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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________.
COMMISSION FILE NUMBER: 000-25771
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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 (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBERS:
INVESTOR RELATIONS (212) 492-8920
(212) 492-1100
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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
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained in this report, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No[ ]
Registrant has no active market for its common stock as of March 8,
2005. Non-affiliates held 65,324,469 shares as of March 8, 2005.
As of March 8, 2005, there are 67,803,760 shares of common stock of
Registrant outstanding.
The Registrant incorporates by reference its definitive Proxy Statement
with respect to its 2005 Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission within 120 days following the end of its
fiscal year, into Part III of this Report.
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
PART I
This Annual Report on Form 10-K contains certain forward-looking statements
relating to Corporate Property Associates 14 Incorporated. As used in this
Annual Report on Form 10-K, the terms "the Company," "we," "us" and "our"
include Corporate Property Associates 14 Incorporated, 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," "estimate," "intend," "could," "should," "would,"
"may," "seeks," "plans" or similar expressions. Do not unduly rely on
forward-looking statements. They give our expectations about the future and are
not guarantees, and speak only as of the date they are made. Such statements
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, performance or achievement to be materially different from
the results of operations or plan expressed or implied by such forward-looking
statements. While we cannot predict all of the risks and uncertainties, they
include, but are not limited to, those described below in "Factors Affecting
Future Operating Results." 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.
(In thousands, except share and per share amounts)
ITEM 1. BUSINESS.
(a) GENERAL DEVELOPMENT OF BUSINESS
Overview
We are a Real Estate Investment Trust ("REIT") that invests in commercial
properties leased to companies domestically and internationally. As of December
31, 2004, our portfolio consisted of 236 properties leased to 72 tenants and
totaled more than 24.8 million square feet.
Our core investment strategy is to purchase and own properties leased to a
diversified group of companies on a single tenant net lease basis. These leases
generally place the economic burden of ownership on the tenant by requiring them
to pay the costs of maintenance, insurance, taxes, structural repairs and other
operating expenses. We also generally seek to include in our leases:
- clauses providing for mandated rent increases or periodic rent
increases tied to increases in the consumer price index ("CPI") or
other indices for the jurisdiction in which the property is located
or, when appropriate, increases tied to the volume of sales at the
property;
- indemnification for environmental and other liabilities; and
- when appropriate, guarantees from parent companies.
We were formed as a Maryland corporation on June 4, 1997. Between November 1997
and November 2001, we sold a total of 65,794,280 shares of common stock for a
total of $657,943 in gross offering proceeds. Through December 31, 2004, we have
also issued 704,596 shares ($7,598) through our dividend reinvestment and share
purchase plan. These proceeds have been used along with limited recourse
mortgage debt to acquire a portfolio of properties. As a REIT, we are not
subject to federal income taxation as long as we satisfy certain requirements
relating to the nature of our income, the level of our distributions and other
factors.
W. P. Carey & Co. LLC ("WPC"), our advisor, provides us with both strategic and
day-to-day management, including acquisition services, research, investment
analysis, asset management, capital funding services, disposition of assets,
investor relations and administrative services. WPC also provides office space
and other facilities for us. We pay asset management fees and certain
transactional fees to WPC and also reimburse WPC for certain expenses. WPC also
serves in this capacity for Corporate Property Associates 12 Incorporated
("CPA(R):12"), Corporate Property Associates 15 Incorporated ("CPA(R):15"),
Corporate Property Associates 16 - Global Incorporated ("CPA(R):16 - Global")
and Carey Institutional Properties Incorporated ("CIP(R)") until its merger into
CPA(R):15 in September 2004 (collectively, including us, the "CPA(R) REITs").
WPC is listed on the New York Stock Exchange under the symbol "WPC."
Our principal executive offices are located at 50 Rockefeller Plaza, New York,
NY 10020 and our telephone number is (212) 492-1100. As of December 31, 2004, we
had no employees. WPC employs 129 individuals who are available to perform
services for us.
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CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Significant Developments During 2004
ACQUISITIONS. On April 29, 2004, along with two affiliates, Corporate Property
Associates 15 Incorporated and Corporate Property Associates 16 - Global
Incorporated, through a limited partnership in which we own an 11.54% limited
partnership interest, we purchased 78 retail self-storage and truck rental
facilities and entered into master lease agreements with two lessees that
operate the facilities under the U-Haul brand name. The self-storage facilities
are leased to Mercury Partners, LP ("Mercury"), and the truck rental facilities
are leased to U-Haul Moving Partners, Inc. ("U-Haul"). The total cost of the
facilities was $312,445. In connection with the purchase, the limited
partnership obtained $183,000 of limited recourse mortgage financing
collateralized by the properties and lease assignments. The loan, which matures
in May 2014, provides for monthly payments of principal and interest of $1,230
at an annual interest rate of 6.449% and a 25-year amortization schedule.
The Mercury lease has an initial term of 20 years with two 10-year renewal
options and provides for annual rent of $18,551. The U-Haul lease has an initial
term 10 years with two 10-year renewal options and provides for annual rent of
$9,990. In the event that U-Haul does not renew its lease, Mercury will assume
the lease obligation for the truck rental facilities. Each lease provides for
rent increases every five years based on a formula indexed to the CPI.
RE-LEASING OF PREVIOUSLY VACANT PROPERTY. In January 2004, we entered into a net
lease with The Retail Distribution Group for a property in Grand Rapids,
Michigan that had been vacant since May 2003. We own a 60% interest in this
property. The Retail Distribution lease provides for initial annual rent of
$903, of which our share is $542, and has an initial term through August 2009.
The Retail Distribution lease provides for reductions to its rent as it vacated
another property in order to lease the Grand Rapids property. Any reductions to
rent will be adjusted for any rentals Retail Distribution receives from the
other property or upon its sale of the other property.
In December 2003, we entered into a net lease with Wavetronix LLC for a portion
of a partially vacant property in Lindon, Utah, which began contributing $301 of
annual lease revenue in June 2004 when improvements at the property were
completed. The lease has an initial term of five years and seven months.
We entered into a lease for the former Scott Companies property in Gardena,
California with Moonlight Molds in September 2004 which provides for initial
annual rent of $356 and provides the lessee an option to purchase the property.
SEC INVESTIGATION. As previously reported by WPC, WPC and Carey Financial
Corporation ("Carey Financial"), the wholly-owned broker-dealer subsidiary of
WPC, are currently subject to an investigation by the United States Securities
and Exchange Commission ("SEC") into payments made to third party broker dealers
in connection with the distribution of REITs managed by WPC and other matters.
Although no regulatory action has been initiated against WPC or Carey Financial
in connection with the matters being investigated, it is possible that the SEC
may pursue an action in the future. The potential timing of any such action and
the nature of the relief or remedies the SEC may seek cannot be predicted at
this time. If such an action is brought, it could materially affect WPC and the
REITs managed by WPC, including us. See Item 3 - Legal Proceedings for a
discussion of this investigation.
(b) FINANCIAL INFORMATION ABOUT SEGMENTS
We operate in one industry segment, investment in net leased real property. For
the year ended December 31, 2004, no lessee represented 10% or more of our total
operating revenue.
(c) NARRATIVE DESCRIPTION OF BUSINESS
Business Objectives and Strategy
Our objectives are to:
- own a diversified portfolio of net-leased real estate that will
increase in value;
- provide increasing revenue rental streams by generally including
scheduled rent increases in our leases;
- fund dividends to shareholders; and
- increase the value of the equity in our real estate by making
regular mortgage principal payments.
We seek to achieve these objectives by purchasing and holding industrial and
commercial properties each net leased to a single corporate tenant. We intend
our portfolio to be diversified by tenant and tenant industry.
Investment Strategies
In analyzing potential investments, WPC reviews many aspects of a transaction,
including the tenant, the real estate and the lease, to determine whether a
potential investment can be structured to satisfy our investment criteria. The
aspects of a transaction which are reviewed and structured by WPC include the
following:
TENANT EVALUATION. WPC evaluates each potential tenant for its credit,
management, position within its industry, operating history and profitability.
WPC generally seeks tenants it believes will have stable or improving credit. By
leasing
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CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
properties to these tenants, we can generally charge rent that is higher than
the rent charged to tenants with recognized credit and thereby enhance our
current return from these properties as compared with properties leased to
companies whose credit potential has already been recognized by the market.
Furthermore, if a tenant's credit does improve, the value of our property will
likely increase (if all other factors affecting value remain unchanged). WPC may
also seek to enhance the likelihood of a tenant's lease obligations being
satisfied, such as through a security deposit which may be in the form of a
letter of credit or cash, or through a guarantee of lease obligations from the
tenant's corporate parent. In evaluating a possible investment, the
creditworthiness of a tenant generally will be a more significant factor than
the value of the property absent the lease with such tenant. While WPC will
select tenants it believes are creditworthy, tenants will not be required to
meet any minimum rating established by an independent credit rating agency.
WPC's and the investment committee's standards for determining whether a
particular tenant is creditworthy vary in accordance with a variety of factors
relating to specific prospective tenants. The creditworthiness of a tenant is
determined on a tenant by tenant, case by case basis. Therefore, general
standards for creditworthiness cannot be applied.
LEASES WITH INCREASING RENTS. WPC typically includes, or attempts to include, a
clause in each lease that provides for increases in rent over the term of the
lease. These increases are generally tied to increases in indices such as the
CPI or mandated rental increases on specific dates and, in the case of retail
stores, participation in gross sales above a stated level.
PROPERTIES IMPORTANT TO TENANT OPERATIONS. WPC generally seeks to invest in
properties with operations that are essential or important to the ongoing
operations of the tenant. WPC believes that these properties provide better
protection in the event a tenant files for bankruptcy, since leases on
properties essential or important to the operations of a bankrupt tenant are
less likely to be terminated by a bankrupt tenant. WPC also seeks to assess the
income, cash flow and profitability of the business conducted at the property so
that, if the tenant is unable to operate its business, we can either continue
operating the business conducted at the property or re-lease the property to
another entity in the same industry as the tenant which can operate the property
profitably.
LEASE PROVISIONS THAT ENHANCE AND PROTECT VALUE. When available, WPC attempts to
include provisions in our leases that require our consent to specified tenant
activity or require the tenant to satisfy specific operating tests. These
provisions could include, for example, operational and financial covenants of
the tenant, prohibitions on a change in control of the tenant without our
consent and indemnification from the tenant against environmental and other
contingent liabilities.
DIVERSIFICATION. WPC seeks to diversify our portfolio to avoid dependence on any
one particular tenant or tenant industry, which also generally results in
diversification by type of facility and geographic location. Diversification, to
the extent achieved, helps reduce the adverse effect of a single
under-performing investment or a downturn in any particular industry or
geographic region.
INVESTMENT COMMITTEE. WPC has an investment committee that provides services to
both the CPA(R) REITs and WPC. As a transaction is structured, it is evaluated
by the chairman of the investment committee with respect to the potential
tenant's credit, business prospects, position within its industry and other
characteristics important to the long-term value of the property and the
capability of the tenant to meet its lease obligations. Before a property is
acquired, the transaction is reviewed by the investment committee to ensure that
it satisfies the investment criteria. For transactions that meet the investment
criteria, the investment committee has sole discretion as to which CPA(R) REIT
or if WPC will hold the investment. In cases where the investment committee
determines that two or more entities among the CPA(R) REITs and WPC should hold
the investment, the independent directors of each participating CPA(R) REIT (and
the WPC directors if WPC participates) must also approve the transaction.
The investment committee is not directly involved in originating or negotiating
potential acquisitions, but instead functions as a separate and final step in
the acquisition process. WPC places special emphasis on having experienced
individuals serve on its investment committee and we do not invest in a
transaction unless it is approved by the investment committee.
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CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
The following people serve on the investment committee:
- George E. Stoddard, Chairman (1), was formerly responsible for
the direct corporate investments of The Equitable Life Assurance
Society of the United States and has been involved with the CPA(R)
programs for over 20 years.
- Frank J. Hoenemeyer, Vice Chairman, was formerly Vice Chairman,
Director and Chief Investment Officer of The Prudential Insurance
Company of America. As Chief Investment Officer, Mr. Hoenemeyer was
responsible for all of Prudential's investments, including stocks,
bonds, private placements, real estate and mortgages.
- Nathaniel S. Coolidge (1) previously served as Senior Vice President
-- Head of Bond & Corporate Finance Department of the John Hancock
Mutual Life Insurance Company. His responsibilities included
overseeing fixed income investments for Hancock, its affiliates and
outside clients.
- Lawrence R. Klein (1) is the Benjamin Franklin Professor of
Economics Emeritus at the University of Pennsylvania and its Wharton
School. Dr. Klein has been awarded the Alfred Nobel Memorial Prize
in Economic Sciences and currently advises various governments and
government agencies.
- Ralph F. Verni (1) is a private investor and business consultant and
formerly Chief Investment Officer of The New England Mutual Life
Insurance Company.
