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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
----------- ------------
COMMISSION FILE NUMBER: 000-25771
-------------------------
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 13-3951476
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
50 ROCKEFELLER PLAZA 10020
NEW YORK, NEW YORK 10020 (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBERS:
INVESTOR RELATIONS (212) 492-8920
(212) 492-1100
-------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
-------------------------
CPA(R):14 has SHARES OF COMMON STOCK registered pursuant to Section
12(g) of the Act.
CPA(R):14 HAS NO SECURITIES registered on any exchanges.
CPA(R):14 does not have any Securities registered pursuant to Section
12(b) of the Act.
CPA(R):14 (1) has filed all reports required by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [X] No [ ].
CPA(R):14 has no active market for common stock at November 10, 2003.
CPA(R):14 has 66,910,487 shares of common stock, $.001 par value
outstanding at November 10, 2003.
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
INDEX
Page No.
--------
PART I
Item 1. - Financial Information*
Condensed Consolidated Balance Sheets, as of September 30, 2003
and December 31, 2002 2
Condensed Consolidated Statements of Income for the three and nine months ended
September 30, 2003 and 2002 3
Condensed Consolidated Statements of Comprehensive Income for the
three and nine months ended September 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 6-11
Item 2. - Management's Discussion and Analysis of Financial Conditions
and Results of Operations 12-19
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. - Controls and Procedures 20
PART II - Other Information
Item 4. - Submission of Matters to a Vote of Security Holders 21
Item 6. - Exhibits and Reports on Form 8-K 21
Signatures 22
* The summarized condensed financial statements contained herein are unaudited;
however, in the opinion of management, all adjustments necessary for a fair
presentation of such financial statements have been included.
-1-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
September 30, 2003 December 31, 2002
------------------- -----------------
(Unaudited) (Note)
----------- ------
ASSETS:
Land and buildings, net of accumulated depreciation of $55,811 at
September 30, 2003 and $38,683 at December 31, 2002 $1,000,412 $ 971,459
Net investment in direct financing leases 116,834 113,428
Real estate under construction - 14,723
Equity investments 120,871 99,320
Cash and cash equivalents 55,024 74,107
Marketable securities 6,806 6,258
Other assets 39,760 40,602
---------- ----------
Total assets $1,339,707 $1,319,897
========== ==========
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY:
Liabilities:
Mortgage notes payable $ 693,444 $ 666,740
Note payable 1,631 -
Accrued interest 4,161 4,043
Due to affiliates 4,226 3,821
Accounts payable and accrued expenses 7,579 7,898
Prepaid rental income and security deposits 18,425 20,642
Deferred acquisition fees payable to affiliate 22,530 23,170
Dividends payable 12,601 12,488
---------- ----------
Total liabilities 764,597 738,802
---------- ----------
Minority interest 27,767 29,206
---------- ----------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value; authorized, 120,000,000 shares; issued and
outstanding, 67,403,718 shares at September 30, 2003
and 66,836,152 shares at December 31, 2002 67 67
Additional paid-in capital 603,512 597,852
Dividends in excess of accumulated earnings (59,799) (47,508)
Accumulated other comprehensive income 10,101 6,113
---------- ----------
553,881 556,524
Less, treasury stock at cost, 735,929 shares at September 30, 2003
and 520,911 shares at December 31, 2002 (6,538) (4,635)
---------- ----------
Total shareholders' equity 547,343 551,889
---------- ----------
Total liabilities, minority interest and shareholders'
equity $1,339,707 $1,319,897
========== ==========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Note: The balance sheet at December 31, 2002 has been derived from the audited
consolidated financial statements at that date.
-2-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS of INCOME (UNAUDITED)
(in thousands, except share and per share amounts)
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues:
Rental income $ 27,439 $ 26,059 $ 80,751 $ 71,928
Interest income from direct financing leases 3,250 2,889 9,713 8,581
Interest and other income 2,126 552 6,121 1,737
----------- ----------- ----------- -----------
32,815 29,500 96,585 82,246
----------- ----------- ----------- -----------
Expenses:
Interest 13,472 11,862 39,234 32,246
Depreciation 5,774 5,340 16,987 15,082
General and administrative 1,924 2,016 6,255 4,721
Property expenses 6,348 3,338 15,216 9,590
Impairment charge on real estate 2,900 - 2,900 -
----------- ----------- ----------- -----------
30,418 22,556 80,592 61,639
----------- ----------- ----------- -----------
Income from continuing operations
before minority interest, equity
investments and (loss) gain 2,397 6,944 15,993 20,607
Minority interest in income (274) (369) (1,156) (1,110)
Income from equity investments 3,530 1,342 10,022 3,931
----------- ----------- ----------- -----------
Income from continuing operations
before (loss) gain 5,653 7,917 24,859 23,428
Unrealized gain (loss) on warrants and foreign
currency contract, net 316 (133) 212 135
Gain on foreign currency transactions 155 - 324 -
----------- ----------- ----------- -----------
Income from continuing operations 6,124 7,784 25,395 23,563
Discontinued operations:
Income from operations of discontinued properties - - - 72
Gain on sale of real estate - - - 333
----------- ----------- ----------- -----------
Income from discontinued operations - - - 405
----------- ----------- ----------- -----------
Net income $ 6,124 $ 7,784 $ 25,395 $ 23,968
=========== =========== =========== ===========
Basic and diluted earnings per share:
Earnings from continuing operations $ .09 $ .12 $ .38 $ .36
Earnings from discontinued operations - - - -
----------- ----------- ----------- -----------
Net income $ .09 $ .12 $ .38 $ .36
=========== =========== =========== ===========
Weighted average shares outstanding - basic and
diluted 66,706,224 66,236,321 66,546,596 66,146,025
=========== =========== =========== ===========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
-3-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $ 6,124 $ 7,784 $ 25,395 $ 23,968
---------- ---------- ---------- ----------
Other comprehensive income:
Change in foreign currency
translation adjustment 271 (295) 3,360 3,479
Unrealized appreciation of
marketable securities 3 (3) 628 (3)
---------- ---------- ---------- ----------
Other comprehensive income 274 (298) 3,988 3,476
---------- ---------- ---------- ----------
Comprehensive income $ 6,398 $ 7,486 $ 29,383 $ 27,444
========== ========== ========== ==========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
-4-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS (UNAUDITED)
(in thousands)
Nine Months Ended
-----------------
September 30,
-------------
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 25,395 $ 23,968
Adjustments to reconcile net income to net cash provided by continuing operating
activities:
Income from discontinued operations - (405)
Depreciation and amortization 17,861 15,664
Straight-line rent adjustments (2,952) (3,182)
Income from equity investments in excess of distributions received (1,822) (19)
Issuance of shares in satisfaction of current and accrued performance fees 5,204 3,640
Minority interest in income 1,156 1,110
Unrealized gain on warrants and foreign currency transactions, net (212) (135)
Impairment charge on real estate 2,900 -
(Decrease) increase in prepaid rents and security deposits (2,616) 4,800
Change in other operating assets and liabilities, net (1,237) 123
-------- --------
Net cash provided by continuing operations 43,677 45,564
Net cash provided by discontinued operations - 74
-------- --------
Net cash provided by operating activities 43,677 45,638
-------- --------
Cash flows from investing activities:
Distributions from operations of equity investments in excess of equity income 988 736
Proceeds from sale of real estate - 3,634
