included in other liabilities allocated to the purchase cost of the Acquisition is a below-market rent intangible of $2,009. These intangibles are being amortized over periods ranging from 19 months to 271⁄2 years. Amortization of below-market and above-market rent intangibles are recorded as an adjustment to revenue. Goodwill represents the excess of the purchase price of the net lease real estate management operations over the fair value of net assets acquired. Other intangible assets represent costs allocated to trade names and advisory con- tracts with the CPA® REITs. Effective January 1, 2002, goodwill and indeﬁnite-lived intangible assets are no longer amortized and workforce has been reclassiﬁed as goodwill. Intangibles are being amortized over their estimated useful lives, which range from 21⁄2 to 161⁄2 years. The Company performs an annual evaluation of testing for impair- ment of goodwill. Based on its evaluation, the Company concluded that its goodwill is not impaired. Goodwill and intangibles are summarized as follows: Amortized intangibles: Management contracts Less: accumulated amortization Lease intangibles: In-place lease Tenant relationship Above-market rent Less: accumulated amortization Unamortized goodwill and indeﬁnite-lived intangibles: Trade name Goodwill Below-market rent Less: accumulated amortization As of December 31, 2003 2004 $ 59,815 (34,089) $ 59,815 (25,262) 25,726 34,553 13,630 4,863 3,828 (1,521) 20,800 3,975 63,607 — — — — — 3,975 63,607 $114,108 $102,135 $ (2,009) 45 $ (1,964) $ $ — — — Amortization of intangibles was $10,304, $7,277 and $9,194 for the years ended December 31, 2004, 2003 and 2002, respectively. The remaining unamortized management contract for CIP® was accelerated to expense as a result of the Merger. c l l . o c & y e r a c . p . w 68 Scheduled net amortization of intangibles for each of the next ﬁve years is as follows: $9,648 in 2005, $9,406 in 2006, $7,295 in 2007, $4,211 in 2008 and $4,184 in 2009. 9 . d i s c l o s u r e s a b o u t f a i r v a l u e o f f i n a n c i a l i n s t r u m e n t s The Company estimates that the fair value of mortgage notes payable and other notes payable was $294,121 and $210,000 at December 31, 2004 and 2003, respectively. The fair value of ﬁxed rate debt instruments was evaluated using a discounted cash ﬂow model with rates that take into account the credit of the tenants and interest rate risk. The carrying value of the combined debt was $292,698 and $209,193 at December 31, 2004 and 2003, respectively. The fair value of the note payable from the line of credit approximates the carrying value as it is a variable rate obligation with an interest rate that resets to market rates. Marketable securities had a carrying value of $3,655 and $3,660 as of December 31,2004 and 2003, respective- ly, and a fair value of $6,940 and $5,479 as of December 31,2004 and 2003, respectively. The Company’s other assets and liabilities, including minority interests, had fair values that approximated their carrying values at December 31, 2004 and 2003, respectively. 1 0 . m o r t g a g e n o t e s p a y a b l e a n d n o t e s p a y a b l e Mortgage notes payable, substantially all of which are limited recourse obligations, are collateralized by the assign- ment of various leases and by real property with a carrying value of approximately $313,689 at December 31, 2004. The interest rates on the variable rate debt as of December 31, 2004 ranged from 3.5375% to 6.44% and mature from 2007 to 2016. The interest rates on the ﬁxed rate debt as of December 31, 2004 ranged from 6.11% to 10.125%, and mature from 2005 to 2018. Scheduled principal payments for the mortgage notes and notes payable during each of the next ﬁve years fol- lowing December 31, 2004 and thereafter are as follows: Year Ending December 31, 2005 2006 2007 2008 2009 Thereafter through 2018 Total (a) Includes maturity of credit facility in May 2007. Total Debt Fixed Rate Debt Variable Rate Debt $ 14,355 23,926 128,587 11,507 38,622 75,701 $ 11,885 21,159 23,526 8,128 35,045 36,659 $ 2,470 2,767 105,061(a) 3,379 3,577 39,042 $292,698 $136,402 $156,296 On May 27, 2004, the Company entered into a credit facility for a $175,000 line of credit with J.P. Morgan Chase Bank and eight other banks. A prior line of credit of $185,000 matured in March 2004 and was extended on a short-term basis. The line of credit, which matures in May 2007, provides the Company a one-time right to increase the amount available under the line of credit up to $225,000. Advances from the line of credit bear interest at an annual rate indexed to either (i) the one, two, three or six-month London Inter-Bank Offered Rate, as deﬁned, plus a spread which ranges from 0.6% to 1.45% depending on leverage or w w w . w p c a r e y . c o m 69 corporate credit rating or (ii) the greater of the bank’s Prime Rate and a rate indexed to the Federal Funds Effective Rate. Advances are prepayable at any time. The revolving credit agreement has ﬁnancial covenants that require, among other things, the Company to (i) maintain minimum equity value of $550,000 plus 85% of amounts received by the Company as proceeds from the issuance of equity interests and (ii) meet or exceed certain operating and coverage ratios. The Company is in compliance with these covenants. As of December 31, 2004, the Company had $102,000 drawn from the credit facility. At December 31, 2004 the average interest rate on advances on the line of credit was 3.5375%. At December 31, 2003 the average interest rate on advances on the prior line of credit was 2.34%. In addition, the Company pays a fee (a) ranging between 0.15% and 0.20% per annum of the unused portion of the credit facility, depending on the Company’s leverage, if no minimum credit rating for the Company is in effect or (b) equal to .15% of the total commitment amount, if the Company has obtained a certain minimum credit rating. The Company declared a quarterly dividend of $.442 per share on December 13, 2004 payable on January 15, 2005 to shareholders of record as of December 31, 2004. 