- Karsten von Koller (1) was formerly Chairman and Member of the Board
of Managing Directors of Eurohypo AG, the leading commercial real
estate financing company in Europe.
(1) Investment committee member also serves as a director of WPC.
Each property we purchase has been, and future purchases will be, appraised by a
third party appraiser. We will not purchase any property that has a total
property cost (the purchase price of the property inclusive of acquisition fees)
which is in excess of its appraised value. These appraisals may take into
consideration, among other things, the terms and conditions of the particular
lease transaction, the quality of the lessee's credit and the conditions of the
credit markets at the time the lease transaction is negotiated. The appraised
value may be greater than the construction cost or the replacement cost of a
property, and the actual sale price of a property if sold by us may be greater
or less than the appraised value.
WPC's practices include obtaining evaluations of the physical condition of
properties and obtaining environmental surveys in an attempt to determine
potential environmental liabilities associated with a property prior to its
acquisition. We will also consider factors peculiar to the laws of foreign
countries, in addition to the risk normally associated with real property
investments, when considering an investment located outside the United States.
Financing Strategies
Consistent with our investment policies, we use leverage when available on
favorable terms. Substantially all of our mortgages are limited recourse and
bear interest at fixed rates. Accordingly, our near term cash flow should not be
adversely affected by increases in interest rates, which are near historical
lows. We may seek to refinance maturing or recently paid-off mortgage debt with
new property-level financing. There is no assurance that existing debt will be
refinanced at lower rates of interest as such debt matures. Many of the loans
restrict our ability to prepay a loan or provide for payment of premiums if paid
prior to the scheduled maturity, but allow defeasance of the loan, that is, a
deposit is made to service the loan commitment even if the underlying property
is sold.
A lender on limited recourse mortgage debt has recourse only to the property
collateralizing such debt and not to any of our other assets, while full
recourse financing would give a lender recourse to all of our assets. The use of
limited recourse debt, therefore, will allow us to limit the exposure of all of
our assets to any one debt obligation. We believe that the strategy of combining
equity and limited recourse mortgage debt will help us to meet our short-term
and
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CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
long-term liquidity needs and will help to diversify our portfolio and,
therefore, reduce concentration of risk in any particular lessee.
WPC continually seeks opportunities and considers alternative financing
techniques to finance properties not currently subject to debt, refinance debt,
reduce interest expense or improve its capital structure.
Asset Management
We believe that effective management of our net lease assets is essential to
maintain and enhance property values. Important aspects of asset management
include restructuring transactions to meet the evolving needs of current
tenants, re-leasing properties, refinancing debt, selling properties and
knowledge of the bankruptcy process. WPC monitors, on an ongoing basis,
compliance by tenants with their lease obligations and other factors that could
affect the financial performance of any of our properties. Monitoring involves
receiving assurances that each tenant has paid real estate taxes, assessments
and other expenses relating to the properties it occupies and confirming that
appropriate insurance coverage is being maintained by the tenant. WPC reviews
financial statements of our tenants and undertakes regular physical inspections
of the condition and maintenance of our properties. Additionally, WPC
periodically analyzes each tenant's financial condition, the industry in which
each tenant operates and each tenant's relative strength in its industry.
Holding Period
We intend to hold each property we acquire for an extended period. The
determination of whether a particular property should be sold or otherwise
disposed of will be made after consideration of relevant factors with a view to
achieving maximum capital appreciation and after-tax return for our
shareholders. If our common stock is not listed for trading on a national
securities exchange or included for quotation on NASDAQ, our intention is to
generally begin selling properties within eight years after the proceeds of the
public offering are substantially invested, subject to market conditions. The
board of directors will consider whether to list the shares, liquidate or devise
an alternative liquidity strategy.
Competition
We face competition for the acquisition of office and industrial properties in
general, and such properties net leased to major corporations in particular,
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. We believe
our management's experience in real estate, credit underwriting and transaction
structuring should allow us to compete effectively for office and industrial
properties.
Environmental Matters
Under various federal, state and local environmental laws, regulations and
ordinances, current or former owners of real estate, as well as other parties,
we may be required to investigate and clean up hazardous or toxic chemicals,
substances or waste or petroleum product or waste, releases on, under, in or
from a property. These parties may be held liable to governmental entities or to
third parties for specified damages and for investigation and cleanup costs
incurred by these parties in connection with the release or threatened release
of hazardous materials. These laws typically impose responsibility and liability
without regard to whether the owner knew of or was responsible for the presence
of hazardous materials, and the liability under these laws has been interpreted
to be joint and several under some circumstances. Our leases often provide that
the tenant is responsible for all environmental liability and for compliance
with environmental regulations relating to the tenant's operations.
We typically undertake an investigation of potential environmental risks when
evaluating an acquisition. Phase I environmental assessments are performed by
third party environmental consulting and engineering firms for all properties we
acquire. Where we believe them to be warranted, Phase II environmental
assessments are performed. Phase I assessments do not involve subsurface
testing, whereas Phase II assessments involve some degree of soil and/or
groundwater testing. We may acquire a property which is known to have had a
release of hazardous materials in the past, subject to a determination of the
level of risk and potential cost of remediation. We normally require property
sellers to indemnify us fully against any environmental problem existing as of
the date of purchase. Additionally, we often structure our leases to require the
tenant to assume most or all responsibility for compliance with the
environmental provisions of the lease or environmental remediation relating to
the tenant's operations and to
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CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
provide that non-compliance with environmental laws is a lease default. In some
cases, we may also require a cash reserve, a letter of credit or a guarantee
from the tenant, the tenant's parent company or a third party to assure lease
compliance and funding of remediation. The value of any of these protections
depends on the amount of the collateral and/or financial strength of the entity
providing the protection. Such a contractual arrangement does not eliminate our
statutory liability or preclude claims against us by governmental authorities or
persons who are not a party to the arrangement. Contractual arrangements in our
leases may provide a basis for us to recover from the tenant damages or costs
for which we have been found liable.
Factors Affecting Future Operating Results
Our future results may be affected by certain risks and uncertainties including
the following:
WE ARE SUBJECT TO THE RISKS OF REAL ESTATE OWNERSHIP WHICH COULD REDUCE THE
VALUE OF OUR PROPERTIES.
Our performance and asset value are subject to risks incident to the ownership
and operation of net leased industrial and commercial property, including:
- changes in the general economic climate;
- changes in local conditions such as an oversupply of space or
reduction in demand for real estate;
- changes in interest rates and the availability of financing; and
- changes in laws and governmental regulations, including those
governing real estate usage, zoning and taxes.
WE MAY HAVE DIFFICULTY RE-LEASING OR SELLING OUR PROPERTIES.
Real estate investments generally lack liquidity compared to other financial
assets and this lack of liquidity will limit our ability to quickly change our
portfolio in response to changes in economic or other conditions. The net leases
we may enter into or acquire may be for properties that are specially suited to
the particular needs of our tenant. With these properties, if the current lease
is terminated or not renewed, we may be required to renovate the property or to
make rent concessions in order to lease the property to another tenant. In
addition, in the event we are forced to sell the property, we may have
difficulty selling it to a party other than the tenant due to the special
purpose for which the property may have been designed. These and other
limitations, such as a property's location and/or local economic conditions, may
affect our ability to re-lease or sell properties without adversely affecting
returns to our shareholders.
THE INABILITY OF A TENANT IN A SINGLE TENANT PROPERTY TO PAY RENT WILL REDUCE
OUR REVENUES.
Most of our properties are each occupied by a single tenant and, therefore, the
success of our investments is materially dependent on the financial stability of
such tenants. Lease payment defaults by tenants could cause us to reduce the
amount of distributions to shareholders. A default of a tenant on its lease
payments to us would cause us to lose the revenue from the property and to seek
an alternative source of revenue to meet any mortgage payment and prevent a
foreclosure if the property is subject to a mortgage. In the event of a default,
we may experience delays in enforcing our rights as landlord and may incur
substantial costs in protecting our investment and reletting our property. If a
lease is terminated, there is no assurance that we will be able to lease the
property for the rent previously received or sell the property without incurring
a loss.
IF OUR TENANTS ARE HIGHLY LEVERAGED, THEY MAY HAVE A HIGHER POSSIBILITY OF
FILING FOR BANKRUPTCY OR INSOLVENCY.
Of tenants that experience downturns in their operating results due to adverse
changes to their business or economic conditions, those that are highly
leveraged may have a higher possibility of filing for bankruptcy or insolvency.
In bankruptcy or insolvency, a tenant may have the option of vacating a property
instead of paying rent.
THE BANKRUPTCY OR INSOLVENCY OF TENANTS MAY CAUSE A REDUCTION IN REVENUE.
Bankruptcy or insolvency of a tenant could cause:
- the loss of lease payments;
- an increase in the costs incurred to carry the property;
- a reduction in the value of shares; and
- a decrease in distributions to shareholders.
Under bankruptcy law, a tenant who is the subject of bankruptcy proceedings has
the option of continuing or terminating any unexpired lease. If the tenant
terminates the lease, any claim we have for breach of the lease (excluding
collateral securing the claim) will be treated as a general unsecured claim.
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CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
The maximum claim will be capped at the amount owed for unpaid rent prior to the
bankruptcy unrelated to the termination, plus the greater of one year's lease
payments or 15% of the remaining lease payments payable under the lease (but no
more than three years' lease payments). In addition, due to the long-term nature
of our leases and terms providing for the repurchase of a property by the
tenant, a bankruptcy court could recharacterize a net-lease transaction as a
secured lending transaction. If that were to occur, we would not be treated as
the owner of the property, but might have additional rights as a secured
creditor. Those rights would not include a right to compel the tenant to timely
perform its obligations under the lease but would instead entitle us to
"adequate protection," a bankruptcy concept that applies to protect us against
further a decrease in the value of the property if the value of the property is
less than the balance owed to us.
As a general rule, insolvency laws outside the United States are not as
favorable to reorganization or to the protection of a debtor's rights as tenants
under a lease as are the laws in the United States. Our rights to terminate a
lease for default are more likely to be enforceable in countries other than the
United States, while a debtor/tenant or its insolvency representative is less
likely to have rights to force continuation of lease without our consent.
Nonetheless, most such laws would permit a tenant or an appointed insolvency
representative to terminate a lease if it so chose.
However, because the bankruptcy laws of the United States are considered to be
more favorable to debtors and to their reorganization, entities which are not
ordinarily perceived as United States entities may seek to take advantage of the
United States bankruptcy laws if they are eligible. An entity would be eligible
to be a debtor under the United States bankruptcy laws if it had a domicile
(state of incorporation or registration), place of business or assets in the
United States. If a tenant became a debtor under the United States bankruptcy
laws, then it would have the option of continuing or terminating any unexpired
lease. Prior to taking the requisite procedural steps to continue or terminate
an unexpired lease, the tenant (or its trustee if one has been appointed) must
timely perform all obligations of the tenant under the lease.
The programs managed by WPC or its affiliates have had tenants file for
bankruptcy protection and are involved in litigation (including two
international tenants). Four of the other fourteen CPA(R) programs reduced the
rate of distributions to their investors as a result of adverse developments
involving tenants.
OUR TENANTS GENERALLY WILL NOT HAVE ACCESS TO TRADITIONAL SOURCES OF CREDIT,
WHICH MAY CREATE A HIGHER RISK OF LEASE DEFAULTS AND THEREFORE LOWER REVENUES.
Generally, no credit rating agencies evaluate or rank the debt or the credit
risk of many of our tenants, as we seek tenants that we believe will have stable
or improving credit profiles that have not been recognized by the traditional
credit market. Our long-term leases with certain of these tenants may therefore
pose a higher risk of default.
THERE IS NOT, AND MAY NEVER BE A PUBLIC MARKET FOR OUR SHARES, SO IT WILL BE
DIFFICULT FOR SHAREHOLDERS TO SELL SHARES QUICKLY.
There is no current public market for the shares and, therefore, it will be
difficult for shareholders to sell their shares promptly. In addition, the price
received for any shares sold prior to a liquidity event is likely to be less
than the proportionate value of the real estate we own. Investor suitability
standards imposed by certain states may also make it more difficult to sell
shares to someone in those states. The shares should be considered as a
long-term investment only.
LIABILITY FOR UNINSURED LOSSES COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
Losses from disaster-type occurrences (such as wars, terrorist activities or
earthquakes) may be either uninsurable or not insurable on economically viable
terms. Should an uninsured loss occur, we could lose our capital investment
and/or anticipated profits and cash flow from one or more properties, which in
turn could cause the value of the shares and distributions to shareholders to be
reduced.
POTENTIAL LIABILITY FOR ENVIRONMENTAL MATTERS COULD ADVERSELY AFFECT OUR
FINANCIAL CONDITION.
We may own industrial and commercial properties that will cause us to be subject
to the risk of liabilities under federal, state and local environmental laws.