Purchases of real estate and equity investments and additional capitalized costs (48,874) (206,914)
VAT taxes paid and recoverable from purchase of real estate 911 (1,957)
Purchase of securities - (8,397)
Proceeds from sales of securities - 1,245
Distributions of mortgage financing proceeds received from equity investee 8,722 -
Payment of deferred acquisition fees (2,373) (1,638)
-------- --------
Net cash used in investing activities (40,626) (213,291)
-------- --------
Cash flows from financing activities:
Prepayment of mortgage principal - (3,800)
Proceeds from mortgages 21,582 190,775
Funds released by mortgage lenders 3,000 -
Proceeds from note 1,617 -
Payments on mortgage principal (6,701) (4,415)
Funding of defeasance escrow account - (2,537)
Distributions to minority interest partner (2,595) (1,994)
Contributions from minority interest partner - 10,758
Proceeds from issuance of shares, net of costs 456 (1,750)
Deferred financing costs and mortgage deposits (47) (3,515)
Dividends paid (37,573) (36,133)
Purchase of treasury stock (1,904) (1,291)
-------- --------
Net cash (used in) provided by financing activities (22,165) 146,098
-------- --------
Effect of exchange rate changes on cash 31 209
-------- --------
Net decrease in cash and cash equivalents (19,083) (21,346)
Cash and cash equivalents, beginning of period 74,107 147,695
-------- --------
Cash and cash equivalents, end of period $ 55,024 $126,349
======== ========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
-5-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
Note 1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements of
Corporate Property Associates 14 Incorporated (the "Company") have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to
Article 10 of Regulation S-X of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. All significant intercompany balances and
transactions have been eliminated. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the results of the interim period presented have been included.
The results of operations for the interim period are not necessarily indicative
of results for the full year. These condensed consolidated financial statements
should be read in conjunction with the audited financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
Certain prior year amounts have been reclassified to conform to current year
financial statement presentation.
Note 2. Transactions with Related Parties:
In connection with performing services on behalf of the Company, the Advisory
Agreement between the Company and Carey Asset Management Corp (the "Advisor"), a
wholly-owned subsidiary of W. P. Carey & Co. LLC, provides that the Advisor
receive asset management and performance fees, each of which are 1/2 of 1% of
Average Invested Assets as defined in the Advisory Agreement. The Advisor has
elected at its option to receive the performance fee in restricted shares of
common stock rather than cash. The Advisor is also reimbursed for the actual
cost of personnel needed to provide administrative services necessary to the
operation of the Company. Asset management fees were $1,901 and $1,489 for the
three months ended September 30, 2003 and 2002, respectively, and $5,644 and
$4,053 for the nine months ended September 30, 2003 and 2002, respectively, with
performance fees in like amount. For the three months ended September 30, 2003
and 2002, the Company incurred personnel reimbursements of $748 and $611,
respectively, and $2,348 and $1,578 for the nine months ended September 30, 2003
and 2002, respectively.
Fees are payable to the Advisor for services provided to the Company relating to
the identification, evaluation, negotiation, financing and purchase of
properties. A portion of such fees are deferred and are payable in equal
installments over no less than eight years following the first anniversary of
the date a property is purchased. For transactions that were completed during
the nine months ended September 30, 2003, the current and deferred fees were
$2,166 and $1,733, respectively.
Note 3. Interest in Mortgage Loan Securitization:
The Company is accounting for its subordinated interest in the Carey Commercial
Mortgage Trust mortgage securitization as an available-for-sale marketable
security which is measured at fair value with all gains and losses from changes
in fair value reported as a component of other comprehensive income as part of
shareholders' equity. As of September 30, 2003, the fair value of the Company's
interests was $6,806, reflecting an aggregate unrealized gain of $885 and
cumulative net amortization of $112 ($80 for the nine months ended September 30,
2003). The fair value of the Company's interests in the trust is determined
using a discounted cash flow model with assumptions of market rates and the
credit quality of the underlying lessees.
One of the key variables in determining fair value of the subordinated interest
is current interest rates. As required by SFAS No. 140, "Accounting for Transfer
and Servicing of Financial Assets and Extinguishments of Liabilities," a
sensitivity analysis of the current value of the interest based on adverse
changes in market interest rates of 1% and 2% is as follows:
-6-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
Fair Value at
--------------
September 30, 2003 1% Adverse Change 2% Adverse Change
------------------ ----------------- -----------------
Fair value of the interests $6,806 $6,470 $6,158
The above sensitivity is hypothetical and changes in fair value, based on a 1%
or 2% variation, should not be extrapolated because the relationship of the
change in assumption to the change in fair value may not always be linear.
Note 4. Lease Revenues:
The Company's operations consist of the investment in and the leasing of
industrial and commercial real estate. The financial reporting sources of the
lease revenues for the nine-month periods ended September 30, 2003 and 2002 are
as follows:
2003 2002
---- ----
Per Statements of Income:
Rental income from operating leases $ 80,751 $71,928
Interest from direct financing leases 9,713 8,581
Adjustment:
Share of leasing revenue applicable to minority interest (5,935) (5,588)
Share of leasing revenue from equity investments 22,712 9,764
-------- -------
$107,241 $84,685
======== =======
For the nine-month periods ended September 30, 2003 and 2002, the Company earned
its net lease revenues from its investments as follows:
2003 % 2002 %
---- ----
Carrefour France, SAS $ 8,392 8% $ 4,289 4%
Starmark Camhood, L.L.C. (b) 4,840 5 - -
Nortel Networks Limited. 4,501 4 4,501 5
Petsmart, Inc. (a) 4,359 4 4,774 6
Clear Channel Communications, Inc. (b) 4,245 4 - -
TruServ Corporation (b) 3,792 4 - -
Atrium Companies, Inc. 3,336 3 3,339 4
Advance PCS, Inc. 3,225 3 3,225 4
Federal Express Corporation 2,961 3 2,929 4
Tower Automotive, Inc. 2,921 3 1,839 2
Galyan's Trading Company 2,858 3 2,858 3
Katun Corporation 2,794 3 846 1
Collins & Aikman Corporation 2,459 2 2,430 3
Advanced Micro Devices, Inc. (b) 2,444 2 2,444 3
Metaldyne Company LLC 2,395 2 2,351 3
Applied Materials, Inc. (b) 2,323 2 2,325 3
PerkinElmer, Inc. 2,200 2 1,834 2
APW North America Inc. 2,124 2 2,071 3
Amerix Corporation 1,853 2 1,843 2
Celestica Corporation 1,815 2 1,815 2
Institutional Jobbers Company 1,703 2 1,703 2
Buffets, Inc. 1,668 2 1,599 2
Gerber Scientific, Inc. 1,638 2 1,588 2
CheckFree Holdings, Inc. (b) 1,596 2 1,581 2
McLane Company, Inc. (a) 1,590 1 1,566 2
Gibson Guitar Corp. (c) 1,533 1 1,408 2
Waddington North America, Inc. 1,490 1 1,370 2
Stellex Technologies, Inc. 1,488 1 1,471 2
Special Devices, Inc. 1,486 1 1,472 2
-7-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
2003 % 2002 %
---- ----
Best Buy Co., Inc. 1,425 1 1,425 2
Builders FirstSource, Inc. 1,401 1 1,479 2
Consolidated Theaters Holding, G.P. 1,298 1 1,281 2
PW Eagle, Inc. 1,238 1 961 1
American Tire Distributors, Inc. 1,233 1 850 1
New Creative Enterprises, Inc. 1,183 1 1,182 1
Rave Reviews Cinemas, L.L.C. 1,075 1 1,054 1
Barjan Products L.L.C. 1,065 1 1,065 1
Compucom Systems, Inc. 1,056 1 1,030 1
Fitness Holdings, Inc. 1,015 1 987 1
Metagenics, Inc. 1,011 1 1,011 1
Other (d) (e) 14,212 13 12,889 14
-------- --- ------- ---
$107,241 100% $84,685 100%
======== === ======= ===
(a) Net of minority interest of an affiliate.