1 1 . d i v i d e n d s p a y a b l e As of December 31, 2004, the Company was not involved in any material litigation. 1 2 . c o m m i t m e n t s a n d c o n t i n g e n c i e s In March 2004, following a broker-dealer examination of Carey Financial Corporation (“Carey Financial”), the Company’s wholly-owned broker-dealer subsidiary, by the staff of the SEC, Carey Financial received a letter from the staff of the SEC alleging certain infractions by Carey Financial of the Securities Act of 1933, the Securities Exchange Act of 1934, the rules and regulations thereunder and those of the National Association of Securities Dealers, Inc. (“NASD”). The staff alleged that in connection with a public offering of shares of CPA®:15, Carey Financial and its retail distributors sold certain securities without an effective registration statement. Speciﬁcally, the staff alleged that the delivery of investor funds into escrow after completion of the ﬁrst phase of the offering (the “Phase I Offering”), completed in the fourth quarter of 2002 but before a registration statement with respect to the second phase of the offering (the “Phase II Offering”) became effective in the ﬁrst quarter of 2003, constituted sales of securities in vio- lation of Section 5 of the Securities Act of 1933. In addition, in the March 2004 letter the staff raised issues about whether actions taken in connection with the Phase II offering were adequately disclosed to investors in the Phase I Offering. In the event the Commission pursues these allegations, or if affected CPA®:15 investors bring a similar private action, CPA®:15 might be required to offer the affected investors the opportunity to receive a return of their investment. It cannot be determined at this time if, as a consequence of investor funds being returned by CPA®:15, Carey Financial would be required to return to CPA®:15 the commissions paid by CPA®:15 on purchases actually rescinded. Further, as part of any action against the Company, the SEC could seek disgorgement of any such commissions or different or additional penalties or relief, including without limitation, injunctive relief and/or civil monetary penalties, irrespective of the outcome of any rescission offer. The Company cannot predict the potential effect such a rescission offer or SEC action may ultimately have on the operations of Carey Financial or the Company. There can be no assurance that the effect, if any, would not be material. The staff also alleged in the March 2004 letter that the prospectus delivered with respect to the Phase I c l l . o c & y e r a c . p . w 70 Offering contained material misrepresentations and omissions in violation of Section 17 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder in that the prospectus failed to disclose that (i) the proceeds of the Phase I Offering would be used to advance commissions and expenses payable with respect to the Phase II Offering, and (ii) the payment of dividends to Phase II shareholders whose funds had been held in escrow pending effectiveness of the registration statement resulted in signiﬁcantly higher annualized rates of return than were being earned by Phase I shareholders. Carey Financial has reim- bursed CPA®:15 for the interest cost of advancing the commissions that were later recovered by CPA®:15 from the Phase II Offering proceeds. In June 2004, the Division of Enforcement of the SEC (“Enforcement Staff”) commenced an investigation into compliance with the registration requirements of the Securities Act of 1933 in connection with the public offerings of shares of CPA®:15 during 2002 and 2003. In December 2004, the scope of the Enforcement Staff’s inquiries broadened to include broker-dealer compensation arrangements in connection with CPA®:15 and other REITs managed by the Company, as well as the disclosure of such arrangements. At that time the Company and Carey Financial received a subpoena from the Enforcement Staff seeking documents relating to payments by the Company, Carey Financial, and REITs managed by the Company to (or requests for payment received from) any broker-dealer, excluding selling commissions and selected dealer fees. The Company and Carey Financial subsequently received additional subpoenas and requests for information from the Enforcement Staff seeking, among other things, information relating to any revenue sharing agreements or payments (deﬁned to include any payment to a broker-dealer, excluding selling commissions and selected dealer fees) made by the Company, Carey Financial or any Company-managed REIT in connection with the distribution of Company-managed REITs or the reten- tion or maintenance of REIT assets. Other information sought by the SEC includes information concerning the accounting