Some of these laws could impose the following on us:
- Responsibility and liability for the cost of removal or remediation
of hazardous substances released on our property, generally without
regard to our knowledge or responsibility of the presence of the
contaminants;
- Liability for the costs of removal or remediation of hazardous
substances at disposal facilities for persons who arrange for the
disposal or treatment of these substances; and
-8-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
- Potential liability for common law claims by third parties based on
damages and costs of environmental contaminants.
Our costs of investigation, remediation or removal of hazardous substances may
be substantial. In addition, the presence of hazardous substances on one of our
properties, or the failure to properly remediate a contaminated property, could
adversely affect our ability to sell or lease the property or to borrow using
the property as collateral.
OUR USE OF DEBT TO FINANCE ACQUISITIONS COULD ADVERSELY AFFECT OUR CASH FLOW.
Most of our property acquisitions are made by borrowing a portion of the
purchase price of our properties and securing the loan with a mortgage on the
property. If we are unable to make our debt payments as required, a lender could
foreclose on the property or properties securing its debt. This could cause us
to lose part or all of our investment which in turn could cause the value of the
shares and distributions to shareholders to be reduced. We generally borrow on a
limited recourse basis to limit our exposure on any property to the amount of
equity invested in the property. We generally borrow approximately 60% of the
purchase price of our properties. There is no limitation on the amount borrowed
on a single property and the aggregate borrowings may not exceed 75% of the
value of all properties without board approval.
BALLOON PAYMENT OBLIGATIONS MAY ADVERSELY AFFECT OUR FINANCIAL CONDITION.
Some of our financing may require us to make a lump-sum or "balloon" payment at
maturity. Our ability to make any balloon payment is uncertain and may depend
upon our ability to refinance the mortgage or our ability to sell the property.
At the time the balloon payment is due, we may or may not be able to refinance
the balloon payment on terms as favorable as the original loan or sell the
property at a price sufficient to make the balloon payment. A refinancing or
sale could affect the rate of return to shareholders and the projected time of
disposition of our assets. Scheduled balloon payments, including our pro rata
share of mortgage obligations on equity investees, for the next five years are
as follows:
2005 - $0
2006 - $6,930
2007 - $0
2008 - $5,321
2009 - $73,877
THE IRS MAY TREAT SALE-LEASEBACK TRANSACTIONS AS LOANS, WHICH COULD JEOPARDIZE
OUR REIT STATUS.
The Internal Revenue Service may take the position that specific sale-leaseback
transactions which we treat as true leases are not true leases for federal
income tax purposes but are, instead, financing arrangements or loans. If a
sale-leaseback transaction were so recharacterized, we might fail to satisfy the
Asset Tests or the Income Tests and consequently lose our REIT status effective
with the year of recharacterization. Alternatively, the amount of our REIT
Taxable Income could be recalculated which could cause us to fail the
Distribution Test.
FAILURE TO QUALIFY AS A REIT WOULD ADVERSELY AFFECT OUR OPERATIONS AND ABILITY
TO MAKE DISTRIBUTIONS.
If we fail to qualify as a REIT in any taxable year, we would be subject to
United States federal income tax on our taxable income at corporate rates. In
addition, we would generally be disqualified from treatment as a REIT for the
four taxable years following the year we lost our REIT status. Failing to
obtain, or losing our REIT status would reduce our net earnings available for
investment or distribution to shareholders because of the additional United
States tax liability, and we would no longer be required to make distributions.
We might be required to borrow funds or liquidate some investments in order to
pay the applicable tax.
Qualification as a REIT is subject to the satisfaction of tax requirements and
various factual matters and circumstances which are not entirely within our
control. New legislation, regulations, administrative interpretations or court
decisions could change the tax laws with respect to qualification as a REIT or
the federal income tax consequences of being a REIT.
THE LIMIT ON THE NUMBER OF OUR SHARES A PERSON MAY OWN MAY DISCOURAGE A
TAKEOVER.
Our articles of incorporation restrict beneficial ownership of more than 9.8% of
the outstanding shares by one person or affiliated group in order to meet REIT
qualification rules. These restrictions may discourage a change of control and
may deter individuals or entities from making tender offers for shares, which
offers might be financially attractive to shareholders or which may cause a
change in our management.
-9-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
OUR BOARD OF DIRECTORS MAY CHANGE OUR INVESTMENT POLICIES WITHOUT SHAREHOLDER
APPROVAL, WHICH COULD ALTER THE NATURE OF YOUR INVESTMENT.
Our bylaws require that our independent directors review our investment policies
at least annually to determine that the policies we are following are in the
best interest of the shareholders. These policies may change over time. The
methods of implementing our investment policies may also vary, as new investment
techniques are developed. Our investment policies, the methods for their
implementation, and our other objectives, policies and procedures may be altered
by a majority of the directors (including a majority of the independent
directors), without the approval of our shareholders. As a result, the nature of
an investment in our shares could change without shareholder consent.
WE MAY NEED TO USE LEVERAGE TO MAKE DISTRIBUTIONS.
We may incur indebtedness if necessary to satisfy the requirement that we
distribute at least 90% of our real estate investment trust taxable income or
otherwise, as is necessary or advisable to assure that we maintain our
qualification as a REIT for federal income tax purposes. In such an event, it is
possible that we could make distributions in excess of our earnings and profits
and, accordingly, that such distributions could constitute a return of capital
for federal income tax purposes. It is also possible that we will make
distributions in excess of our income as calculated in accordance with generally
accepted accounting principles.
A CHANGE IN ACCOUNTING STANDARDS REGARDING OPERATING LEASES MAY MAKE THE LEASING
OF FACILITIES IN THE FUTURE LESS ATTRACTIVE TO OUR POTENTIAL TENANTS, WHICH
COULD REDUCE OVERALL DEMAND FOR OUR LEASING SERVICES.
Under Statement of Financial Accounting Standard No. 13, "Accounting for
Leases", if the present value of a company's minimum lease payments equals 90%
or more of a property's fair value, the lease is classified as a capital lease,
and the lease obligation is included as a liability on the company's balance
sheet. However, if the present value of the minimum lease payments is less than
90% of the property's value, the lease is considered an operating lease, and the
obligation does not appear on the company's balance sheet, but rather in the
footnotes thereto. Thus, entering an operating lease can appear to enhance a
tenant's balance sheet. The SEC is currently conducting a study of
off-balance-sheet financing, including leasing, and the Financial Accounting
Standards Board has recently indicated that it is considering addressing the
issue. If the accounting standards regarding the financial statement
classification of operating leases are revised, then companies may be less
willing to enter into new leases because the apparent benefits to their balance
sheets could be reduced or eliminated. This in turn could make it more difficult
for us to enter into new leases on terms we find favorable.
OUR SUCCESS IS DEPENDENT ON THE PERFORMANCE OF WPC.
Our ability to achieve our investment objectives and to pay distributions is
dependent upon the performance of WPC in the acquisition of investments, the
selection of tenants, the determination of any financing arrangements, and upon
the management of the assets. Shareholders must rely entirely on the management
ability of WPC and the oversight of the board of directors. The past performance
of WPC managed partnerships and REITs may not be indicative of the performance
of WPC with respect to our company. We cannot guarantee that WPC will be able to
successfully manage and achieve liquidity for us to the extent it has done so
for prior programs.
WPC MAY BE SUBJECT TO CONFLICTS OF INTEREST.
WPC manages our business and selects our real estate investments. WPC has some
conflicts of interest in its management of us, which arise primarily from the
involvement of WPC and its affiliates in other activities that may conflict with
us and the payment of fees by us to WPC and its affiliates. The activities in
which a conflict could arise between us and WPC are:
- competition with certain affiliates for property acquisitions, which
may cause WPC and its affiliates to direct properties suitable for
us to other related entities or itself;
- the receipt of compensation by WPC and its affiliates for property
purchases, leases, sales and financing for us, which may cause WPC
and its affiliates to engage in transactions that generate higher
fees, rather than transactions that are more appropriate or
beneficial for our business;
- agreements between us and WPC or any of its affiliates, including
agreements regarding compensation of WPC and its affiliates, will
not be negotiated on an arm's length basis as would occur if the
agreements were with unaffiliated third parties;
- purchases and loans from affiliates, subject to our investment
procedures, objectives and policies, which will increase fees and
interest payable to affiliates, thereby decreasing our net income
and possibly causing us to incur higher leverage levels;
-10-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
- disposition, incentive and termination fees, which are based on the
sale price of properties, may cause a conflict between the advisor's
desire to sell a property and our plans to hold or sell the
property.
- WPC allocates expenses it incurs in connection with providing
services to us and other affiliated entities pursuant to
methodologies and procedures developed by it, and based on its
judgment, which methodologies may have the effect of favoring WPC
and other affiliates at our expense.
Inherent in these transactions is the conflict of interest that arises due to
the potential impact of the transaction on the amount of fees received by WPC
and/or its affiliates, which may reduce our cash available for distributions to
shareholders and may negatively impact the distribution rate.
MARYLAND LAW COULD RESTRICT CHANGE IN CONTROL.
Provisions of Maryland law applicable to us prohibit business combinations with:
- any person who beneficially owns 10% or more of the voting power of
outstanding shares;
- an affiliate who, at any time within the two-year period prior to
the date in question, was the beneficial owner of 10% or more of the
voting power of our outstanding shares, referred to as an interested
shareholder; or
- an affiliate of an interested shareholder.
These prohibitions last for five years after the most recent date on which the
interested shareholder became an interested shareholder. Thereafter, any
business combination must be recommended by our board of directors and approved
by the affirmative vote of at least 80% of the votes entitled to be cast by
holders of our outstanding shares and two-thirds of the votes entitled to be
cast by holders of our shares other than shares held by the interested
shareholder. These requirements could have the effect of inhibiting a change in
control even if a change in control were in our shareholders' interest. These
provisions of Maryland law do not apply, however, to business combinations that
are approved or exempted by our board of directors prior to the time that
someone becomes an interested shareholder.
OUR PARTICIPATION IN JOINT VENTURES CREATES ADDITIONAL RISK.
We may participate in joint ventures and purchase properties jointly with other
entities, some of which may be unaffiliated with us. There are additional risks
involved in these types of transactions. These risks include the potential of
our joint venture partner becoming bankrupt and the possibility of diverging or
inconsistent economic or business interests of us and our partner. These
diverging interests could result in, among other things, exposing us to
liabilities of the joint venture in excess of our proportionate share of these
liabilities. The partition rights of each owner in a jointly owned property
could reduce the value of each portion of the divided property. In addition, the
fiduciary obligation that WPC or our board may owe to our partner in an
affiliated transaction may make it more difficult for us to enforce our rights.
INTERNATIONAL INVESTMENT RISKS, INCLUDING CURRENCY FLUCTUATION, ADVERSE
POLITICAL OR ECONOMIC DEVELOPMENTS, LACK OF UNIFORM ACCOUNTING STANDARDS
(INCLUDING AVAILABILITY OF INFORMATION IN ACCORDANCE WITH U.S. GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES), UNCERTAINTY OF FOREIGN LAWS AND THE DIFFICULTY
OF ENFORCING CERTAIN OBLIGATIONS IN OTHER COUNTRIES MAY AFFECT OUR OPERATIONS
AND OUR ABILITY TO MAKE DISTRIBUTIONS.
We own interests in properties located in France, Finland, The Netherlands and
the United Kingdom and we may purchase additional properties located outside the
United States. Foreign real estate investments involve certain risks not
generally associated with investments in the United States. These risks include
unexpected changes in regulatory requirements, political and economic
instability in certain geographic locations, potential imposition of adverse or
confiscatory taxes, possible currency transfer restrictions, expropriation, the
difficulty of enforcing obligations in other countries and the burden of
complying with a wide variety of foreign laws. Any such events may adversely
affect our performance and/or impair our ability to make expected distributions
to shareholders. In addition, there is less publicly available information about
foreign companies and a lack of uniform financial accounting standards and
practices (including the availability of information in accordance with
accounting principles generally accepted in the U.S.) which could impair our
ability to analyze transactions and receive timely and accurate financial
information from tenants necessary to meet our reporting obligations to
financial institutions or governmental or regulatory agencies. Certain of these
risks may be greater in emerging markets and less developed countries.
-11-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
WE MAY INCUR COSTS TO FINISH BUILD-TO-SUIT PROPERTIES.
We may sometimes acquire undeveloped or partially developed land parcels for the
purpose of owning to-be-built facilities for a prospective tenant. Often,
completion risk, cost overruns and on-time delivery are the obligations of the
prospective tenant. To the extent that the tenant or the third-party developer
experiences financial difficulty or other complications during the construction
process, we may be required to incur project costs to complete all or part of
the project within a specified time frame. The incurrence of these costs or the
non-occupancy by the tenant may reduce the project's and our portfolio's
returns.
WE MAY FACE COMPETITION FOR ACQUISITION OF PROPERTIES.
We face competition for the acquisition of office and industrial properties in
general, and such properties net leased to major corporations in particular,
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.
THE NET ASSET VALUE IS BASED ON INFORMATION THAT OUR ADVISOR PROVIDES TO A
THIRD PARTY.