(b) Represents the Company's proportionate share of lease revenues from its
equity investments.
(c) Net of minority interest of an unaffiliated third party.
(d) Includes amounts which are net of minority interest.
(e) Includes the Company's proportionate share of lease revenues from
equity investments.
For the nine-month period ended September 30, 2003, lessees were responsible for
the direct payment of approximately $10,049 of real estate taxes on behalf of
the Company.
In connection with a lease that had been terminated in a prior period, the
Company recognized approximately $2,588 of other income in 2003 as the result of
a security deposit from a former lessee, Exodus Communications, Inc. which was
forfeited to the Company. Such amount is included in interest and other income
for the nine-month period ended September 30, 2003 in the accompanying condensed
consolidated financial statements.
Note 5. Equity Investments:
The Company owns interests in single-tenant net leased properties through equity
interests (i) in various partnerships and limited liability companies and (ii)
as tenants-in-common subject to joint control. The ownership interests range
from 33.33% to 50%. All of the underlying investments are owned with affiliates
that have similar investment objectives as the Company. The lessees are Advanced
Micro Devices, Inc., Compucom Systems, Inc., Textron, Inc., CheckFree Holdings,
Inc., Special Devices, Inc., Applied Materials, Inc., TruServ Corporation, Clear
Channel Communications, Inc. and Starkmark Camhood, LLC. On February 7, 2003,
the Company along with two affliliates, through a newly-formed limited liability
company, entered into a master net lease with Starmark Camhood, LLC ("Starmark")
(see Note 8).
Summarized financial information of the Company's equity investees is as
follows:
(In thousands) September 30, 2003 December 31, 2002
------------------ -----------------
Assets (primarily real estate) $782,695 $591,167
Liabilities (primarily mortgage notes payable) 471,471 329,330
Partners' and members' equity 311,224 261,837
Nine Months Ended September 30,
--------------------------------
2003 2002
---- ----
Revenues (primarily rental revenues) $ 60,402 $ 25,396
Expenses (primarily interest on mortgages and depreciation) (34,152) (14,907)
-------- --------
Net income $ 26,250 $ 10,489
======== ========
-8-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
Note 6. Discontinued Operations:
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", effective for financial statements issued for fiscal years
beginning after December 15, 2001, the results of operations 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 SFAS No. 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).
The operations from a property in Greenville, Texas, which was sold in June 2002
are included as "Discontinued Operations." There were no discontinued operations
in 2003. A summary of Discontinued Operations for the nine months ended
September 30, 2002 is as follows:
Nine Months Ended
September 30, 2002
------------------
Revenues (primarily rental revenues) $150
Expenses (primarily interest on mortgages,
depreciation and property expenses) (78)
Gain on sale of real estate 333
----
Income from discontinued operations $405
====
Note 7. Acquisition of Real Estate Interest:
Investments acquired during the nine months ended September 30, 2003 which were
fully described in the Company's Quarterly Report on Form 10-Q for the periods
ended March 31, 2003 and June 30, 2003 are summarized as follows:
Initial Original Annual
Ownership Annual Mortgage Debt Date
Lease Obligor: Cost Interest Location Rent Financing Service Acquired
- -------------- ---- -------- -------- ---- --------- ------- --------
Starmark Camhood LLC(a) $72,984 41% 15 health club $7,492 $ 44,403 $ 4,138 2/7/2003
facilities
Carrefour France SAS(c) $10,422 100% Le Mans, France $2,651 $ 8,203(b) $ 642 7/24/2003
(a) The Starmark investment is accounted for as an equity investment. The
amounts presented are pro rata.
(b) Variable rate obligation.
(c) Expansion of an existing property.
Note 8. Impairment Charge on Real Estate:
The Company owns a property in Gardena, California leased to Scott Companies
Inc. Scott has rent arrearages of $272 as of September 30, 2003 and as a result
of its financial difficulties has defaulted on its lease. The Company has
written down the property to its estimated fair value and recognized an
impairment charge of $2,900.
Note 9. Accounting Pronouncements:
In June 2001, FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." SFAS No. 143 was issued to establish standards for the recognition
and measurement of an asset retirement obligation. SFAS No. 143 requires
retirement obligations associated with tangible long-lived assets to be
recognized at fair value as the liability is incurred with a corresponding
increase in the carrying amount of the related long-lived asset. SFAS No. 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002. SFAS No. 143 was adopted on January 1, 2003, and did not have a
material effect on the financial statements.
-9-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
In May 2002, FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44 and 64,
Amendment of SFAS No. 13 and Technical Corrections" which eliminates the
requirement that gains and losses from the extinguishment of debt be classified
as extraordinary items unless it can be considered unusual in nature and
infrequent in occurrence. The Company adopted this Statement effective January
1, 2003 and the adoption did not have a material effect on the Company's
financial statements. The Company no longer classifies gains and losses for the
extinguishment of debt as extraordinary items.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities". SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. SFAS No. 146 was adopted
on January 1, 2003 and did not have a material effect on the Company's financial
statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," ("FIN 45") which changes the accounting for, and
disclosure of certain guarantees. Beginning with transactions entered into after
December 31, 2002, certain guarantees are required to be recorded at fair value,
which is different from prior practice, under which a liability was recorded
only when a loss was probable and reasonably estimable. In general, the change
applies to contracts or indemnification agreements that contingently require the
Company to make payments to a guaranteed third-party based on changes in an
underlying asset, liability, or an equity security of the guaranteed party. The
adoption of the accounting provisions of FIN 45 on January 1, 2003 did not have
a material effect on the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS No. 123, Accounting
for Stock Based Compensation. SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock based compensation (i.e., recognition of a charge for issuance of
stock options in the determination of income.). However, SFAS No. 148 does not
permit the use of the original SFAS No. 123 prospective method of transition for
changes to the fair value based method made in fiscal years beginning after
December 15, 2003. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock based
employee compensation, description of transition method utilized and the effect
of the method used on reported results. The transition and annual disclosure
provisions for valuing stock-based compensation of SFAS No. 148 are to be
applied for fiscal years ending after December 15, 2002. The Company does not
have any employees nor any stock-based compensation plans.