treatment and disclosure of any such payments, communications with third parties (including other REIT issuers) concerning revenue sharing, and documents concerning the calculation of underwriting compen- sation in connection with the REIT offerings under applicable NASD rules. In response to the Enforcement Staff ’s subpoenas and requests, the Company and Carey Financial have pro- duced documents relating to payments made to certain broker-dealers both during and after the offering process, for certain of the REITs managed by the Company (including Corporate Property Associates 10 Incorporated, CIP®, CPA®:12, CPA®:14, and CPA®:15), in addition to selling commissions and selected dealer fees. The expenses associated with these payments, which were made during the period from early 2000 through the end of 2003, were borne by the REITs. The Company is continuing to gather information relating to these types of payments made to broker-dealers and supply it to the SEC. The Company and Carey Financial are cooperating fully with this investigation and are in the process of pro- viding information to the Enforcement Staff in response to the subpoenas and requests. Although no regulatory action has been initiated against the Company or Carey Financial in connection with the matters being investi- gated, it is possible that the SEC may pursue an action against either of them in the future. The potential timing of any such action and the nature of the relief or remedies the SEC may seek cannot be predicted at this time. If such an action is brought, it could have a material adverse effect on the Company. w w w . w p c a r e y . c o m 71 1 3 . i m p a i r m e n t c h a r g e s a n d l o a n l o s s e s The Company incurred impairment charges of $22,098, $4,440 and $29,411 for the years ended December 31, 2004, 2003 and 2002, respectively, of which $7,550, $2,960 and $8,901 are included in Discontinued Operations for each respective year. 2 0 0 4 In connection with the Company’s annual review of the estimated residual values on its properties classiﬁed as net investments in direct ﬁnancing leases, the Company determined that an other than temporary decline in esti- mated 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 resulting changes in estimates resulted in the recognition of impairment charges of $5,248 in 2004. The Company owns a property that is leased to Livho, Inc. (“Livho”), which operates the property as a Holiday Inn hotel in Livonia, Michigan. The Company has provided Livho with signiﬁcant ﬁnancial support over the past several years in order to support the hotel’s operations. The Livonia hotel’s ﬁnancial performance has continued to perform below projections even after certain additional investments in the property were placed in service. The Company performed an impairment valuation of the Livonia property and has determined that the value of the Livonia property has undergone an other than temporary decline in value, and accordingly, has recognized an impairment charge of $7,500 for 2004. In February 2003, the Company sold its property in Winona, Minnesota to the lessee, Peerless Chain Company (“Peerless”) for $8,550, consisting of cash of $6,300 and notes receivable with a fair value of $2,250, and recog- nized a gain on sale of $46. The Company also received a note receivable from Peerless of approximately $1,700 for unpaid rents which was previously included in the allowance for uncollected rents. The Company previously recognized an impairment charge of $4,000, in 2002, on the Peerless property, which was classiﬁed as held for sale in 2002. During 2004, installment payments due under the notes were not paid, however, the Company received a $1,000 settlement payment from the former lessee and has determined that the remaining amounts will not be recovered. The remaining balance on the notes of $1,250 has been written off as a loan loss. As a result of entering into a commitment to sell a property in Toledo, Ohio in June 2004, recognized an impair- ment charge on properties held for sale of $4,700, which is included in discontinued operations. The charge was based on the property’s sales price, less estimated costs to sell. The property was sold in July 2004 for $4,175 and a gain on sale of $6 was recognized. The Company recognized impairment charges on other properties classiﬁed as held for sale as of December 31, 2004, or sold during 2004, of $2,850, which are included in discontinued operations, and an impairment charge of $550 on real estate held for use. 2 0 0 3 In addition to impairment charges totaling $1,208 related to the Company’s annual review of the estimated resid- ual values on its properties classiﬁed as net investments in direct ﬁnancing leases, the Company recognized an impairment charge of $272 on its assessment of the recoverability of debentures received in connection with a bankruptcy settlement with a former lessee. c l l . o c & y e r a c . p . w 72 The company recognized impairment charges on other properties held for sale as of December 31, 2003, or sold during 2003, of $2,960, which are included in discontinued operations. The impairments are discussed fur- ther in Note 7. 