Our asset management and performance fees are based on an annual third party
valuation of our real estate. Any valuation includes the use of estimates and
our valuation may be influenced by the information provided by the advisor.
Because net asset value is an estimate and can change as interest rate and real
estate markets fluctuate, there is no assurance that a shareholder will realize
net asset value in connection with any liquidity event.
(d) FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
See Note 13 of the Consolidated Financial Statements for financial data
pertaining to our segment and geographic operations.
(e) AVAILABLE INFORMATION
All filings we make with the SEC, including our Annual Report on Form 10-K, our
Quarterly Reports on Form 10-Q, and our Current Reports on Form 8-K, and any
amendments, are available for free on our website as soon as reasonably
practicable after they are filed or furnished to the SEC. Our website address is
http://www.cpa14.com. Our SEC filings are available to be read or copied at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
Information regarding the operation of the Public Reference Room can be obtained
by calling the SEC at 1-800-SEC-0330. Our filings can also be obtained for free
on the SEC's Internet site at http://www.sec.gov. The reference to our website
address does not constitute incorporation by reference of the information
contained on our website in this Report or other filings with the SEC, and the
information contained on our website is not part of this document.
-12-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
ITEM 2. PROPERTIES.
Set forth below is certain information relating to our properties owned as of
December 31, 2004.
RENT PER SHARE OF
LEASE OBLIGOR/ OWNERSHIP SQUARE CURRENT ANNUAL INCREASE
LOCATION INTEREST(1) SQUARE FOOTAGE FOOT RENTS(2) FACTOR
- ------------------------------------- ------------------ -------------- -------- -------------- ----------
CARREFOUR FRANCE, SAS (3)
Boe, Carpiquet, Le Mans,
Vendin-le-Vieil, Lagnieu,
Luneville, and St. Germain du Puy,
France 100% 2,973,115 $ 2.43 $ 8,699,513 (4) INSEE (5)
Lieusaint, France 100% 100,561 19.52 1,962,601 (4) INSEE (5)
Le Mans, France 100% 840,974 3.44 2,896,413 (4) INSEE (5)
--------- -----------
Total: 3,914,650 13,558,527
STARMARK CAMHOOD, L.L.C. (3)
Tampa and Boca Raton, FL; Newton,
MA; Bloomington (2), Brooklyn 41% interest in a
Center, Bumsville, Eden Prairie limited liability 1,652,154 11.06 7,491,683 CPI
(2), Fridley, Minnetonka and St. company owning
Louis Park, MN; Albuquerque, NM (4) land and buildings(8)
NORTEL NETWORKS LIMITED (3)
Richardson, TX 100% 281,758 18.77 5,287,500 Stated
PETSMART, INC. (3)
Phoenix, AZ; Westlake Village, CA;
Boca Raton, Lake Mary, 70% interest in
Tallahassee, Plantation, FL; two limited
Evanston, IL; Braintree, MA; partnerships 946,177 7.68 5,083,924 Stated
Oxon Hill, MD; Flint, MI; Fridley, owning land and
MN; Dallas, Southlake, TX buildings(8)
ATRIUM COMPANIES, INC. (3)
Dallas and Greenville, TX 100% 823,713 2.40 1,977,683 CPI
Welcome, NC; Murrysville, PA; 100% 826,702 3.38 2,791,356 CPI
Wylie, TX --------- ------------
Total: 1,650,415 4,769,039
CLEAR CHANNEL COMMUNICATIONS, INC. (3)
New York, NY 40% interest in a
limited
partnership 227,685 47.94 4,365,725 Stated
owning land and
buildings(8)
CAREMARK RX, INC. (ADVANCE PCS) (3)
Scottsdale, AZ 100% 354,888 12.12 4,300,000 Fair value(6)
TRUE VALUE COMPANY (3)
Kingman, AZ; Woodland, CA; 35% interest in
Jonesboro, GA; Kansas City, MO; three limited
Springfield, OR; Fogelsville, PA; partnerships 3,628,156 3.36 4,264,076 Stated
Corsicana, TX owning land and
buildings(8)
FEDERAL EXPRESS CORPORATION (3)
Collierville, TN 60% interest in a
limited liability
company owning 394,404 17.03 4,030,632 CPI
land and building(8)
KATUN CORPORATION (3)
Davenport, IA; Bloomington, MN 100% 343,423 8.65 2,971,350 CPI
Gorinchem, The Netherlands 100% 133,500 6.93 925,392 (4) CPI
--------- ------------
Total: 476,923 3,896,742
TOWER AUTOMOTIVE (3)
Granite City, IL; Kendallville, IN;
Clinton Township, MI; 100% 1,047,400 3.72 3,895,126 CPI
Upper Sandusky, OH
LEASE OBLIGOR/
LOCATION LEASE TERM MAXIMUM TERM
- ------------------------------------- ---------- ------------
CARREFOUR FRANCE, SAS (3)
Boe, Carpiquet, Le Mans,
Vendin-le-Vieil, Lagnieu,
Luneville, and St. Germain du Puy, Mar. 2011 Mar. 2011
France
Lieusaint, France Jun. 2011 Jun. 2011
Le Mans, France Jul. 2012 Jul. 2012
Total:
STARMARK CAMHOOD, L.L.C. (3)
Tampa and Boca Raton, FL; Newton,
MA; Bloomington (2), Brooklyn
Center, Bumsville, Eden Prairie Feb. 2023 Feb. 2053
(2), Fridley, Minnetonka and St.
Louis Park, MN; Albuquerque, NM (4)
NORTEL NETWORKS LIMITED (3)
Richardson, TX Dec. 2016 Dec. 2031
PETSMART, INC. (3)
Phoenix, AZ; Westlake Village, CA;
Boca Raton, Lake Mary,
Tallahassee, Plantation, FL;
Evanston, IL; Braintree, MA; Nov. 2021 Nov. 2041
Oxon Hill, MD; Flint, MI; Fridley,
MN; Dallas, Southlake, TX
ATRIUM COMPANIES, INC. (3)
Dallas and Greenville, TX Nov. 2019 Nov. 2029
Welcome, NC; Murrysville, PA; Nov. 2021 Nov. 2031
Wylie, TX
Total:
CLEAR CHANNEL COMMUNICATIONS, INC. (3)
New York, NY
Sep. 2020 Sep. 2040
CAREMARK RX, INC. (ADVANCE PCS) (3)
Scottsdale, AZ Sep. 2021 Sep. 2051
TRUE VALUE COMPANY (3)
Kingman, AZ; Woodland, CA;
Jonesboro, GA; Kansas City, MO;
Springfield, OR; Fogelsville, PA; Dec. 2022 Nov. 2042
Corsicana, TX
FEDERAL EXPRESS CORPORATION (3)
Collierville, TN
Aug. 2019 Aug. 2039
KATUN CORPORATION (3)
Davenport, IA; Bloomington, MN Jul. 2022 Jul. 2042
Gorinchem, The Netherlands Jul. 2022 Jul. 2042
Total:
TOWER AUTOMOTIVE (3)
Granite City, IL; Kendallville, IN;
Clinton Township, MI; Apr. 2020 Apr. 2040
Upper Sandusky, OH
-13-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
RENT PER SHARE OF
LEASE OBLIGOR/ OWNERSHIP SQUARE CURRENT ANNUAL INCREASE
LOCATION INTEREST(1) SQUARE FOOTAGE FOOT RENTS(2) FACTOR
- ------------------------------------- ----------------- -------------- -------- -------------- -----------
PERKINELMER, INC. (3)
Turku, Finland 100% 266,310 13.79 3,671,519 (4) Finnish CPI
DICK'S SPORTING GOODS, INC. (3),(7)
Kennesaw, GA; Plainfield, IN; 100% 401,569 8.72 3,502,793 Stated
Leawood, KS
COLLINS & AIKMAN CORPORATION (3)
Manchester, MI; Albemarle,
Farmville and Old Fort, NC; 100% 1,948,586 1.77 3,443,475 CPI
Holmesville, OH; Springfield, TN
METALDYNE COMPANY LLC (3)
Rome, GA; Niles, IL; Plymouth, MI; 100% 534,501 6.20 3,312,740 CPI
Solon and Twinsburg, OH
U-HAUL MOVING PARTNERS AND MERCURY PARTNERS, LP (3)
Mercury Partners, LP - 11.54% interest
78 Locations in 24 States in a limited
partnership
owning land and
buildings(8) 3,779,262 4.91 2,140,799 CPI
U-Haul Moving Partners -
78 Locations in 24 States 2,035,000 4.91 1,152,846 CPI
--------- ----------
Total: 5,814,262 3,293,645
ADVANCED MICRO DEVICES, INC. (3)
Sunnyvale, CA 33 1/3% interest
in a limited
liability company 361,965 27.01 3,258,938 CPI
owning land and
buildings(8)
APPLIED MATERIALS, INC.
(ETEC SYSTEMS, INC.) (3)
Hayward, CA 49.99% interest
in a building
owned by a 129,000 50.13 3,232,840 CPI
limited liability
company(8)
APW NORTH AMERICA, INC. (3)
Monon, IN; Champlin, MN;
Robbinsville, NJ; North Salt Lake 100% 816,665 3.64 2,972,913 CPI
City, UT; Radford, VA
AMERIX CORP. (3)
Columbia, MD 100% 160,000 15.61 2,497,022 CPI
GERBER SCIENTIFIC, INC. (3)
South Windsor (2) and Manchester, CT 100% 347,500 6.73 2,337,644 CPI
BUFFETS, INC.3
Eagan, MN 100% 99,342 23.45 2,329,684 CPI
WADDINGTON NORTH AMERICA, INC. (3)
City of Industry, CA; Florence, KY; 100% 448,600 5.17 2,321,146 CPI
Chemsford, MA; Lancaster, TX
NEXPAK CORPORATION (3)
Duluth, GA 100% 221,374 6.29 1,392,721 CPI
Helmond, The Netherlands 100% 117,000 7.33 857,678 (4) CPI
------- ----------
Total: 338,374 2,250,399
MAYO FOUNDATION (7)
Rochester, MN 100% 204,846 10.71 2,193,900 CPI
CHECKFREE HOLDINGS, INC. (3)
Norcross, GA 50% interest in a
limited liability
company owning 220,676 19.79 2,180,360 CPI
land and building(8)
LEASE OBLIGOR/
LOCATION LEASE TERM MAXIMUM TERM
- ------------------------------------- ----------- ------------
PERKINELMER, INC. (3)
Turku, Finland Dec. 2021 Dec. 2031
DICK'S SPORTING GOODS, INC. (3),(7)
Kennesaw, GA; Plainfield, IN; Dec. 2020 Dec. 2060
Leawood, KS
COLLINS & AIKMAN CORPORATION (3)
Manchester, MI; Albemarle,
Farmville and Old Fort, NC; Sep. 2021 Sep. 2041
Holmesville, OH; Springfield, TN
METALDYNE COMPANY LLC (3)
Rome, GA; Niles, IL; Plymouth, MI; Jul. 2021 Jul. 2041
Solon and Twinsburg, OH
U-HAUL MOVING PARTNERS AND MERCURY PARTNERS, LP (3)
Mercury Partners, LP -
78 Locations in 24 States
Apr. 2024 Apr. 2034
U-Haul Moving Partners -
78 Locations in 24 States Apr. 2014 Apr. 2034
Total:
ADVANCED MICRO DEVICES, INC. (3)
Sunnyvale, CA
Dec. 2018 Dec. 2038
APPLIED MATERIALS, INC.
(ETEC SYSTEMS, INC.) (3)
Hayward, CA
Sep. 2014 Jan. 2030
APW NORTH AMERICA, INC. (3)
Monon, IN; Champlin, MN;
Robbinsville, NJ; North Salt Lake May 2017 May. 2027
City, UT; Radford, VA
AMERIX CORP. (3)
Columbia, MD Feb. 2017 Feb. 2037
GERBER SCIENTIFIC, INC. (3)
South Windsor (2) and Manchester, CT Jul. 2018 Jul. 2038
BUFFETS, INC. (3)
Eagan, MN Sep. 2020 Sep. 2040
WADDINGTON NORTH AMERICA, INC. (3)
City of Industry, CA; Florence, KY; Apr. 2021 Apr. 2041
Chemsford, MA; Lancaster, TX
NEXPAK CORPORATION (3)
Duluth, GA Mar. 2021 Mar. 2041
Helmond, The Netherlands Jun. 2021 Jun. 2041
Total:
MAYO FOUNDATION (7)
Rochester, MN Jun. 2016 Jun. 2026
CHECKFREE HOLDINGS, INC. (3)
Norcross, GA
Dec. 2015 Dec. 2030
-14-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
RENT PER SHARE OF
LEASE OBLIGOR/ OWNERSHIP SQUARE CURRENT ANNUAL INCREASE
LOCATION INTEREST(1) SQUARE FOOTAGE FOOT RENTS(2) FACTOR
- ------------------------------------- ------------------ -------------- -------- -------------- -----------
TORRANCE, CA
Best Buy Co., Inc. 100% 102,470 19.00 1,946,930 Stated
Big O Development, Inc. 100% 4,500 22.80 102,600 CPI
------- ---------
Total: 106,970 2,049,530
STELLEX TECHNOLOGIES, INC. (3)
Valencia, CA; North Amityville, NY 100% 281,889 7.27 2,048,234 CPI
MCLANE COMPANY FOODSERVICE, INC. (3)
Shawnee, KS; Burlington, NJ; 60% interest in
Manassas, VA two limited
liability 529,428 6.44 2,044,635 CPI
companies owning
land and buildings(8)
SPECIAL DEVICES, INC.(3)
Mesa, AZ; Moorpark, CA 50% as 249,276 16.36 2,038,513 CPI
tenants-in-common(8)
INSTITUTIONAL JOBBERS COMPANY (3)
Valdosta, GA; Johnson City, TN 100% 411,417 4.84 1,990,713 Stated
CAREER EDUCATION CORPORATION (3)
Upper Saucon Township, PA 100% 97,285 20.22 1,966,752 CPI
BUILDERS FIRSTSOURCE, INC. (3)
Harrisburg, NC 100% 174,000 6.16 1,071,128 CPI
Norcross, GA; Cincinnati, OH; 60% interest in a
Elkwood, VA limited partnership
owning land and 389,261 3.70 863,789 CPI
buildings(8) ------- ---------
Total: 563,261 1,934,917
RAVE REVIEWS CINEMAS, L.L.C.