On January 17, 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), the primary objective of which is to
provide guidance on the identification of entities for which control is achieved
through means other than voting rights ("variable interest entities" or "VIEs")
and to determine when and which business enterprise should consolidate the VIE
(the "primary beneficiary"). This new model applies when either (1) the equity
investors (if any) do not have a controlling financial interest or (2) the
equity investment at risk is insufficient to finance that entity's activities
without additional financial support. In addition, FIN 46 requires both the
primary beneficiary and all other enterprises with a significant variable
interest in a VIE make additional disclosures. On October 8, 2003, the FASB
staff issued a FASB Staff Position ("FSP") which deferred the effective date of
FIN 46 until December 31, 2003 for VIEs created prior to February 1, 2003. The
Company's maximum loss exposure is the carrying value of its equity investments.
The Company has evaluated the potential impact and believes this interpretation
will not have a material impact on its accounting for its investments in
unconsolidated joint ventures as none of these investments are VIEs.
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging under SFAS No. 133. The
changes in the statement improve financial reporting by requiring that contracts
with comparable characteristics be accounted for similarly. In particular, the
statement (1) clarifies under what circumstances a contract with an initial net
investment meets the characteristics of a derivative instrument discussed in
paragraph 6(b) of SFAS No. 133, (2) clarifies when
-10-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
a derivative contains a financing component, (3) amends the definition of an
underlying to conform it to language used in FIN 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", and (4) amends certain other existing pronouncements.
SFAS No. 149 is generally effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated after June 30, 2003. The
adoption of SFAS No. 149 did not have a material effect on the financial
statements.
On May 30, 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liability and Equity." SFAS No. 150
establishes standards to classify as liabilities certain financial instruments
that are mandatorily redeemable or include an obligation to repurchase. Such
financial instruments will be measured at fair value with changes in fair value
included in the determination of net income. The FASB recently issued FSP 150-3,
which defers the provisions of paragraph 9 and 10 of SFAS No. 150 indefinitely
as they apply to mandatorily redeemable noncontrolling interests associated with
finite-lived entities. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
has interests in five limited partnerships that are consolidated and that are
considered mandatorily redeemable controlling interests with finite lives. In
accordance with the deferral noted above, these minority interests have not been
reflected as liabilities. The carrying value and fair value of these minority
interests are approximately $12,451 and $13,478, respectively, at September 30,
2003.
-11-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except share and per share amounts)
The following information should be read in conjunction with Corporate Property
Associates 14 Incorporated's ("CPA(R):14") condensed consolidated financial
statements and notes thereto as of September 30, 2003 included in this quarterly
report and CPA(R):14's Annual Report on Form 10-K for the year ended December
31, 2002. This quarterly report contains forward looking statements. Such
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievement of CPA(R):14 to be
materially different from the results of operations or plans expressed or
implied by such forward looking statements. Accordingly, such information should
not be regarded as representations by CPA(R):14 that the results or conditions
described in such statements or the objectives and plans of CPA(R):14 will be
achieved. Item 1 of the Annual Report on Form 10-K for the year ended December
31, 2002 provides a description of CPA(R):14's business objectives, acquisition
and financing strategies and risk factors which could affect future operating
results.
CRITICAL ACCOUNTING POLICIES:
Certain accounting policies are critical to the understanding of CPA(R):14's
financial condition and results of operations. Management believes that an
understanding of financial condition and results of operations requires an
understanding of CPA(R):14's accounting policies.
The preparation of financial statements requires that Management make estimates
and assumptions that affect the reported amount of assets, liabilities, revenues
and expenses. For instance, CPA(R):14 must assess its ability to collect rent
and other tenant-based receivables and determine an appropriate charge for
uncollected amounts. Because CPA(R):14's real estate operations have a limited
number of lessees, Management believes that it is necessary to evaluate specific
situations rather than solely use statistical methods. CPA(R):14 recognizes a
provision for uncollected rents which typically ranges between 0.25% and 1% of
lease revenues (rental income and interest income from direct financing leases)
and measures its allowance against actual rent arrearages and adjusts the
percentage applied.
Real estate accounted for under the operating method is stated at cost less
accumulated depreciation. Costs directly related to build-to-suit projects,
primarily interest, if applicable, are capitalized. CPA(R):14 considers a
build-to-suit project as in service upon completion of improvements, but no
later than a date that is negotiated and stated in the lease. If portions of a
project are substantially completed and occupied and other portions have not
reached that stage, the substantially completed portions are accounted for
separately. CPA(R):14 allocates costs incurred between the portions under
construction and the portions completed and only capitalizes costs for the
portion under construction.
In connection with CPA(R):14's acquisition of properties, purchase costs will be
allocated to the tangible and intangible assets and liabilities acquired based
on their estimated fair values in accordance with SFAS No. 141, "Business
Combinations." The value of the tangible assets, consisting of land, buildings
and tenant improvements, will be determined as if vacant. Intangible assets
including the above-market or below-market value of leases, the value of
in-place leases and the value of tenant relationships will be recorded at their
relative fair values.
CPA(R):14 records above-market and below-market in-place lease values for owned
properties based on the present value (using an interest rate reflecting the
risks associated with the leases acquired) of the difference between (i) the
contractual amounts to be paid pursuant to the leases negotiated and in-place at
the time of acquisition of the properties and (ii) an 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 intangible assets is allocated to in-place lease
values and tenant relationship intangible values based on CPA(R):14's evaluation
of the specific characteristics of each tenant's lease and its overall
relationship with each tenant. Characteristics considered in allocating these
values include the nature and extent of
-12-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
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. The aggregate value of other intangible assets
acquired is measured based on the difference between (i) the property valued
with an in-place lease adjusted to market rental rates and (ii) the property
valued as if vacant. Independent appraisals or our estimates are considered in
determining these values.
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. CPA(R):14 also considers
information obtained about a property in connection with its pre-acquisition due
diligence. Estimated carrying costs will include real estate taxes, insurance,
other property operating costs and estimates of lost rentals at market rates
during the hypothetical expected lease-up periods, based on an assessment of
specific market conditions. CPA(R):14 estimates costs to execute leases
including commissions and legal costs to the extent that such costs are not
already incurred with a new lease that has been negotiated in connection with
the purchase of the property.