2 0 0 2 The Company recorded impairment charges totaling $14,880 related to its annual review of the estimated resid- ual values on its properties classiﬁed as net investments in direct ﬁnancing leases. Prior to the Company converting its 708,269 OP units of MeriStar to 708,269 shares of common stock in 2003, the Company accounted for its investment as an available for sale marketable security. Because of a continued and prolonged weakness in the hospitality industry, and a substantial decrease in MeriStar’s earnings, the Company concluded that the underlying value of its investment in the OP Units had undergone an other than temporary decline. Accordingly, the Company wrote down its equity investment in MeriStar by $4,596 in 2002, to reﬂect the investment at its estimated fair value. The Company recognized impairment charges of $4,900 on other properties, which were sold in either 2002 or 2003 or held for sale as of December 31, 2002. 1 4 . s a l e s o f r e a l e s t a t e The results of operations and the related gain or loss on properties, which were not held for sale as of December 31, 2001 and sold in 2004, 2003 and 2002, are included in “Discontinued Operations.” (see Note 7) 2 0 0 3 In December 2003, the Company sold a property in Oxnard, California for $7,500, and recognized a gain of $414. The Company placed proceeds of the sale in an escrow account with the intention of entering into a Section 1031 noncash exchange which, under the Internal Revenue Code, would allow the Company to acquire like-kind prop- erty, and defer a taxable gain until the new property is sold, upon satisfaction of certain conditions. During 2004, $7,185 was released from the escrow account, when an exchange was not completed. 2 0 0 2 At December 31, 2001, the Company’s 18.3 acre property in Los Angeles, California was classiﬁed as held for sale. In June 2002, the Company sold the property to the Los Angeles Uniﬁed School District (the “School District”) for $24,000, less costs, and recognized a gain on sale of $11,160. Subsequent to the sale of the property, a sub- sidiary of the Company entered into a build-to-suit development management agreement with the School District with respect to the development and construction of a new high school on the property. The subsidiary, in turn, engaged a general contractor to undertake the construction project. Under the build-to-suit agreement, the subsidiary’s role is that of a development manager pursuant to provisions of the California Education Code. Under the construction agreement with the general contractor, a subsidiary is acting as a conduit for the pay- ments made by School District and is only obligated to make payments to the general contractor based on pay- ments received, except for a maximum guarantee of up to $2,000 for nonpayment. The guarantee ends upon completion of construction. w w w . w p c a r e y . c o m 73 Due to the Company’s continuing involvement with the development management agreement of the property, the recognition of gain on sale and the subsequent development management fee income on the build-to-suit project are being recognized using a blended proﬁt margin under the percentage of completion method of accounting. The build-to-suit development agreement provides for fees of up to $4,700 and an early completion incentive fee of $2,000 if the project is completed before September 1, 2004. Incentive fees, which are contingent, are not included in the percentage of completion calculation. In addition, approximately $2,000 of the gain on sale has been deferred and will be recognized only when the Company is released from its $2,000 guarantee com- mitment. The Company and the School District are currently preparing for an arbitration proceeding relating to certain disagreements regarding the costs of the project and whether the Company is entitled to reimbursement for incurring these costs. The recognition of income on the project is being recognized using a blended proﬁt margin under the percentage of completion method of accounting. Due to its disputes with the District and a change in estimate of proﬁt on the development project, the Company has recognized a loss in development income of $1,303 and income of $1,298, for the years ended December 31, 2004 and 2003, respectively. During 2002, the Company also sold properties in Fredericksburg, Virginia; Urbana, Illinois; Maumelle, Arkansas; Burnsville, Minnesota; and Casa Grande for an aggregate of $10,238 and recognized a net gain on sales of $1,151. 1 5 . s t o c k o p t i o n s , r e s t r i c t e d s t o c k a n d w a r r a n t s In January 1998, the predecessor of Carey Management (see Note 2) was granted warrants to purchase 2,284,800 shares exercisable at $21 per share and 725,930 shares exercisable at $23 per share as compensation for invest- ment banking services in connection with structuring the consolidation of the CPA® Partnerships. The warrants are exercisable until January 2009. The Company maintains stock option incentive plans pursuant to which share options may be issued. The 1997 Share Incentive Plan (the “Incentive Plan”), as amended, authorizes the issuance of up to 2,600,000 shares. The Company Non-Employee Directors’ Plan (the “Directors’ Plan”) authorizes the issuance of up to 300,000 shares. Both plans were approved by a vote of the shareholders. The Incentive Plan provides for the grant of (i) share options which may or may not qualify as incentive stock options, (ii) performance shares, (iii) dividend equivalent rights and (iv) restricted shares. Share options have been granted as follows: 513,171 in 2004 at exercise prices ranging from $22.59 to $35.16, 122,000 in 2003 at exercise prices ranging from $25.01 to $31.79 per share and 877,337 in 2002 at exercise prices ranging from $22.73 to $24.01 per share. The options granted under the Incentive Plan have a 10-year term and vest over peri- ods ranging from three to ten years from the date of grant. The vesting of grants is accelerated upon a change in control of the Company and under certain other conditions. The Directors’ Plan provides for similar terms as the Incentive Plan. Options granted under the Directors’ Plan have a 10-year term and vest over three years from the date of grant. During 2004, 12,000 share options were granted at exercise prices ranging from $24.50 to $30.25 per share. No share options were granted in 2003 and 2002. c l l . o c & y e r a c . p . w 74 Share option and warrant activity for the Company’s Incentive Plan and Directors’ Plan is as follows: Outstanding at beginning of year Granted Exercised Forfeited Outstanding at end of year Shares 4,812,902 525,171 (146,121) (26,335) 5,165,617 2004 Weighted Average Exercise Price 2003 Weighted Average Exercise Price For the Year Ended December 31, 2002 Weighted Average Shares Exercise Price Shares $20.95 4,979,862 122,000 $29.68 (251,113) $21.09 (37,847) $24.18 $20.26 4,320,815 877,337 $26.24 (192,617) $14.29 (25,673) $19.14 $22.05 4,812,902 $21.20 4,979,862 $19.88 $23.03 $12.69 $19.17 $20.26 $20.31 Options exercisable at end of year 4,287,999 $20.97 4,108,073 $20.95 3,611,115 Stock options outstanding for the Company’s Incentive Plan and Directors’ Plan as of December 31, 2004 are as follows: Options Outstanding Range of Exercise Prices $7.69 $16.25 to $35.16 Options Outstanding at December 31, 2004 39,946 5,125,671 5,165,617 Weighted Average Remaining Contractual Options Weighted Exercisable at Average December 31, Weighted Average 2004 Exercise Price Life Exercise Price Options Exercisable 5.50 5.40 5.41 $ 7.69 $22.16 $22.05 39,946 4,248,053 4,287,999 $ 7.69 $21.09 $20.97 At December 31, 2003 and 2002, the range of exercise prices and weighted-average remaining contractual life of out- standing share options and warrants was $7.69 to $31.79 and 6.03 years, and $7.69 to $24.01 and 6.9 years, respectively. On June 30, 2003, WPCI granted an incentive award to certain ofﬁcers of WPCI consisting of 1,500,000 restricted shares, representing an approximate 13% interest in WPCI, and 1,500,000 options for WPCI common stock with a combined fair value of $2,485 at that date. Both the options and restricted stock were issued in 2003 and are vesting rat- ably over ﬁve years. The options are exercisable at $1 per share for a period of ten years from the initial vesting date. The vested restricted stock and stock received upon the exercise of options of WPCI by minority interest holders may be redeemed commencing in 2012 or thereafter solely in exchange for shares of the Company. Any redemption will be sub- ject to a third party valuation of WPCI. The fair value of the awards has been recorded as minority interest and included in other liabilities in the accompanying consolidated ﬁnancial statements. The awards were also initially recorded in unearned compensation as a component of shareholders’ equity. The awards are being accounted for as a variable plan in accordance with APB No. 25 because the number of Company shares to be issued upon a redemption will not be known until a redemption occurs. Subsequent changes in the fair value of the minority interest subsequent to the grant date are included in the determination of net income based on the vesting period and valued quarterly. As a result of an increase in fair value, $2,155 was incurred as compensation expense for the year ended December 31, 2004. The com- bined estimated fair value of the options and restricted stock as of December 31, 2004 and 2003 is $5,691 and $1,615, respectively. The unearned compensation is being amortized over the vesting periods and $1,094 and $577 and has been amortized into compensation expense for the years ended December 31, 2004 and 2003, respectively. w w w . w p c a r e y . c o m 75 The per share fair value of the 1,500,000 share options granted by WPCI during 2003 was estimated to be $1.593 using a Black-Scholes option pricing formula. The more signiﬁcant assumptions underlying the determi- nation of the average fair value included a risk-free interest rate of 4.42% and an expected life of 11 years. 1 6 . e m p l o y e e i n c e n t i v e a n d b e n e f i t p l a n s c o m p e n s a t i o n During 2003, the Company adopted a non-qualiﬁed deferred compensation plan under which a portion of any participating ofﬁcer’s cash compensation in excess of designated amounts will be deferred and the ofﬁcer will be awarded a Partnership Equity Plan Unit (“PEP Unit”). The value of each PEP Unit is intended to correspond to the value of a share of the CPA® REIT designated at the time of such award. Redemption will occur at the earlier of a liquidity event of the underlying CPA® REIT or twelve years from the date of award. The award is fully vested upon grant, and the Company may terminate the plan at any time. The value of each PEP Unit will be adjusted to reﬂect the underlying appraised value of the CPA® REIT. Additionally, each PEP Unit will be entitled to a distribu- tion equal to the distribution rate of the CPA® REIT. All issuances of PEP Units, changes in the fair value of PEP Units and distributions