Pensacola, FL 100% 72,156 15.04 1,085,164 CPI
Port St. Lucie, FL 100% 53,104 13.89 737,839 CPI
------- ---------
Total: 125,260 1,823,003
GIBSON GUITAR CORP. (3)
Elgin, IL ;Bozeman, MT; 82.5% interest in
Nashville, TN (2) two limited
partnerships 336,721 6.44 1,790,239 CPI
owning land and
buildings(9)
PW EAGLE, INC. (3)
Perris, CA; Eugene, OR; West 100% 1,079,424 1.59 1,719,170 CPI
Jordan, UT; Tacoma, WA
AMERICAN TIRE DISTRIBUTORS, INC. (3)
Charlotte, NC; Lincolnton, NC; 100% 465,588 3.68 1,715,085 CPI
Mauldin, SC
NEW CREATIVE ENTERPRISES, INC. (3)
Milford, OH 100% 437,000 3.73 1,629,114 CPI
CONSOLIDATED THEATERS HOLDING, G.P. (3)
Midlothian, VA 100% 80,730 19.21 1,550,489 Stated
PRODUCTION RESOURCE GROUP LLC (3)
Las Vegas, NV 100% 127,496 7.68 979,034 CPI
Burbank and Los Angeles, CA 100% 49,374 8.80 434,305 CPI
------- ---------
Total: 176,870 1,413,339
COMPUCOM SYSTEMS, INC. (3)
Dallas, TX 33 1/3% interest
in a limited
liability company 255,378 16.54 1,408,043 CPI
owning land and
building(8)
LEASE OBLIGOR/
LOCATION LEASE TERM MAXIMUM TERM
- ------------------------------------- ----------- ------------
TORRANCE, CA
Best Buy Co., Inc. Jan. 2005 Jan. 2010
Big O Development, Inc. Jun. 2012 Jun. 2022
Total:
STELLEX TECHNOLOGIES, INC. (3)
Valencia, CA; North Amityville, NY Feb. 2020 Feb. 2040
MCLANE COMPANY FOODSERVICE, INC. (3)
Shawnee, KS; Burlington, NJ;
Manassas, VA
Nov. 2015 Nov. 2025
SPECIAL DEVICES, INC. (3)
Mesa, AZ; Moorpark, CA Jun. 2021 Jun. 2041
INSTITUTIONAL JOBBERS COMPANY (3)
Valdosta, GA; Johnson City, TN Dec. 2019 Dec. 2028
CAREER EDUCATION CORPORATION (3)
Upper Saucon Township, PA Jun. 2023 Jun. 2043
BUILDERS FIRSTSOURCE, INC. (3)
Harrisburg, NC Jun. 2020 Jun. 2030
Norcross, GA; Cincinnati, OH;
Elkwood, VA
Jan. 2017 Jan. 2037
Total:
RAVE REVIEWS CINEMAS, L.L.C.
Pensacola, FL Oct. 2023 Oct. 2032
Port St. Lucie, FL Jun. 2021 Jun. 2041
Total:
GIBSON GUITAR CORP. (3)
Elgin, IL ;Bozeman, MT;
Nashville, TN (2)
Mar. 2021 Mar. 2041
PW EAGLE, INC. (3)
Perris, CA; Eugene, OR; West Feb. 2022 Feb. 2042
Jordan, UT; Tacoma, WA
AMERICAN TIRE DISTRIBUTORS, INC. (3)
Charlotte, NC; Lincolnton, NC; Mar. 2022 Mar. 2042
Mauldin, SC
NEW CREATIVE ENTERPRISES, INC. (3)
Milford, OH Sep. 2021 Sep. 2046
CONSOLIDATED THEATERS HOLDING, G.P. (3)
Midlothian, VA Aug. 2020 Aug. 2030
PRODUCTION RESOURCE GROUP LLC (3)
Las Vegas, NV Mar. 2014 Mar. 2024
Burbank and Los Angeles, CA Oct. 2014 Oct. 2024
Total:
COMPUCOM SYSTEMS, INC. (3)
Dallas, TX
Mar. 2019 Mar. 2029
-15-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
RENT PER SHARE OF
LEASE OBLIGOR/ OWNERSHIP SQUARE CURRENT ANNUAL INCREASE
LOCATION INTEREST(1) SQUARE FOOTAGE FOOT RENTS(2) FACTOR
- ------------------------------------- ------------------ -------------- -------- -------------- -----------
24 HOUR FITNESS (3)
Salt Lake City, UT 100% 36,851 16.80 618,949 CPI
St. Charles, MO 100% 38,432 19.46 747,790 CPI
------ ---------
Total: 75,283 1,366,739
UTI HOLDINGS, INC. AND
NASCARTECHNICAL INSTITUTE, INC. (3)
Mooresville, NC 100% 144,995 9.15 1,326,533 CPI
METAGENICS, INC.
San Clemente, CA 100% 88,070 14.96 1,317,477 Stated
BARJAN PRODUCTS L.L.C. (3)
Rock Island, IL 100% 241,950 5.44 1,316,906 Stated
THE BON-TON DEPARTMENT STORES,INC.(3)
York, PA (2) 100% 301,337 4.35 1,309,526 CPI
TEXTRON, INC. (3)
Gilbert, AZ 50% interest in a
limited liability
company owning 243,370 10.19 1,239,739 CPI
land and building(8)
BLP GROUP PLC (3)
Doncaster, South Yorkshire, United 100% 225,998 5.40 1,221,014(4) Stated
Kingdom
LINCOLN TECHNICAL INSTITUTE, INC. (3)
Union, NJ; Allentown and 100% 158,202 7.72 1,220,917 CPI
Philadelphia, PA; Grand Prairie, TX
MERIDIAN AUTOMOTIVE SYSTEMS, INC. (3)
Salisbury, NC 100% 333,830 3.62 1,207,160 Stated
TOWNE HOLDINGS, INC. (3)
Elk Grove Village, IL 100% 46,672 19.67 918,225 CPI
INTERNATIONAL GARDEN PRODUCTS, INC. (3)
Lakewood, NJ 100% 218,201 4.15 905,674 CPI
LENNAR CORPORATION (3)
Houston, TX 100% 52,144 14.04 731,854 CPI
L-3 COMMUNICATIONS (BRASHEAR LP) (3)
Pittsburgh, PA 100% 146,103 4.79 699,200 CPI
TRANSCORE HOLDINGS INC. (AMTECH) (3)
Albuquerque, NM 100% 74,747 8.69 649,881 Stated
EARLE M. JORGENSEN COMPANY (3)
Kansas City, MO 100% 120,855 5.19 627,059 Stated
MOONLIGHT MOLDS (3)
Gardena, CA 100% 88,793 6.38 566,470 Stated
LINDON, UT
Wasatch Summit LLC 100% 20,100 12.36 248,436 Stated
Wavetronix LLC 100% 24,110 12.50 301,380 Stated
Vacant 100% 39,190 -
------- ---------
Total: 83,400 549,816
VAN EERDEN - THE RETAIL DISTRIBUTION GROUP
60% interest in a
limited liability
Grand Rapids, MI company owning
land and buildings(8) 179,461 5.03 541,578 Stated
LEASE OBLIGOR/
LOCATION LEASE TERM MAXIMUM TERM
- ------------------------------------- ----------- ------------
24 HOUR FITNESS (3)
Salt Lake City, UT May 2020 May 2035
St. Charles, MO Dec. 2020 Dec. 2035
Total:
UTI HOLDINGS, INC. AND
NASCARTECHNICAL INSTITUTE, INC. (3)
Mooresville, NC Sep. 2022 Sep. 2043
METAGENICS, INC.
San Clemente, CA Aug. 2011 Aug. 2021
BARJAN PRODUCTS L.L.C. (3)
Rock Island, IL Oct. 2016 Oct. 2026
THE BON-TON DEPARTMENT STORES, INC. (3)
York, PA (2) Dec. 2020 Dec. 2046
TEXTRON, INC. (3)
Gilbert, AZ
Jan. 2019 Jan. 2039
BLP GROUP PLC (3)
Doncaster, South Yorkshire, United Jan. 2031 Jan. 2031
Kingdom
LINCOLN TECHNICAL INSTITUTE, INC. (3)
Union, NJ; Allentown and Dec. 2016 Dec. 2016
Philadelphia, PA; Grand Prairie, TX
MERIDIAN AUTOMOTIVE SYSTEMS, INC. (3)
Salisbury, NC Sep. 2021 Sep. 2041
TOWNE HOLDINGS, INC. (3)
Elk Grove Village, IL Oct. 2020 Oct. 2040
INTERNATIONAL GARDEN PRODUCTS, INC. (3)
Lakewood, NJ Dec. 2021 Dec. 2031
LENNAR CORPORATION (3)
Houston, TX Oct. 2015 Oct. 2035
L-3 COMMUNICATIONS (BRASHEAR LP) (3)
Pittsburgh, PA Mar. 2014 Mar. 2024
TRANSCORE HOLDINGS INC. (AMTECH) (3)
Albuquerque, NM Sep. 2015 Sep. 2030
EARLE M. JORGENSEN COMPANY (3)
Kansas City, MO Mar. 2020 Mar. 2035
MOONLIGHT MOLDS (3)
Gardena, CA Nov. 2009 Nov 2019
LINDON, UT
Wasatch Summit LLC Mar. 2008 Mar. 2013
Wavetronix LLC Nov. 2009 Nov. 2009
Vacant
Total:
VAN EERDEN - THE RETAIL DISTRIBUTION GROUP
Grand Rapids, MI Aug. 2009 Aug. 2013
-16-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
RENT PER SHARE OF
LEASE OBLIGOR/ OWNERSHIP SQUARE CURRENT ANNUAL INCREASE
LOCATION INTEREST(1) SQUARE FOOTAGE FOOT RENTS(2) FACTOR
- ------------------------------------- ------------------ -------------- -------- -------------- -----------
MCCOY, INC. (3)
Houston, TX 90% interest in a
limited
partnership 140,000 4.26 536,760 Stated
owning land and
building(9)
WEST UNION CORPORATION (3)
Tempe, AZ 100% 116,922 4.55 532,350 Stated
NEWPARK RESOURCES, INC.
Lafayette, LA 100% 34,425 11.52 394,495 CPI
NASHVILLE, TN (3) 82.5% interest in a
Various Tenants limited 16,973 13.56 230,095 Stated
Vacant partnership
owning land and 12,783 0.00 -
building(9) ------- -------
Total: 29,756 230,095
DALEVILLE, IN
Clarke-Detroit Diesel-Allison 100% 7,020 4.50 31,590 Stated
Vacant 88,000
-------
Total: 95,020
LEASE OBLIGOR/
LOCATION LEASE TERM MAXIMUM TERM
- ------------------------------------- ----------- ------------
MCCOY, INC. (3)
Houston, TX
Sep. 2007 Sep. 2007
WEST UNION CORPORATION (3)
Tempe, AZ Jan. 2015 Jan. 2035
NEWPARK RESOURCES, INC.
Lafayette, LA Nov. 2017 Nov. 2027
NASHVILLE, TN (3)
Various Tenants Sep. 2004 Sep. 2004
Vacant through through
Total: Nov. 2008 Nov. 2008
DALEVILLE, IN
Clarke-Detroit Diesel-Allison Aug. 2006 Aug. 2006
Vacant
Total:
1. Percentage of ownership in land and building, except as noted. Fee
simple ownership interest unless otherwise noted.
2. Share of Current Annual Rents is the product of the Square Footage,
the Rent per Square Foot, and the Ownership Interest percentage.