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 renewal terms of the leases but no amortization
period for intangible assets will exceed the remaining depreciable life of the
building.
CPA(R):14 also uses estimates and judgments when evaluating whether long-lived
assets are impaired. When events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, Management performs
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 Management to
make its best estimate of market rent, residual value and holding period. As
CPA(R):14's investment objective is to hold properties on a long-term basis,
holding periods will range from five to ten years. In its evaluations, CPA(R):14
obtains market information from outside sources; however, such information
requires Management to determine whether the information received is appropriate
to the circumstances. Depending on the assumptions made and estimates used, the
estimated cash flow projected in the evaluation of long-lived assets can vary
within a range of outcomes. CPA(R):14 considers the likelihood of possible
outcomes in determining the best estimate of future cash flows. Because
CPA(R):14's properties are leased to single tenants, CPA(R):14 is more likely to
incur significant writedowns when circumstances deteriorate because of the
possibility that a property will be vacated in its entirety. This makes the
risks faced by CPA(R):14 different from the risks faced by companies that own
multi-tenant properties. Events or changes in circumstances can result in
further writedowns and impact the gain or loss ultimately realized upon sale of
the asset. For its direct financing leases, CPA(R):14 performs a review of its
estimated residual values of properties at least annually to determine whether
there has been an other than temporary decline in CPA(R):14's current estimate
of residual value. If the review indicates a decline in residual values that is
other than temporary, a loss is recognized and the accounting for the direct
financing lease will be revised 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.
To the extent that investments and subsidiaries account for their financial
position and results of operations in a functional currency other than U.S.
dollars, it is necessary for CPA(R):14 to translate from the functional currency
to U.S. dollars. The functional currency is the currency of the primary economic
environment in which the real estate investments or subsidiary operates. The
translation of the functional currency for assets and liabilities uses the
current exchange rate as of the balance sheet date and for revenues and expenses
uses a weighted average exchange rate during the period. Gains and losses
resulting from foreign currency translation adjustments are reported as a
component of other comprehensive income as part of shareholders' equity.
Foreign currency transactions may produce receivables or payables that are fixed
in terms of the amount of foreign currency that will be received or paid. A
change in the exchange rates between the functional currency and the currency in
which a transaction is denominated increases or decreases the expected amount of
functional currency cash flows upon settlement of that transaction. That
increase or decrease in the expected functional currency cash flows is a foreign
currency transaction gain or loss that generally is 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
-13-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
(Dollars in thousands, except share and per share amounts)
transaction generally is included in net income from the period in which the
transaction is settled. Foreign currency transactions are not included in
determining net income but are accounted for in the same manner as foreign
currency translation adjustments and reported as a component of other
comprehensive income as part of shareholders' equity if (i) they are designated
as, and are effective as, economic hedges of a net investment and are (ii)
intercompany foreign currency transactions that are of a long-term nature (that
is, settlement is not planned or anticipated in the foreseeable future), when
the entities to the transactions are consolidated or accounted for by the equity
method in the financial statements.
When assets are identified by Management as held for sale, CPA(R):14
discontinues depreciating the assets and estimates the sales price, net of
selling costs, of such assets. If, in Management's opinion, the net sales price
of the assets that 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. If circumstances that previously were considered unlikely occur
and, as a result, CPA(R):14 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) the
carrying value before it was classified as held for sale, adjusted for any
depreciation expense that would have been recognized had the property been
continuously classified as held and used, or (b) the fair value at the time of
the subsequent decision not to sell.
In 2002, CPA(R):14 acquired a subordinated interest in a mortgage trust that
consists of limited recourse loans on 62 properties that are owned by CPA(R):14
or three of its affiliates. The fair value of the interests in the trust is
determined using a discounted cash flow model with assumptions of market rates
and the credit quality of the underlying lessees. If there are adverse changes
in either market rates or the credit quality of the lessees, the model and,
therefore, the income recognized from the subordinated interests as well as the
fair value, will be adjusted.
Costs incurred in connection with leases are capitalized and amortized on a
straight-line basis over the terms of the related leases and included in
property expense. Unamortized leasing costs are also charged to property expense
upon early termination of the lease. Costs incurred in connection with obtaining
mortgages and debt financing are capitalized and amortized over the term of the
related debt and included in interest expense. Unamortized financing costs are
written off and included in charges for early extinguishment of debt if a loan
is retired early.
Stated rental revenue and interest income from direct financing leases are
recognized on a straight-line basis and a constant rate of interest,
respectively, over the terms of the respective leases. Unbilled rents receivable
represents the amount by which straight-line rental revenue exceeds rents
currently billed in accordance with the lease agreements. The majority of
CPA(R):14's leases provide for periodic rent increases based on formulas indexed
to increases in the CPI. CPI-based and other contingent-type rents are
recognized currently. CPA(R):14 recognizes rental income from sales overrides
after the level of sales requiring a rental payment to CPA(R):14 is reached.
CPA(R):14 and certain affiliates are investors in certain real estate assets. It
is anticipated that additional properties will be purchased through real estate
ventures. These investments may be held through incorporated or unincorporated
jointly-held entities. Substantially all of these investments represent jointly
purchased properties which were net leased to a single tenant and were
structured to provide diversification and reduce concentration of a risk from a
single lessee for CPA(R):14 and the affiliate. The placement of an investment in
a jointly-held entity or tenancy in common requires the approval of CPA(R):14's
Independent Directors. All of the jointly-held investments are structured so
that CPA(R):14 and the affiliate contribute equity, receive distributions and
are allocated profit or loss in amounts that are proportional to their ownership
interests. All of the jointly-held investments are subject to contractual
agreements. No fees are payable to affiliates under any of the limited
partnership and joint venture agreements. The presentation of these jointly-held
investments and their related results in the accompanying consolidated financial
statements is determined based on factors such as controlling interest,
significant influence and whether each party has the ability to make independent
decisions. Such factors will determine whether such investments are consolidated
in the accounts of CPA(R):14 or accounted for under the equity method. Equity
method investments are reviewed for impairment in the event of a change in
circumstances that is other than temporary. An investment's value is only
impaired if Management's estimate of the net realizable value of the investment
is less than the carrying value of the investment. To the extent an impairment
has occurred, the loss shall be measured as the excess of the carrying amount of
the investment over the fair value of the investment.
-14-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
(Dollars in thousands, except share and per share amounts)
CPA(R):14 measures derivative instruments, including derivative instruments
embedded in other contracts, if any, at fair value and records them as an asset
or liability, depending on CPA(R):14's rights or obligations under the
applicable derivative contract. For derivatives designated as fair value hedges,
the changes in the fair value of both the derivative instrument and the hedged
item are recorded in earnings. For derivatives designated as cash flow hedges,
the effective portions of the derivative would be reported in other
comprehensive income, a component of shareholders' equity, and are subsequently
reclassified into earnings when the hedged item affects earnings (i.e., the
forecasted event occurs). Changes in fair value of derivative instruments not
designated as hedging and ineffective portions of hedges are recognized in the
determination of earnings.