paid are included in compensation expense of the Company. Compensation expense under this plan for the years ended December 31, 2004 and 2003 was $2,826 and $2,028, respectively. The Company sponsors a qualiﬁed proﬁt-sharing plan and trust covering substantially all of its full-time employees who have attained age twenty-one, worked a minimum of 1,000 hours and completed one year of service. The Company is under no obligation to contribute to the plan and the amount of any contribution is determined by and at the discretion of the Board of Directors. The Board of Directors can authorize contribu- tions to a maximum of 15% of an eligible participant’s compensation, limited to $31 annually per participant. For the years ended December 31, 2004, 2003 and 2002, amounts expensed by the Company for contributions to the trust were $1,988, $1,926 and $1,677, respectively. Annual contributions represent an amount equivalent to 15% of each eligible participant’s compensation for that period. The components of the Company’s provision for income taxes for the years ended December 31, 2004, 2003 and 1 7 . i n c o m e t a x e s 2002 are as follows: Federal: Current Deferred State, local and foreign: Current Deferred Total provision c l l . o c & y e r a c . p . w 76 2004 2003 2002 $26,330 7,497 33,827 15,827 3,320 19,147 $ 5,694 5,749 11,443 3,944 3,729 7,673 $ 2,436 8,756 11,192 2,492 4,399 6,891 $52,974 $19,116 $18,083 Deferred income taxes as of December 31, 2004 and 2003 consist of the following: Deferred tax assets: Unearned and deferred compensation Other liabilities Deferred tax liabilities: Receivables from afﬁliates Investments Other 2004 2003 $ 3,436 — 3,436 22,939 18,974 1,872 43,785 $ 2,063 1,121 3,184 19,067 12,894 755 32,716 Net deferred tax liability $40,349 $29,532 The difference between the tax provision and the tax beneﬁt recorded at the statutory rate at December 31, 2004, 2003 and 2002 is as follows: Pre-tax income from taxable subsidiaries Federal provision at statutory tax rate (35%) State and local taxes, net of federal beneﬁt Amortization of intangible assets Other Tax provision – taxable subsidiaries Other state, local and foreign taxes Total tax provision 2004 2003 2002 $98,707 34,547 11,695 2,210 3,215 51,667 1,307 $41,820 14,219 3,950 1,625 (2,225) 17,569 1,547 $35,296 12,001 3,617 1,886 (517) 16,987 1,096 $52,974 $19,116 $18,083 The Company evaluates its results from operations by major business segment as follows: 1 8 . s e g m e n t r e p o r t i n g Real Estate Operations This business segment includes the operations of properties under operating lease, properties under direct ﬁnancing leases, real estate under construction and development, assets held for sale and equity investments in ventures accounted for under the equity method which are engaged in these activities. Because of the Company’s and its subsidiaries legal structure, these operations are not generally subject to federal income taxes however, they may be subject to certain state, local and foreign taxes. w w w . w p c a r e y . c o m 77 Management Services Operations This business segment includes management operations on a fee for services basis predominately from the CPA® REITs pursuant to the Advisory Agreements and to a lesser extent from third parties. This business line also includes interest on deferred fees and earnings from unconsolidated investments in the CPA® REITs accounted for under the equity method which were received in-lieu of cash for certain fees. These operations are performed in corporate subsidiaries and are subject to federal, state, local and foreign taxes as applicable. The Company’s ﬁnancial statements are prepared on a consolidated basis including these taxable operations and include a provi- sion for current and deferred taxes on these operations. c l l . o c & y e r a c . p . w 78 A summary of comparative results of these business segments is as follows: Year Ended: Revenues: 2004 2003 2002 Operating expenses: 2004 2003 2002 Interest expense: 2004 2003 2002 Other, net(2): 2004 2003 2002 Provision for income taxes: 2004 2003 2002 Income (loss) from continuing operations: 2004 2003 2002 Total assets as of: December 31, 2004 December 31, 2003 Total long-lived assets as of: December 31, 2004 December 31, 2003 Management Real Estate Other(1) Total Company $148,457 88,060 84,255 $ (56,790) (48,925) (48,708) $ $ (35) — — 3,490 2,980 1,550 $ 73,592 68,080 65,335 $ (27,101) (18,701) (37,460) $ (14,803) (14,982) (15,893) $ 4,668 3,277 12,182 $ 5,725 3,098 2,814 $ 227,774 159,238 152,404 $(15,181) (1,209) (1,854) $ (99,072) (68,835) (88,022) $ — $ (14,838) (14,982) (15,893) — — $ — $ — — 8,158 6,257 13,732 $ (51,537) (17,715) (16,587) $ (1,437) (1,401) (1,496) $ — $ (52,974) (19,116) (18,083) — — $ 43,585 24,400 20,510 $ 34,919 36,273 22,668 $ (9,456) 1,889 960 $ 69,048 62,562 44,138 $237,889 200,674 $766,184 688,848 $ 9,466 16,983 $1,013,539 906,505 $ 83,018 75,433 $740,895 629,767 $ 9,140 16,147 $ 833,053 721,347 (1) Primarily consists of the Company’s other business operations, which includes its hotel operations and the School District build-to-suit development project. The results of operations for the period ended December 31, 2004 include a loss in development income related to the build-to-suit project of $1,303. (2) Includes interest income, minority interest, income from equity investments and gains and losses on sales and