3. These properties are encumbered by mortgage notes payable.
4. Based on exchange rates at December 31, 2004.
5. INSEE construction index, an index published quarterly by the French
Government.
6. Increase Factor is applicable to the Renewal terms, not the Initial
term.
7. Tenant name change due to merger, acquisition or assignment.
8. Remaining interest in this property is owned by an affiliate(s).
9. Remaining interest in this property is owned by a non-affiliated third
party.
ITEM 3. LEGAL PROCEEDINGS.
As of the date hereof, we are not a party to any material pending legal
proceedings.
In March 2004, following a broker-dealer examination of Carey Financial, the
wholly-owned broker-dealer subsidiary of WPC, 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(R):
15, Carey Financial and its retail distributors sold certain securities without
an effective registration statement and failed to make certain disclosures. In
the event the SEC pursues these allegations, or if affected CPA(R): 15 investors
bring a similar private action, CPA(R): 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(R): 15, Carey Financial would be required to return to CPA(R):
15 the commissions paid by CPA(R): 15 on purchases actually rescinded. Further,
as part of any action against WPC, 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 potential effect such a rescission
offer or SEC action may ultimately have on the operations of WPC, Carey
Financial or the REITs managed by WPC, including us cannot be predicted at this
time.
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(R): 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(R): 15 and other REITs managed by WPC, as well as the
disclosure of such arrangements. At that time WPC and Carey Financial received a
subpoena from the Enforcement Staff seeking documents relating to payments by
WPC, Carey Financial, and REITs managed by WPC to (or requests for payment
received from) any broker-dealer, excluding selling commissions and selected
dealer fees. WPC 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 WPC, Carey Financial or any REIT
managed by WPC in connection with the distribution of REITs managed by WPC or
the retention or maintenance of REIT assets. Other information sought by the SEC
includes information concerning the accounting treatment and disclosure of any
such payments, communications with third parties (including other REIT issuers)
concerning revenue sharing, and documents concerning the calculation of
underwriting compensation in connection with the REIT offerings under applicable
NASD rules.
In response to the Enforcement Staff's subpoenas and requests, WPC and Carey
Financial have produced documents relating to payments made to certain
broker-dealers both during and after the offering process, for certain of the
REITs managed by WPC (including Corporate Property Associates 10 Incorporated,
CIP(R), CPA(R): 12, us and CPA(R): 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, including us. WPC is continuing to gather information relating to
these types of payments made to broker-dealers and supply it to the SEC.
WPC, Carey Financial and the REITs, including us, are cooperating fully with
this investigation and are in the process of providing information to the
Enforcement Staff in response to the subpoenas and requests. Although no
regulatory action has been initiated against WPC or Carey Financial in
connection with the matters being investigated, it is possible that the SEC may
pursue an action against either WPC or Carey Financial 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 WPC and the REITs managed by WPC,
including us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of the year ended December 31,
2004 to a vote of security holders, through the solicitation of proxies or
otherwise.
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CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
Information with respect to our common equity is hereby incorporated by
reference to page 34 of our Annual Report contained in Appendix A.
ITEM 6. SELECTED FINANCIAL DATA.
Selected Financial Data are hereby incorporated by reference to page 2 of our
Annual Report contained in Appendix A.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's Discussion and Analysis are hereby incorporated by reference to
pages 3 to 13 of our Annual Report contained in Appendix A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
(In thousands)
Market risk is the exposure to loss resulting from changes in interest rates,
credit spreads, foreign currency exchange rates and equity prices. In pursuing
our business plan, the primary market risks to which we are exposed are interest
rate and foreign currency exchange rate risks.
INTEREST RATE RISK
The value of our real estate is subject to fluctuations based on changes in
interest rates, local and regional economic conditions and changes in the
creditworthiness of lessees, and which may affect our ability to refinance our
debt when balloon payments are scheduled.
Our marketable securities consist of our ownership interests in Carey Commercial
Mortgage Trust ("CCMT") and auction-rate securities. 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 December 31, 2004, our marketable securities had a fair value
of $13,904.
Approximately $675,360 of our 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 December 31, 2004 ranged
from 5.15% to 8.85%. The interest rate on the variable rate debt as of December
31, 2004 ranged from 3.55% to 6.27%.
2005 2006 2007 2008 2009 Thereafter Total Fair Value
-------- -------- -------- -------- -------- ---------- -------- ----------
Fixed rate debt $ 11,915 $ 12,915 $ 13,892 $ 20,086 $ 63,116 $ 553,436 $675,360 $ 690,336
Weighted average
interest rate 7.11% 7.11% 7.12% 7.28% 7.97% 7.37%
Variable rate debt $ 270 $ 252 $ 260 $ 267 $ 278 $ 26,684 $ 28,011 $ 28,011
Annual interest expense from variable rate debt would increase or decrease by
approximately $280 for each change of 1% in annual interest rates. We have an
interest rate swap agreement on a variable rate obligation with a balance at
December 31, 2004 of $8,873 which is therefore not affected by changes in
interest rates. A change in interest rates of 1% would impact the fair value of
our fixed rate debt at December 31, 2004 by approximately $36,131.
FOREIGN CURRENCY EXCHANGE RATE RISK
We have foreign operations in the United Kingdom, Finland, France and The
Netherlands and as such are subject to risk from the effects of exchange rate
movements of foreign currencies, which may affect future costs and cash flows.
Our foreign operations for the preceding year were conducted in the Euro and the
Great Britain Pound. For these currencies we are a net receiver of the foreign
currency (we receive more cash then we pay out) and therefore we
-18-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
benefit from a weaker U.S. dollar and are adversely affected by a stronger U.S.
dollar relative to the foreign currency. The foreign operations were not
significant to our consolidated financial position, results of operations or
cash flows during the three-year period ended December 31, 2004. Realized and
unrealized foreign currency translation gains of $1,357 and $90, respectively,
for the year ended December 31, 2004 are included in the accompanying
consolidated financial statements and are primarily due to changes in foreign
currency on accrued interest receivable on notes receivable from wholly-owned
subsidiaries.
To date, we have not entered into any foreign currency forward exchange
contracts to hedge the effects of adverse fluctuations in foreign currency
exchange rates.
Scheduled future minimum rents, exclusive of renewals, under non-cancelable
leases resulting from our foreign operations are as follows:
2005 2006 2007 2008 2009 Thereafter Total
-------- -------- -------- -------- -------- ---------- --------
Rental income (1) $ 19,800 $ 19,800 $ 19,800 $ 19,800 $ 19,800 $ 87,052 $186,052
Interest income from direct
financing leases (1) 1,221 1,221 1,334 1,334 1,334 40,637 47,081
Scheduled principal payments for the mortgage notes payable during each of the
next five years and thereafter are as follows:
2005 2006 2007 2008 2009 Thereafter Total
-------- -------- -------- -------- -------- ---------- --------
Fixed rate debt (1) $ 4,787 $ 5,214 $ 5,571 $ 5,940 $ 11,897 $ 113,929 $147,338
Variable rate debt (1) 95 102 110 118 128 6,460 7,013
(1) Based on December 31, 2004 exchange rate. Contractual rents and mortgage
notes are denominated in the functional currency of the country of each
property.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following consolidated financial statements and supplementary data are
hereby incorporated by reference to pages 15 to 33 of our Annual Report
contained in Appendix A:
(i) Report of Independent Registered Public Accounting Firm.
(ii) Consolidated Balance Sheets at December 31, 2004 and 2003.
(iii) Consolidated Statements of Income for the years ended December 31, 2004,
2003, and 2002.
(iv) Consolidated Statement of Shareholders' Equity for the years ended
December 31, 2002, 2003, and 2004.
(v) Consolidated Statements of Cash Flows for the years ended December 31,
2004, 2003, and 2002.
(vi) Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Our co-chief executive officers and chief financial officer have conducted a
review of our disclosure controls and procedures as of December 31, 2004.
Our disclosure controls and procedures include our 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 our management, including our
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, our chief executive officers and chief financial officer
have concluded that our disclosure controls (as defined in Rule 13a-14(c) under
the Exchange Act) are sufficiently effective to ensure that the information
required to be disclosed by us in the reports we file under the Exchange Act is
recorded, processed, summarized and reported within the required time periods.
-19-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting (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 management and directors; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized 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 misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
We assessed the effectiveness of our internal control over financial reporting
as of December 31, 2004. In making this assessment, we used criteria set forth
in Internal Control - Integrated Framework issued by the Committee 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 in Item 8, as stated in their report in Item 8.
-20-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
This information will be contained in our definitive Proxy Statement with
respect to our Annual Meeting of Shareholders, to be filed with the Securities
and Exchange Commission within 120 days following the end of our fiscal year,
and is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION.
This information will be contained in our definitive Proxy Statement with
respect to our Annual Meeting of Shareholders, to be filed with the Securities
and Exchange Commission within 120 days following the end of our fiscal year,
and is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
This information will be contained in our definitive Proxy Statement with
respect to our Annual Meeting of Shareholders, to be filed with the Securities
and Exchange Commission within 120 days following the end of our fiscal year,
and is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This information will be contained in our definitive Proxy Statement with
respect to our Annual Meeting of Shareholders, to be filed with the Securities
and Exchange Commission within 120 days following the end of our fiscal year,
and is hereby incorporated by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
This information will be contained in our definitive Proxy Statement with
respect to our Annual Meeting of Shareholders, to be filed with the Securities
and Exchange Commission within 120 days following the end of our fiscal year,
and is hereby incorporated by reference.
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CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) 1. Consolidated Financial Statements:
The following consolidated financial statements are filed as a part of this
Report:
Report of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets, December 31, 2004 and 2003.
Consolidated Statements of Income for the years ended December 31, 2004, 2003,
and 2002.
Consolidated Statement of Shareholders' Equity for the years ended December 31,
2002, 2003, and 2004.
Consolidated Statements of Cash Flows for the years ended December 31, 2004,
2003, and 2002.
Notes to Consolidated Financial Statements.
The Consolidated Financial Statements are hereby incorporated by reference to
pages 15 to 33 of our Annual Report contained in Appendix A.
(a) 2. Financial Statement Schedule:
The following schedule is filed as a part of this Report:
Report of Independent Registered Public Accounting Firm.
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 2004.
Schedule III of Registrant is contained on pages 30 to 37 of this Form 10-K.
Financial Statement Schedules other than those listed above are omitted because
the required information is given in the Consolidated Financial Statements,
including the Notes thereto, or because the conditions requiring their filing do
not exist.
-22-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
(a) 3. Exhibits:
The following exhibits are filed as part of this Report. Documents other than
those designated as being filed herewith are incorporated herein by reference.
Exhibit No. Description Method of Filing
3.1 Articles of Amendment Exhibit 3.1 to Registration Statement
(Form S-11) No. 333-76761
3.1(2) Articles of Incorporation of Registrant Exhibit 3.1 to Registration Statement
(Form S-11) No. 333-31437
3.2 Form of Bylaws of Registrant Exhibit 3.2 to Registration Statement
(Form S-11) No. 333-31437
4.1 Dividend Reinvestment and Share Purchase Plan Exhibit 4.1 to Registrant's Form S-3D
dated July 22, 2002
10.1 Amended and Restated Advisory Agreement Exhibit 10.5 to Registrant's Form 8-K
dated February 22, 2005
10.2 Lease Agreement dated July 27, 1998 by and between Best Exhibit 10.1 to Registrant's Form 8-K
(CA) QRS 14-4, as Landlord, and Best Buy Co. Inc., as dated February 2, 1999
Tenants.
10.2(5) Lease Agreement dated February 3, 1998 by and between ESI Exhibit 10.2 to Registrant's Form 8-K
(CA) QRS 12-6 INC., as Landlord and Etec Systems, Inc. dated February 2, 1999
as Tenants.
10.3(5) Lease Agreement date July 29, 1998 by and between META Exhibit 10.3 to Registrant's Form 8-K
(CA) QRS 14-16, as Landlord, and Metagenics Incorporated, dated February 2, 1999
as Tenants.
10.4(5) Lease Agreement dated July 30, 1998 by and between TRUCK Exhibit 10.4 to Registrant's Form 8-K
(IN) QRS 14-3, INC., as Landlord, and Burlington Motor dated February 2, 1999
Carrier as Tenant.
10.5(5) Lease Agreement dated November 24, 1998 by and between Exhibit 10.5 to Registrant's Form 8-K
BAC (MO) QRS 14-10, Inc., as Landlord, and The Benjamin dated February 2, 1999
Ansehl Co., as Tenants
10.7 Lease Agreement dated December 22, 1998 by and between Exhibit 10.6 to Registrant's Form 8-K
Conductor (CA) QRS 14-11, Inc., as Landlord, and Advance dated February 2, 1999
Micro Devices, Inc., as Tenants.