Public business enterprises are required to report financial and descriptive
information about their reportable operating segments. Operating segments are
components of an enterprise about which financial information is available that
is evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Management evaluates the
performance of CPA(R):14's portfolio of properties as a whole, rather than by
identifying discrete operating segments. This evaluation includes assessing
CPA(R):14's ability to meet distribution objectives, increase the dividend and
increase value by evaluating potential investments in single tenant net lease
real estate and by seeking favorable limited recourse mortgage financing
opportunities. As of September 30, 2003, CPA(R):14 operates in one segment, real
estate operations, and owned properties in the United States, the Netherlands,
Finland, France and the United Kingdom.
RESULTS OF OPERATIONS:
Net income for the comparable three-month and nine-month periods ended September
30, 2003 and 2002 decreased and increased by $1,660 and $1,427, respectively,
and income from continuing operations decreased and increased by $1,660 and
$1,832, respectively. Net income for the nine-month period ended September 30,
2003 included the benefit from the forfeiture of a $2,588 security deposit to
CPA(R):14 by a former lessee which was offset by a $2,900 impairment charge on
real estate. The increases in income from continuing operations, net of the
forfeiture benefit and impairment charge are due to an increase in CPA(R):14's
real estate asset base including its equity investments and the completion of
build-to-suit projects. CPA(R):14 still has funds available to further diversify
its real estate portfolio.
Lease revenues increased by $1,741 and $9,955 for the three-month and nine-month
periods, respectively, primarily as a result of completing build-to-suit
commitments and purchasing real estate. In July 2003, CPA(R):14 funded an
expansion of an existing property leased to Carrefour France SAS in Le Mans,
France. Additional annual rent from the expansion will provide approximately
$1,000, based on current exchange rates. CPA(R):14 also completed build-to-suit
projects with Waddington North America, Inc., Career Education Group and Rave
Motion Pictures LLC during the current nine-month period which will provide
aggregate annual lease revenues of $2,691. During 2002, CPA(R):14 entered into
leases with Carrefour France SA, UTI Holdings, Inc., Tower Automotive, Inc., PW
Eagle, Inc., American Tire Distributors and Katun Corporation, which provided
for $1,025 and $8,732 of the increases in lease revenues for the three-month and
nine-month periods. In March 2003, Fleming Companies, Inc. filed a voluntary
petition of bankruptcy and subsequently terminated its lease at a property in
Grand Rapids, Michigan. An affiliate owns a 40% minority interest in the
property. CPA(R):14's share of annual rent from the Fleming lease was $925. The
Grand Rapids property is being remarketed. More than 35 leases have rent
increases scheduled in 2003 and 2004. The initial term of a lease with Best Buy,
Inc. for a retail property in Torrance, California is scheduled to expire in
2005 and contributes $1,900 of annual lease revenues. Best Buy has not indicated
whether it intends to extend its lease.
Income from equity investments increased by $2,188 and $6,091 for the
three-month and nine-month periods ended September 30, 2003, respectively,
primarily as the result of acquiring interests in properties leased to TruServ
Corporation and Clear Channel Communications, Inc. in December 2002 and Starmark
Camhood, LLC in February 2003. CPA(R):14's annual distributions from the real
estate operations of these equity investments are estimated to be approximately
$7,715.
The increase in interest and other income of $1,574 and $4,384 during the
three-month and the nine-month periods ended September 30, 2003, respectively,
consisted of property expense reimbursements received from lessees,
-15-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
(Dollars in thousands, except share and per share amounts)
interest income earned from CPA(R):14's interest in a mortgage securitization
and, for the nine-month period, the forfeiture of the $2,588 security deposit.
Reimbursements from tenants of $1,593 and $1,742 for the current three-month and
nine-month periods, respectively, were used to pay real estate taxes and other
property expenses that a lessee generally incurs under a net lease, and the
reimbursements, net of the expenses, have no effect on net income. CPA(R):14
acquired its subordinated interest in the mortgage securitization in August 2002
and earned interest income of $194 and $599 from the investment for the current
three-month and nine-month periods, respectively. Interest income from cash
investments decreased by $124 and $825 for the comparable periods, respectively,
as CPA(R):14 has used its cash to purchase real estate.
Interest expense for the three-month and nine-month periods ended September 30,
2003 increased by $1,610 and $6,988, respectively, as a result of obtaining
$198,455 and $27,477 of mortgage financing in 2002 and 2003, respectively.
Increases in depreciation were directly attributable to the increase in real
estate assets purchased in 2002 and 2003. Property expense for the comparable
three-month and nine-month periods increased by $3,010 and $5,626, respectively,
due to expenses which have been reimbursed by lessees and increases in asset
management and performance fees of $449 and $3,182 for the comparable periods.
The asset-based fees increased as a result of the growth of CPA(R):14's asset
base. Property expenses have increased due to the vacancy of a property in Grand
Rapids, Michigan; however, if CPA(R):14 enters into a lease with a new tenant,
CPA(R):14 expects the lessee to pay such costs. Estimated annual carrying costs
on the Grand Rapids property are approximately $400. General and administrative
expense decreased by $92 and increased by $1,534 for the comparable three-month
and nine-month periods, due to an increase in investor-related costs over the
comparable nine-month periods and increases in certain variable costs which
increased as CPA(R):14's asset base increased.
Financial Condition:
There has been no material change in CPA(R):14's financial condition since
December 31, 2002. CPA(R):14's cash has decreased by $19,083 since December 31,
2002, primarily as a result of acquiring new real estate investments. CPA(R):14
is using its cash to purchase new properties to further diversify its portfolio,
complete its commitments on build-to-suit construction projects and maintain
cash balances sufficient to meet working capital needs. As of September 30,
2003, CPA(R):14 had approximately $18,339 of cash available for the acquisition
of real estate investments, and $1,661 committed to complete build-to-suit
projects.
For the nine months ended September 30, 2003, cash flows from operating
activities and equity investments of $44,665 were not fully sufficient to pay
dividends to shareholders of $37,572, meet scheduled principal payment
installments on mortgage debt of $6,701 and distribute $2,195 to minority
partners ($400 from the release of mortgage escrow funds was distributed to a
minority partner). Operating cash flow is expected to continue to increase as a
result of acquiring the Carrefour expansion and completing three build-to-suit
projects, all of which commenced paying rent in the third quarter. Annual cash
flow from the three build-to-suit projects and the Carrefour expansion, net of
property-level debt service, is projected to be approximately $2,104.
CPA(R):14's investment in Starmark is projected to contribute annual
distributions of $3,300, of which only $587 had been received through September
30, 2003. A portion of Starmark's rent has been used to fund certain debt
service escrow obligations which are to be reimbursed by the lessee. Based on
the projected increase in operating cash flows from the completed build-to-suit
projects and the investment in Starmark, cash flow from operations and equity
investments is expected to be sufficient to meet operating cash flows
objectives.