foreign currency transactions. w w w . w p c a r e y . c o m 79 For 2004, geographic information for the real estate operations segment is as follows: Revenues Operating expenses Interest expense Other, net(2) Provision for income taxes Income from continuing operations Total assets Total long-lived assets Domestic International(1) $ 65,910 (24,117) (11,458) 2,545 (806) 32,076 696,378 676,192 $ 7,682 (2,984) (3,345) 2,123 (631) 2,843 69,806 64,703 For 2003, geographic information for the real estate operations segment is as follows: Revenues Operating expenses Interest expense Other, net(2) Provision for income taxes Income from continuing operations Total assets Total long-lived assets Domestic International(1) $ 61,678 (16,108) (11,569) 2,608 (893) 35,716 619,367 568,407 $ 6,402 (2,593) (3,413) 669 (508) 557 69,481 61,360 For 2002, geographic information for the real estate operations segment is as follows: Revenues Operating expenses Interest expense Other, net(2) Provision for income taxes Income from continuing operations Domestic International(1) $ 60,037 (35,625) (12,880) 11,335 (1,066) 21,801 $ 5,298 (1,835) (3,013) 847 (430) 867 Total Real Estate $ 73,592 (27,101) (14,803) 4,668 (1,437) 34,919 766,184 740,895 Total Real Estate $ 68,080 (18,701) (14,982) 3,277 (1,401) 36,273 688,848 629,767 Total Real Estate $ 65,335 (37,460) (15,893) 12,182 (1,496) 22,668 (1) The company’s international operations consist of investments in France. (2) Includes interest income, minority interest, income from equity investments and gains and losses on sales and foreign currency transactions. c l l . o c & y e r a c . p . w 80 1 9 . s e l e c t e d q u a r t e r l y f i n a n c i a l d a t a ( u n a u d i t e d ) Revenues(2) Expenses(2) Net income Earnings per share – Basic Diluted Dividends declared per share Revenues(1)(2) Expenses(1)(2) Net income Earnings per share – Basic Diluted Dividends declared per share March 31, 2004 $36,973 20,878 11,092 .30 .29 .4360 March 31, 2003 $44,869 18,962 17,273 .48 .46 .4320 Three Months Ended June 30, 2004 September 30, 2004 December 31, 2004 $53,359 22,555 15,480 .41 .40 .4380 $99,179 30,689 35,154 .94 .90 .4400 $38,263 24,950 2,125 .06 .05 .4420 Three Months Ended June 30, 2003 September 30, 2003 December 31, 2003 $34,944 16,065 12,974 .35 .34 .4330 $43,055 17,848 14,047 .38 .37 .4340 $36,370 15,960 18,584 .51 .48 .4350 (1) 2003 amounts have been reclassiﬁed to conform to the current year presentation of excluding interest income and interest expense from the revenues and expenses line items above, respectively. (2) Certain amounts from previous quarters have been reclassiﬁed to discontinued operations (see Note 7). w w w . w p c a r e y . c o m 81 w . p . c a r e y & c o . l l c Market for The Company’s Common Stock and Related Stockholder Matters Listed Shares are listed on the New York Stock Exchange. As of December 31, 2004 there were 29,645 holders of record of the Shares of the Company. Quarterly cash dividends are usually declared in December, March, June and September and paid in January, April, July and October. Quarterly cash dividends declared per share in 2004 and 2003 are as follows: d i v i d e n d p o l i c y Cash Dividends Declared Per Share First quarter Second quarter Third quarter Fourth quarter Total: 2004 2003 $ .4360 .4380 .4400 .4420 $1.7560 $ .4320 .4330 .4340 .4350 $1.7340 The high, low and closing prices on the New York Stock Exchange for a Listed Share for each ﬁscal quarter of 2003 and 2004 were as follows (in dollars): l i s t e d s h a r e s 2003 First Quarter Second Quarter Third Quarter Fourth Quarter 2004 First Quarter Second Quarter Third Quarter Fourth Quarter High $25.35 30.50 33.70 33.14 High $30.99 30.99 31.00 35.98 Low $24.15 24.81 27.13 29.10 Low $29.01 25.22 29.00 29.76 Close $25.00 29.94 31.75 30.52 Close $30.95 29.78 29.86 35.16 In accordance with the rules of the New York Stock Exchange (“NYSE”), each of William P. Carey and Gordon F. DuGan, our Co-Chief Executive Ofﬁcers, have certiﬁed, without qualiﬁcation, that he is not aware of any viola- tion by the Company of the NYSE’s corporate governance listing standards. Further, Messrs. Carey and DuGan have ﬁled with the SEC, as Exhibit 31.1 to the Company’s most recently ﬁled Form 10-K, the Sarbanes-Oxley Act Section 302 certiﬁcation regarding the quality of the Company’s public disclosure. c l l . o c & y e r a c . p . w 82 w . p . c a r e y & c o . l l c Report on Form 10-K The Company will supply to any shareholder, upon written request and without charge, a copy of the Annual Report on Form 10-K for the year ended December 31, 2004 as ﬁled with the Securities and Exchange Commission (“SEC”). The 10-K may also be obtained through the SEC’s EDGAR database at www.sec.gov. w w w . w p c a r e y . c o m 83 George E. Stoddard Chairman of the Investment Committee; Former Head of the Direct Placement Department, The Equitable Life Assurance Society of The United States Wm. Polk Carey Chairman and Board Member Gordon F. DuGan President, Chief Executive Ofﬁcer and Board Member George E. Stoddard Co-Chief Investment Ofﬁcer and Board Member John D. Miller Co-Chief Investment Ofﬁcer John J. Park Chief Financial Ofﬁcer, Managing Director and Treasurer Claude Fernandez Managing Director and Chief Accounting Ofﬁcer Jan F. Kärst Managing Director – Investments Edward V. LaPuma Managing Director – Investments W. Sean Sovak Managing