10.7(5) Lease Agreement dated December 28, 1998 by and between Exhibit 10.7 to Registrant's Form 8-K,
CBS (PA) QRS 14-12, Inc. as Landlord, and Contraves dated February 2, 1999
Brashear Systems L. P., as Tenants
10.28(4) Form of Sales Agency Agreement. Exhibit 10.28 to Registration Statement
(Form S-11) No. 333-76761
10.29(4) Form of Selected Dealer Agreement. Exhibit 10.29 to Registration Statement
(Form S-11) No. 333-76761
-23-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
10.31(4) Form of Wholesaling Agreement. Exhibit 10.31 to Registration Statement
(Form S-11) No. 333-76761
10.32(4) Form of Escrow Agreement. Exhibit 10.32 to Registration Statement
(Form S-11) No. 333-76761
21.1 Subsidiaries of Registrant as of March 11, 2005 Filed herewith
23.1 Consent of PricewaterhouseCoopers LLP Filed herewith
31.1 Certification of Co-Chief Executive Officers Filed herewith
31.2 Certification of Chief Financial Officer Filed herewith
32.1 Section 906 Certification of Co-Chief Executive Officers Filed herewith
32.2 Section 906 Certification of Chief Financial Officer Filed herewith
-24-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
a Maryland corporation
3/15/05 BY: /s/ John J. Park
- -------------------- ------------------------------------------
Date John J. Park
Managing Director and Chief
Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
3/15/05 BY: /s/ William Polk Carey
- -------------------- ------------------------------------------
Date William Polk Carey
Chairman of the Board, Co-Chief
Executive Officer and Director
(Co-Principal Executive Officer)
3/15/05 BY: /s/ Gordon F. DuGan
- -------------------- ------------------------------------------
Date Gordon F. DuGan
Vice Chairman of the Board, Co-Chief
Executive Officer, Director,
Senior Managing Director and Chief
Acquisitions Officer
(Co-Principal Executive Officer)
3/15/05 BY: /s/ Charles E. Parente
- -------------------- ------------------------------------------
Date Charles E. Parente
Director
3/15/05 BY: /s/ Warren G. Wintrub
- -------------------- ------------------------------------------
Date Warren G. Wintrub
Director
3/15/05 BY: /s/ John J. Park
- -------------------- ------------------------------------------
Date John J. Park
Managing Director and Chief
Financial Officer
(Principal Financial Officer)
3/15/05 BY: /s/ Claude Fernandez
- -------------------- ------------------------------------------
Date Claude Fernandez
Managing Director and Chief
Accounting Officer
(Principal Accounting Officer)
-25-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders of
Corporate Property Associates 14 Incorporated:
Our audits of the consolidated financial statements, of management's assessment
of the effectiveness of internal control over financial reporting and of the
effectiveness of internal control over financial reporting referred to in our
report dated March 15, 2005 appearing in the 2004 Annual Report to Shareholders
of Corporate Property Associates 14 Incorporated (which report, consolidated
financial statements and assessment are incorporated by reference in this Annual
Report on Form 10-K) also included an audit of the financial statement schedule
listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
PricewaterhouseCoopers LLP
New York, New York
March 15, 2005
-30-
CORPORATE PROPERTY ASSOCIATES 14, INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2004
Costs Increase
Initial Cost to Company Capitalized (Decrease) in
----------------------------- Subsequent to Net Investment
Description Encumbrances Land Buildings Acquisition (a) (b)
----------- ------------ ---- --------- --------------- ---
Operating Method:
Partially occupied office and
trucking facility in
Daleville, Indiana $ 2,100,000 $5,439,267 $ (3,810,000)
Retail store leased to
BestBuy Co., Inc. and Big
O Development, Inc. 13,059,980 6,933,851 $ 45,914
Research and development
facility leased to
Metagenics, Inc. 2,390,000 8,957,798
Manufacturing facility
leased to L-3
Communications $ 3,818,511 620,000 6,186,283
Manufacturing and
distribution facilities
leased
to Production Resource
Group L.L.C 7,177,336 3,860,000 8,263,455
Industrial/manufacturing
facilities leased to
Moonlight Molds 2,849,655 2,340,000 3,942,723 (2,900,000)
Distribution and warehouse
facilities leased to
McLane
Company, Inc. 20,738,649 3,604,000 8,613,172 21,321,241
Distribution and warehouse
facility leased to The
Retail
Distribution Group, Inc. 5,764,183 740,000 3,042,828 7,638,183
Land leased to Consolidated
Theaters Holding, G.P. 1,964,085 3,515,000
Office and warehouse
facility leased to
Builders
FirstSource, Inc. 13,562,271 3,929,891 10,397,514 8,476,016
Life on which
Depreciation
Gross Amount at which Carried in Latest
at Close of Period Statement of
--------------------------- Accumulated Income
Description Land Buildings Total Depreciation (d) Date Acquired is Computed
----------- ---- --------- ----- ---------------- ------------- -----------
Operating Method:
Partially occupied office and
trucking facility in
Daleville, Indiana $ 2,100,000 $1,629,267 $ 3,729,267 $ 603,797 June 29, 1998 40 yrs.
Retail store leased to
BestBuy Co., Inc. and Big
O Development, Inc. 13,059,980 6,979,765 20,039,745 1,126,393 July 28, 1998 40 yrs.
Research and development
facility leased to
Metagenics, Inc. 2,390,000 8,957,798 11,347,798 1,171,212 July 29, 1998 40 yrs.
Manufacturing facility
leased to L-3
Communications 620,000 6,186,283 6,806,283 934,387 December 28, 1998 40 yrs.
Manufacturing and
distribution facilities
leased
to Production Resource March 31, 1999 and
Group L.L.C 3,860,000 8,263,455 12,123,455 1,166,242 October 15, 1999 40 yrs.
Industrial/manufacturing
facilities leased to
Moonlight Molds 2,340,000 1,042,723 3,382,723 27,154 July 19, 1999 40 yrs.
Distribution and warehouse
facilities leased to
McLane
Company, Inc. 3,604,000 29,934,413 33,538,413 3,633,417 August 18, 1999 40 yrs.
Distribution and warehouse
facility leased to The
Retail
Distribution Group, Inc. 740,000 10,681,011 11,421,011 1,359,804 August 18, 1999 40 yrs.
Land leased to Consolidated
Theaters Holding, G.P. 3,515,000 3,515,000 September 22, 1999 N/A
Office and warehouse
facility leased to
Builders June 29, 1999 and
FirstSource, Inc. 3,945,275 18,858,146 22,803,421 1,830,560 December 20, 2001 40 yrs.
-31-
CORPORATE PROPERTY ASSOCIATES 14, INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2004
Costs Increase
Initial Cost to Company Capitalized (Decrease) in
----------------------------- Subsequent to Net Investment
Description Encumbrances Land Buildings Acquisition (a) (b)
----------- ------------ ---- --------- --------------- ---
Operating Method:
Office and research facility
leased to Amerix
Corporation 13,663,803 2,622,500 20,232,580 3,113,719
Industrial and manufacturing
facility leased to Atrium
Companies, Inc. 15,565,760 1,596,442 23,910,092 322,771
Retail and service facility
leased to 24-Hour Fitness,
Inc. 6,895,133 2,920,000 8,659,950 743,654
Office and research facility
leased to West Union
Corporation 3,231,884 940,000 4,557,382 12,498
Office and warehouse
facility leased to Barjan
Products, LLC 6,995,488 500,000 9,944,545 1,887,506
Industrial and manufacturing
facility leased to Stellex
Technologies, Inc. 10,573,561 2,932,000 16,397,988 17,904 (4,119,723)
Manufacturing and
distribution facility
leased to APW North America
Inc. 16,688,192 4,580,000 24,844,084 14,784
Distribution and warehouse
facility leased to
International Garden
Products, Inc. 6,515,118 710,000 4,531,037 3,438,798
Retail and services facility
leased to Dick's Sporting
Goods, Inc. 18,921,329 7,330,000 22,305,554 4,177,399
Land leased to Caremark Rx,
Inc. 8,536,174 14,600,000
Industrial and manufacturing
facility leased to
Transcore Holdings, Inc. 3,383,493 1,490,000 4,635,655 7,176
Life on which
Depreciation
Gross Amount at which Carried in Latest
at Close of Period Statement of
---------------------------- Accumulated Income
Description Land Buildings Total Depreciation (d) Date Acquired is Computed
----------- ---- --------- ----- ---------------- ------------- -----------
Operating Method:
Office and research facility
leased to Amerix
Corporation 2,622,500 23,346,299 25,968,799 2,863,395 November 1, 1999 40 yrs.
Industrial and manufacturing
facility leased to Atrium November 18, 1999 and
Companies, Inc. 1,596,442 24,232,863 25,829,305 2,104,038 December 1, 2001 40 yrs.
Retail and service facility
leased to 24-Hour Fitness, December 29, 1999 and
Inc. 2,920,000 9,403,604 12,323,604 1,005,489 December 28, 2000 40 yrs.
Office and research facility
leased to West Union
Corporation 940,000 4,569,880 5,509,880 547,434 January 12, 2000 40 yrs.
Office and warehouse
facility leased to Barjan
Products, LLC 500,000 11,832,051 12,332,051 1,208,426 February 3, 2000 40 yrs.
Industrial and manufacturing
facility leased to Stellex
Technologies, Inc. 1,482,000 13,746,169 15,228,169 1,675,314 February 29, 2000 40 yrs.
Manufacturing and
distribution facility
leased to APW North America
Inc. 4,580,000 24,858,868 29,438,868 2,874,307 May 30, 2000 40 yrs.
Distribution and warehouse
facility leased to
International Garden
Products, Inc. 710,000 7,969,835 8,679,835 820,370 June 29, 2000 40 yrs.
Retail and services facility
leased to Dick's Sporting
Goods, Inc. 7,830,000 25,982,953 33,812,953 2,893,211 June 29, 2000 40 yrs.
Land leased to Caremark Rx,
Inc. 14,600,000 14,600,000 September 21, 2000 N/A
Industrial and manufacturing
facility leased to
Transcore
Holdings, Inc. 1,490,000 4,642,831 6,132,831 498,137 September 25, 2000 40 yrs.
-32-
CORPORATE PROPERTY ASSOCIATES 14, INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2004
Costs Increase
Initial Cost to Company Capitalized (Decrease) in
------------------------- Subsequent to Net Investment
Description Encumbrances Land Buildings Acquisition (a) (b)
----------- ------------ ---- --------- --------------- ---
Operating Method:
Office and research facility
leased to Lennar
Corporation 4,824,658 570,000 6,759,843
Office and research facility
leased to Buffets, Inc. 11,097,559 4,225,000 15,518,481 1,420
Distribution and warehouse
facility leased to Earle
M.Jorgensen Company 3,684,492 570,000 5,869,790 39,219
Distribution and warehouse
facility leased to
Institutional Jobbers
Company 12,668,688 650,000 16,889,267 409,990
Land leased to Towne
Holdings, Inc. 2,296,743 4,100,000
Office facility leased to
Newpark Resources, Inc. 2,446,017 660,000 3,004,921
Office and research facility
leased to Federal Express
Corporation 43,182,038 3,154,425 70,645,575 12,000
Retail, service, distribution
and warehouse facility
leased to The Bon-Ton
Stores, Inc. 7,224,881 1,974,000 10,067,885 2,900
Distribution and warehouse
facility leased to McCoy,
Inc. 3,965,703 1,025,000 4,530,120 9,419
Industrial and manufacturing
facility leased to
Metaldyne
Company LLC 16,195,975 4,140,000 23,822,057 1,404,883
Service facility leased to
the Mayo Foundation 11,927,354 3,348,824 9,275,468 8,941,752
Industrial and manufacturing
facilities leased to Gerber
Scientific, Inc. 12,183,718 1,555,400 18,822,872 250,000
Life on which
Depreciation
Gross Amount at which Carried in Latest
at Close of Period Statement of
----------------------------- Accumulated Income
Description Land Buildings Total Depreciation (d) Date Acquired is Computed
----------- ---- --------- ----- ---------------- ------------- -----------
Operating Method:
Office and research facility
leased to Lennar
Corporation 570,000 6,759,843 7,329,843 725,275 September 26, 2000 40 yrs.
Office and research facility
leased to Buffets, Inc. 4,225,000 15,519,901 19,744,901 1,665,138 September 28, 2000 40 yrs.
Distribution and warehouse
facility leased to Earle M.
Jorgensen Company 570,000 5,909,009 6,479,009 633,857 September 29, 2000 40 yrs.
Distribution and warehouse
facility leased to
Institutional Jobbers
Company 650,000 17,299,257 17,949,257 1,820,418 October 6, 2000 40 yrs.
Land leased to Towne
Holdings, Inc. 4,100,000 4,100,000 October 30, 2000 N/A
Office facility leased to
Newpark Resources, Inc. 660,000 3,004,921 3,664,921 303,622 December 1, 2000 40 yrs.
Office and research facility
leased to Federal Express
Corporation 3,154,425 70,657,575 73,812,000 13,077,214 December 6, 2000 7 - 40 yrs.