CPA(R):14's investing activities included using a total of $48,874 to purchase a
41% interest in the Starmark properties, to complete the Waddington, Career
Education and Rave projects and to acquire the Carrefour expansion. As of
September 30, 2003, all three build-to-suit projects were in service; however,
$1,661 remained to be funded. In July 2003, CPA(R):14 used $10,422 for the
acquisition of the Carrefour expansion (including obtaining mortgage financing
of $8,203 based on the exchange rate for the Euro). The annual cash flow (rent
less property-level mortgage debt service) from the expansion is projected to be
approximately $397, based on current exchange rates. In January 2003, CPA(R):14
received $8,722 from its share of mortgage proceeds obtained by an equity
investee. CPA(R):14 also paid an annual installment of deferred acquisition fees
in January 2003 of $2,373.
In addition to paying dividends to shareholders, principal payments on mortgage
debt and paying distributions to minority interest owners, CPA(R):14's financing
activities included obtaining proceeds of $21,582 from mortgage
-16-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
(Dollars in thousands, except share and per share amounts)
loans and $1,617 from a note payable collateralized by the Carrefour property.
During 2003, CPA(R):14 obtained the $8,203 mortgage loan collateralized by the
Carrefour property and $6,680 of additional proceeds on a mortgage loan
collateralized by the Career Education property, increasing the loan on the
property to $12,500. Annual debt service on the Carrefour and Career Education
properties is $558 at current exchange rates and $984, respectively. CPA(R):14
also obtained $6,700 of limited recourse mortgage debt collateralized by the UTI
Holdings, Inc. property in Mooresville, North Carolina, at an annual debt
service of $587. CPA(R):14 has no mortgage balloon payments scheduled until June
2006. Substantially all of CPA(R):14's mortgages are limited recourse and bear
interest at fixed rates. Accordingly, CPA(R):14's cash flow should not be
adversely affected by increases in interest rates which are at or near
historical lows. A lender on limited recourse mortgage debt has recourse only to
the property collateralizing such debt and not to any of CPA(R):14's other
assets, while unsecured financing would give a lender recourse to all of CPA(R):
14's assets. The use of limited recourse debt, therefore, will allow CPA(R):14
to limit its exposure of all of its assets to any one debt obligation.
Management believes that the strategy of combining equity and limited recourse
mortgage debt will allow CPA(R):14 to meet its short-term and long-term
liquidity needs and will help to diversify CPA(R):14's portfolio and, therefore,
reduce concentration of risk in any particular lessee.
CPA(R):14 conducts business in Europe. While CPA(R):14 recognized a foreign
transaction gain in 2003 of $324 in connection with the transfer of cash from a
foreign subsidiary, foreign currency transaction gains and losses were not
material to CPA(R):14's results of operations for the nine months ended
September 30, 2003. CPA(R):14 was not subject to material foreign currency
exchange rate risk from the effects of changes in exchange rates. To date,
CPA(R):14 has not entered into any foreign currency forward exchange contracts
or other derivative financial instruments to hedge the effects of adverse
fluctuations in foreign currency exchange rates. CPA(R):14 has obtained limited
recourse mortgage financing at fixed rates of interest in the local currency. To
the extent that currency fluctuations increase or decrease rental revenues as
translated to dollars, the change in debt service, as translated to dollars,
will partially offset the effect of fluctuations in revenue, and, to some extent
mitigate the risk from changes in foreign currency rates. As of September 30,
2003, Carrefour, which leases properties in France, contributed 8% of lease
revenues (see Note 4 to the accompanying condensed consolidated financial
statements). The leverage used on the limited recourse financing of the
Carrefour investments is higher than the average leverage on CPA(R):14's
domestic real estate investments.
OFF-BALANCE SHEET ARRANGEMENTS, GUARANTEES AND AGGREGATE CONTRACTUAL AGREEMENTS:
A summary of CPA(R):14's contractual obligations and commitments is as follows:
(in thousands) Total 2003 2004 2005 2006 2007 Thereafter
----- ---- ---- ---- ---- ---- ----------
Obligations:
Mortgage notes payable (1) $693,444 $2,544 $10,578 $11,593 $12,547 $13,488 $642,694
Deferred acquisition fees 22,530 3,204 3,420 3,420 3,420 9,066
Subordinated disposition fees 240 240
Commitments:
Commitments for build-to-suit
construction 1,661 1,661
Share of minimum rents payable
under office cost-sharing
agreement 1,100 28 390 390 292
-------- ------ ------- ------- ------- ------- --------
$718,975 $4,233 $14,172 $15,403 $16,259 $16,908 $652,000
======== ====== ======= ======= ======= ======= ========
(1) The mortgage notes payable were obtained in connection with the acquisition
of properties in the ordinary course of business.
ACCOUNTING PRONOUNCEMENTS:
In June 2001, FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." SFAS No. 143 was issued to establish standards for the recognition
and measurement of an asset retirement obligation. SFAS No. 143 requires
retirement obligations associated with tangible long-lived assets to be
recognized at fair value as the
-17-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
(Dollars in thousands, except share and per share amounts)
liability is incurred with a corresponding increase in the carrying amount of
the related long-lived asset. SFAS No. 143 is effective for financial statements
issued for fiscal years beginning after June 15, 2002. SFAS No. 143 was adopted
on January 1, 2003 and did not have a material effect on the financial
statements.
In May 2002, FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4, 44 and 64,
Amendment of SFAS No. 13 and Technical Corrections" which eliminates the
requirement that gains and losses from the extinguishment of debt be classified
as extraordinary items unless it can be considered unusual in nature and
infrequent in occurrence. CPA(R):14 adopted this statement effective January 1,
2003 and the adoption did not have a material affect on CPA(R):14's financial
statements. CPA(R):14 no longer classifies gains and losses for the
extinguishment of debt as extraordinary items.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities". SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
("EITF") has set forth in EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. SFAS No. 146 was adopted
on January 1, 2003 and did not have a material effect on CPA(R):14's financial
statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," ("FIN 45") which changes the accounting for, and
disclosure of certain guarantees. Beginning with transactions entered into after
December 31, 2002, certain guarantees are required to be recorded at fair value,
which is different from prior practice, under which a liability was recorded
only when a loss was probable and reasonably estimable. In general, the change
applies to contracts or indemnification agreements that contingently require
CPA(R):14 to make payments to a guaranteed third-party based on changes in an
underlying asset, liability, or an equity security of the guaranteed party. The
adoption of the accounting provisions of FIN 45 on January 1, 2003 did not have
a material effect on CPA(R):14's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS No. 123, Accounting
for Stock Based Compensation. SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock based compensation (i.e., recognition of a charge for issuance of
stock options in the determination of income.). However, SFAS No. 148 does not
permit the use of the original SFAS No. 123 prospective method of transition for
changes to the fair value based method made in fiscal years beginning after
December 15, 2003. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock based
employee compensation, description of transition method utilized and the effect
of the method used on reported results. The transition and annual disclosure
provisions for valuing stock-based compensation of SFAS No. 148 are to be
applied for fiscal years ending after December 15, 2002. CPA(R):14 does not have
any employees nor any stock-based compensation plans.