Director – Investments Auditors Pricewaterhouse LLP Executive Ofﬁces W. P. Carey & Co. LLC 50 Rockefeller Plaza New York, NY 10020 212-492-1100 1-800-WP CAREY Transfer Agent Mellon Investor Services L.L.C. 85 Challenger Road Ridgeﬁeld Park, NJ 07660 1-888-200-8690 Annual Meeting June 8, 2005 at 2:00 p.m. Waldorf=Astoria Hotel New York, New York Form 10-K A Copy of The Company’s Annual Report on Form 10-K as ﬁled with the Securities and Exchange Commission may be obtained without charge at www.sec.gov or by writing the Executive Ofﬁces at the address above. Investment Committee Frank J. Hoenemeyer Vice Chairman of the Investment Committee; Former Vice Chairman and Chief Investment Ofﬁcer, The Prudential Insurance Company of America Nathaniel S. Coolidge Member Senior Ofﬁcers Anne Coolidge Taylor Managing Director – Investments Thomas E. Zacharias Managing Director – Asset Management and Chief Operating Ofﬁcer Douglas E. Barzelay General Counsel Benjamin P. Harris Executive Director – Investments Susan C. Hyde Executive Director and Director of Investor Relations Michael D. Roberts Executive Director and Controller Donna M. Neiley Senior Vice President – Asset Management Jason E. Fox Director – Investments P. Edward Kaplan Jr. Director – Investments Gino M. Sabatini Director – Investments Corporate Information Website www.wpcarey.com E-mail IR@wpcarey.com Trading Information Shares of W. P. Carey & Co. LLC trade on the New York Stock Exchange under the symbol “WPC.” Dividend Information The following table sets forth for the period indicated, the per share dividends paid to shareholders of record since inception: March 31, 1998 June 30, 1998 September 30, 1998 December 31, 1998 March 31, 1999 June 30, 1999 September 30, 1999 December 31, 1999 March 31, 2000 June 30, 2000 September 30, 2000 December 31, 2000 0.4125 0.4125 0.4125 0.4125 0.4175 0.4175 0.4175 0.4175 0.4225 0.4225 0.4225 0.4225 c l l . o c & y e r a c . p . w 84 Dr. Lawrence R. Klein Member Ralph F. Verni Member Dr. Karsten von Köller Member L. Janusz Hooker First Vice President – Investments Robert C. Kehoe First Vice President – Finance Jeffrey S. Leﬂeur First Vice President – Investments Mykolas Rambus First Vice President and Chief Information Ofﬁcer Thomas J. Ridings Jr. First Vice President – Accounting C. Curtis Ritter First Vice President and Director of Corporate Communications Joseph W. Sanchez First Vice President – Accounting Gagan S. Singh First Vice President – Finance David G. Termine First Vice President – Accounting March 31, 2001 June 30, 2001 September 30, 2001 December 31, 2001 March 31, 2002 June 30, 2002 September 30, 2002 December 31, 2002 March 31, 2003 June 30, 2003 September 30, 2003 December 31, 2003 March 31, 2004 June 30, 2004 September 30, 2004 December 31, 2004 March 31, 2005 0.4225 0.4250 0.4260 0.4270 0.4280 0.4290 0.4300 0.4310 0.4320 0.4330 0.4340 0.4350 0.4360 0.4380 0.4400 0.4420 0.4440 Wm. Polk Carey Chairman Gordon F. DuGan Chief Executive Ofﬁcer and President Francis J. Carey Chairman of the Executive Committee, Chief Ethics Ofﬁcer George E. Stoddard Chairman of the Investment Committee, Co-Chief Investment Ofﬁcer and Senior Managing Director Below from left, seated: R. Winssinger, W. Carey, C. Townsend; standing: R. Verni, N. Coolidge, K. von Köller, G. Stoddard, L. Klein, F. Carey, E. Faber and G. DuGan. Board of Directors Nathaniel S. Coolidge Chairman of the Audit Committee; Former Head of Bond and Corporate Finance Department, John Hancock Mutual Life Insurance Company Eberhard Faber, IV Chairman of the Nomination and the Corporate Governance Committees; Former Director of the Federal Reserve Bank of Philadelphia Dr. Lawrence R. Klein Chairman of the Economic Policy Committee; Nobel Laureate in Economics, Benjamin Franklin Professor Economics (Emeritus), University of Pennsylvania Charles C. Townsend, Jr. Lead Director of the Board and Chairman of the Compensation Committee; Former Head of Corporate Finance, Morgan Stanley & Co. Ralph F. Verni Former President and Chief Executive Ofﬁcer, State Street Research & Management Dr. Karsten von Köller Former Chairman and Member of the Board of Managing Directors, Eurohypo AG Reginald Winssinger Chairman of Horizon New America National Portfolio Inc. ounded in 1973, W. P. Carey & Co. is a leading global investment ﬁrm that has long served as the pre-eminent provider of sale-leaseback ﬁnancing to corporations and private equity ﬁrms in the United States and Europe. ■ It owns a portfolio of net-leased real estate assets and F provides asset management services to the Corporate Property Associates (CPA®) series of income-generating real estate investment funds. The Company currently owns or manages more than 650 commercial and industrial properties worldwide, representing approximately 90 million square feet and valued at approximately $7 billion. ■ W. P. Carey’s shareholders continue to beneﬁt from the stability of its net-leased portfolio, as well as from its growing asset management business. The Company remains committed to providing its shareholders with stable income and consistent investment performance, while also meeting the ﬁnancing needs of its tenant companies. a n n u a l r e p o r t 2 0 0 4 W. P. Carey & Co. LLC 50 Rockefeller Plaza, New York, NY 10020 212-492-1100 ■ IR@wpcarey.com ■ www.wpcarey.com NYSE: WPC

Continue reading text version or see original annual report in PDF format above