On January 17, 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), the primary objective of which is to
provide guidance on the identification of entities for which control is achieved
through means other than voting rights ("variable interest entities" or "VIEs")
and to determine when and which business enterprise should consolidate the VIE
(the "primary beneficiary"). This new model applies when either (1) the equity
investors (if any) do not have a controlling financial interest or (2) the
equity investment at risk is insufficient to finance that entity's activities
without additional financial support. In addition, FIN 46 requires both the
primary beneficiary and all other enterprises with a significant variable
interest in a VIE make additional disclosures. On October 8, 2003, the FASB
staff issued a FASB Staff Position ("FSP") which deferred the effective date of
FIN 46 until December 31, 2003 for VIEs created prior to February 1, 2003.
CPA(R):14's maximum loss exposure is the carrying value of its equity
investments. CPA(R):14 has evaluated the potential impact and believes this
interpretation will not have a material impact on its accounting for its
investments in unconsolidated joint ventures as none of these investments are
VIEs.
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CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
(Dollars in thousands, except share and per share amounts)
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging under SFAS No. 133. The
changes in the statement improve financial reporting by requiring that contracts
with comparable characteristics be accounted for similarly. In particular, the
statement (1) clarifies under what circumstances a contract with an initial net
investment meets the characteristics of a derivative instrument discussed in
paragraph 6(b) of SFAS No. 133, (2) clarifies when a derivative contains a
financing component, (3) amends the definition of an underlying to conform it to
language used in FIN 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others", and (4)
amends certain other existing pronouncements. SFAS No. 149 is generally
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The adoption of FASB No.
149 did not have a material effect on the financial statements.
On May 30, 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liability and Equity." SFAS No. 150
establishes standards to classify as liabilities certain financial instruments
that are mandatorily redeemable or include an obligation to repurchase. Such
financial instruments will be measured at fair value with changes in fair value
included in the determination of net income. The FASB recently issued FSP 150-3,
which defers the provisions of paragraph 9 and 10 of SFAS No. 150 indefinitely
as they apply to mandatorily redeemable noncontrolling interests assocated with
finite-lived entities. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. CPA(R):14
has interests in five limited partnerships that are consolidated and that are
considered mandatorily redeemable controlling interests with finite lives. In
accordance with the deferral noted above, these minority interests have not been
reflected as liabilities. The carrying value and fair value of these minority
interests are approximately $12,451 and $13,478, respectively, at September 30,
2003.
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CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(in thousands)
Market risk is the exposure to loss resulting from changes in interest and
foreign currency exchange rates and equity prices. In pursuing its business
plan, the primary market risks to which CPA(R):14 is exposed are interest rate
risk and foreign currency exchange risk.
The value of CPA(R):14's real estate is subject to fluctuations based on changes
in interest and foreign currency exchange rates, local and regional economic
conditions and changes in the creditworthiness of lessees, and which may affect
CPA(R):14's ability to refinance its debt when balloon payments are scheduled.
CPA(R):14 owns marketable securities through its ownership interests in Carey
Commercial Mortgage Trust ("CCMT"). The value of the marketable securities is
subject to fluctuation based on changes in interest rates, economic conditions
and the creditworthiness of lessees at the mortgaged properties. As of September
30, 2003, CPA(R):14's interests in CCMT had a fair value of $6,806.
Approximately $665,939 of CPA(R):14's long-term debt bears interest at fixed
rates, and therefore the fair value of these instruments is affected by changes
in the market interest rates. The following table presents principal cash flows
based upon expected maturity dates of the debt obligations and the related
weighted-average interest rates by expected maturity dates for the fixed rate
debt. The interest rate on the fixed rate debt as of September 30, 2003 ranged
from 6.09% to 8.85%. The interest rate on the variable rate debt as of September
30, 2003 ranged from 3.12% to 6.59%.
2003 2004 2005 2006 2007 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed rate debt $2,469 $10,211 $11,201 $12,138 $13,061 $616,859 $665,939 $675,290
Weighted average
interest rate 7.20% 7.20% 7.20% 7.20% 7.20% 7.47%
Variable rate debt $ 75 $ 367 $ 392 $ 409 $ 427 $ 25,835 $ 27,505 $ 27,505
CPA(R):14 has foreign operations. Accordingly, CPA(R):14 is subject to foreign
currency exchange risk from the effects of exchange rate movements of foreign
currencies and this may affect future costs and cash flows; however, exchange
rate movements to date have not had a significant effect on CPA(R):14's
financial position or results of operations. To date CPA(R):14 has not entered
into any foreign currency forward exchange contracts to hedge the effects of
adverse fluctuations in foreign currency exchange. One of CPA(R):14's lease
agreements provides the option to receive a portion of the rent in dollars or
the local currency; this option is considered a derivative financial instrument
and changes in the fair value of the option, which were not significant, are
included in the determination of net income.
Item 4. - CONTROLS AND PROCEDURES
The Co-Chief Executive Officers and Chief Financial Officer of the Company have
conducted a review of the Company's disclosure controls and procedures as of
September 30, 2003.
The Company's disclosure controls and procedures include the Company's controls
and other procedures designed to ensure that information required to be
disclosed in this and other reports filed under the Securities Exchange Act of
1934, as amended (the "Exchange Act") is accumulated and communicated to the
Company's management, including its Co-Chief Executive Officers and Chief
Financial Officer, to allow timely decisions regarding required disclosure and
to ensure that such information is recorded, processed, summarized and reported,
within the required time periods.
Based upon this review, the Company's Co-Chief Executive Officers and Chief
Financial Officer have concluded that the Company's disclosure controls (as
defined in Rule 13a-14(c) promulgated under the Exchange Act) are sufficiently
effective to ensure that the information required to be disclosed by the Company
in the reports it files under the Exchange Act is recorded, processed,
summarized and reported with adequate timeliness.
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CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
PART II
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended September 30, 2003, no matters were submitted
to a vote of Security Holders.
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
31.1 Certification of Co-Chief Executive Officers
31.2 Certification of Chief Financial Officer
32.1 Certification of Co-Chief Executive Officers Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
During the quarter ended September 30, 2003, the Company was not
required to file any reports on Form 8-K.
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CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
11/10/2003 By: /s/ John J. Park
- -------------- -----------------------------------
Date John J. Park
Managing Director and
Chief Financial Officer
(Principal Financial Officer)
11/10/2003 By: /s/ Claude Fernandez
- -------------- -----------------------------------
Date Claude Fernandez
Managing Director and
Chief Accounting Officer
(Principal Accounting Officer)
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