Retail, service, distribution
and warehouse facility
leased to The Bon-Ton
Stores, Inc. 1,974,000 10,070,785 12,044,785 1,017,708 December 27, 2000 40 yrs.
Distribution and warehouse
facility leased to McCoy,
Inc. 1,025,000 4,539,539 5,564,539 458,722 December 27, 2000 40 yrs.
Industrial and manufacturing
facility leased to Metaldyne June 29, 2000 and
Company LLC 4,140,000 25,226,940 29,366,940 2,206,313 August 16, 2001 40 yrs.
Service facility leased to
the Mayo Foundation 3,348,824 18,217,220 21,566,044 1,642,918 August 14, 2000 40 yrs.
Industrial and manufacturing
facilities leased to Gerber
Scientific, Inc. 1,555,400 19,072,872 20,628,272 1,638,071 July 30, 2001 N/A
-33-
CORPORATE PROPERTY ASSOCIATES 14, INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2004
Costs Increase
Initial Cost to Company Capitalized (Decrease) in
----------------------------- Subsequent to Net Investment
Description Encumbrances Land Buildings Acquisition (a) (b)
----------- ------------ ---- --------- --------------- ---
Operating Method:
Industrial and manufacturing
facility leased to
Meridian Automotive
Systems, Inc. 7,071,784 1,370,000 2,671,897 6,298,329
Industrial and manufacturing
facility leased to
Waddington North
America, Inc. 10,629,165 4,398,000 13,418,144 3,745,441
Industrial and manufacturing
facility leased to New
Creative Enterprises, Inc. 9,712,151 2,000,000 12,869,110
Retail and service
facilities leased to
Lincoln Technical
Institute, Inc. 6,027,802 2,486,384 7,601,852
Manufacturing and
distribution facility
leased to Gibson Guitar,
Inc. 11,636,897 3,900,000 17,937,226 13,947 (293,545)
Office and Research facility
leased to Nortel Networks
Limited 29,207,164 3,400,000 45,053,608
Industrial and manufacturing
facility leased to Perkin
Elmer, Inc. - Finland 25,222,719 801,195 23,389,834 81,315 12,557,367
Retail and service
facilities leased to
Petsmart, Inc. 42,046,712 17,100,000 54,742,917
Distribution and warehouse
facility leased to Nexpak
Corporation 7,586,949 2,167,000 11,445,566 5,231
Distribution and warehouse
facility leased to Nexpak
Corporation - Netherlands 6,706,146 2,230,224 3,360,091 2,872,546
Multiplex motion picture
theater leased to Rave
Review Cinemas, LLC 3,200,000 3,066,397 6,799,722 (4,112,076)
Life on which
Depreciation
Gross Amount at which Carried in Latest
at Close of Period Statement of
----------------------------- Accumulated Income
Description Land Buildings Total Depreciation (d) Date Acquired is Computed
----------- ---- --------- ----- ---------------- ------------- -----------
Operating Method:
Industrial and manufacturing
facility leased to
Meridian Automotive
Systems, Inc. 1,370,000 8,970,226 10,340,226 682,030 November 16, 2000 40 yrs.
Industrial and manufacturing
facility leased to
Waddington North America,
Inc. 4,643,000 16,918,585 21,561,585 1,380,027 April 30, 2001 7 - 40 yrs.
Industrial and manufacturing
facility leased to New
Creative Enterprises, Inc. 2,000,000 12,869,110 14,869,110 1,059,021 September 6, 2001 40 yrs.
Retail and service
facilities leased to
Lincoln Technical
Institute, Inc. 2,486,384 7,601,852 10,088,236 578,488 December 28, 2001 40 yrs.
Manufacturing and
distribution facility
leased to Gibson Guitar,
Inc. 3,900,000 17,657,628 21,557,628 1,689,599 March 19, 2001 40 yrs.
Office and Research facility
leased to Nortel Networks
Limited 3,400,000 45,053,608 48,453,608 3,425,951 December 19, 2001 40 yrs.
Industrial and manufacturing
facility leased to Perkin
Elmer, Inc. - Finland 1,235,038 35,594,673 36,829,711 2,721,351 December 28, 2001 40 yrs.
Retail and service
facilities leased to
Petsmart, Inc. 17,100,000 54,742,917 71,842,917 4,277,237 November 28, 2001 40 yrs.
Distribution and warehouse
facility leased to Nexpak
Corporation 2,167,000 11,450,797 13,617,797 1,085,342 March 28, 2001 40 yrs.
Distribution and warehouse
facility leased to Nexpak
Corporation - Netherlands 3,434,864 5,027,997 8,462,861 451,483 June 29, 2001 40 yrs.
Multiplex motion picture
theater leased to Rave
Review Cinemas, LLC 3,685,000 5,269,043 8,954,043 463,865 December 7, 2000 40 yrs.
-34-
CORPORATE PROPERTY ASSOCIATES 14, INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2004
Costs Increase
Initial Cost to Company Capitalized (Decrease) in
--------------------------- Subsequent to Net Investment
Description Encumbrances Land Buildings Acquisition (a) (b)
----------- ------------ ---- --------- --------------- ---
Operating Method:
Office building in Lindon,
Utah partially leased to
Wasatch Summit LLC and
Wavetronix LLC 1,390,000 1,122,716 6,611,363
Warehouse, distribution,
office, and industrial
facilities leased to PW
Eagle, Inc. 8,012,297 6,050,000 8,198,138
Distribution and Warehouse
facility leased to
American
Tire Distributors, Inc. 8,577,336 1,860,000 12,851,675
Warehouse and distribution
facilities leased to
Carrefour France, SAS 108,102,940 15,724,087 75,210,660 9,761,339 47,707,816
Warehouse, distribution, and
office facility leased to
Katun Corporation 18,593,362 3,260,000 26,009,123
Industrial facility leased to
Katun Corporation -
Netherlands 7,306,362 2,374,404 3,864,260 2,257,499
Industrial facility leased to
Tower Automotive, Inc. 19,439,880 4,390,000 30,336,328
Educational facility leased to
Career Education Corp. 12,125,075 3,200,000 15,415,229 1,086,974
------------ ------------ ------------- ------------ -----------
$636,547,192 $183,653,756 $ 746,609,010 $105,650,605 $50,159,884
============ ============ ============= ============ ===========
Life on which
Depreciation
Gross Amount at which Carried in Latest
at Close of Period Statement of
---------------------------- Accumulated Income
Description Land Buildings Total Depreciation (d) Date Acquired is Computed
----------- ---- --------- ----- ---------------- ------------- -----------
Operating Method:
Office building in Lindon,
Utah partially leased to
Wasatch Summit LLC and
Wavetronix LLC 1,390,000 7,734,079 9,124,079 602,791 December 27, 2000 40 yrs.
Warehouse, distribution,
office, and industrial
facilities leased to PW
Eagle, Inc. 6,050,000 8,198,138 14,248,138 589,157 February 28, 2002 40 yrs.
Distribution and Warehouse
facility leased to
American
Tire Distributors, Inc. 1,860,000 12,851,675 14,711,675 898,486 March 26, 2002 40 yrs.
Warehouse and distribution
facilities leased to
Carrefour France, SAS 25,392,072 123,011,830 148,403,902 8,168,346 March 26, 2002 40 yrs.
Warehouse, distribution, and
office facility leased to
Katun Corporation 3,260,000 26,009,123 29,269,123 1,598,464 July 5, 2002 40 yrs.
Industrial facility leased to
Katun Corporation -
Netherlands 3,274,560 5,221,603 8,496,163 322,089 July 5, 2002
Industrial facility leased to
Tower Automotive, Inc. 4,390,000 30,336,328 34,726,328 2,054,022 August 10, 2002 40 yrs.
Educational facility leased to
Career Education Corp. 3,200,000 16,502,203 19,702,203 632,000 August 10, 2002 40 yrs.
------------ ------------ -------------- -----------
$195,655,764 $890,417,491 $1,086,073,255 $86,212,092
============ ============ ============== ===========
-35-
CORPORATE PROPERTY ASSOCIATES 14, INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2004
Costs Increase
Initial Cost to Company Capitalized (Decrease) in
------------------------- Subsequent to Net Investments
Description Encumbrances Land Buildings Acquisition (b)
----------- ------------ ---- --------- ----------- ---
Direct Financing Method:
Industrial/manufacturing
facilities leased to Atrium
Companies, Inc. 10,809,424 $ 459,608 $ 20,426,564 $(3,191,407)
Multiplex theater facility leased
to Consolidated Theaters
Holding, G.P. 6,909,363 10,818,996 $ 854,117 692,137
Office and research facility
leased to Caremark Rx, Inc. 14,859,326 25,414,917
Distribution and warehouse
facility leased to Towne
Holdings, Inc. 2,339,413 4,172,251 3,920
Multiplex motion picture theater
leased to Rave Review Cinemas,
LLC 4,112,076 2,541,782
Manufacturing and distribution
facility leased to BLP Group plc 7,012,824 8,383,364 7,099 3,414,129
Industrial and manufacturing
facility leased to Collins and
Aikman Corporation 16,238,669 2,961,000 24,473,555 20,257
Office facility leased to UTI
Holdings, Inc. and Nascar
Technical Institute 6,465,234 1,600,000 9,275,962 130,053 (227,349)
----------- ---------- ------------ ---------- -----------
$64,634,253 $5,020,608 $107,077,685 $3,557,228 $ 687,510
=========== ========== ============ ========== ===========
Gross Amount
at which Carried
at Close of
Period
Description Total Date Acquired
----------- ----- -------------
Direct Financing Method:
Industrial/manufacturing
facilities leased to Atrium
Companies, Inc. $ 17,694,765 November 18, 1999
Multiplex theater facility leased
to Consolidated Theaters
Holding, G.P. 12,365,250 September 22, 1999
Office and research facility
leased to Caremark Rx, Inc. 25,414,917 September 21, 2000
Distribution and warehouse
facility leased to Towne
Holdings, Inc. 4,176,171 October 30, 2000
Multiplex motion picture theater
leased to Rave Review Cinemas,
LLC 6,653,858 December 7, 2000
Manufacturing and distribution
facility leased to BLP Group plc 11,804,592 January 9, 2001
Industrial and manufacturing
facility leased to Collins and
Aikman Corporation 27,454,812 September 28, 2001
Office facility leased to UTI
Holdings, Inc. and Nascar
Technical Institute 10,778,666 February 11, 2002
------------
$116,343,031
============
-36-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to SCHEDULE III - REAL ESTATE
and ACCUMULATED DEPRECIATION
(a) Consists of the costs of improvements subsequent to purchase and
acquisition costs including legal fees, appraisal fees, title costs and
other related professional fees.
(b) The increase (decrease) in net investment is due to the amortization of
unearned income producing a constant periodic rate of return on the net
investment which is more (less) than lease payments received, foreign
currency translation adjustments, impairment losses and property sales.
(c) At December 31, 2004, the aggregate cost of real estate owned by CPA(R):14
and its subsidiaries for Federal income tax purposes is $944,168,050.
(d)
Reconciliation of Real Estate Accounted for Under the
Operating Method
December 31,
--------------------------------------------------------------------
2004 2003 2002
------------------ ------------------- -------------------
Balance at beginning of year $ 1,072,543,402 $ 1,010,142,307 $ 799,046,644
Additions 2,034,685 19,988,102 189,179,533
Reclassification from real estate under construction - 14,723,082 571,164
Reclassification to direct financing lease, net of
reclassification from direct financing lease - (729,353) -
Reclassification to asset held for sale (4,119,723) - -
Foreign currency translation adjustment 15,614,891 28,419,264 21,344,966
------------------ ------------------ -------------------
Balance at close of year $ 1,086,073,255 $ 1,072,543,402 $ 1,010,142,307
================== ================== ===================
Reconciliation of Accumulated Depreciation
December 31,
--------------------------------------------------------------------
2004 2003 2002
------------------ ------------------ ------------------
Balance at beginning of year $ 62,105,338 $ 38,682,696 $ 17,728,004
Depreciation expense 23,425,574 22,728,601 20,631,843
Depreciation expense from discontinued operations 64,583 66,743 66,743
Reclassification to direct financing lease - (236,973) -
Reclassification to asset held for sale (323,213) - -
Foreign currency translation adjustment 939,810 864,271 256,106
------------------ ------------------ ------------------
Balance at close of year $ 86,212,092 $ 62,105,338 $ 38,682,696
================== ================== ==================
-37-
APPENDIX A TO FORM 10-K
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
2004 ANNUAL REPORT
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting (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 management and directors; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized 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 misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
We assessed the effectiveness of our internal control over financial reporting
as of December 31, 2004. In making this assessment, we used criteria set forth
in Internal Control - Integrated Framework issued by the Committee 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 in Item 8, as stated in their report in Item 8.
-1-
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ---------
OPERATING DATA:
Revenues (1) $ 130,237 $ 127,424 $ 110,139 $ 64,532 $ 36,790
Income from continuing operations (2) 38,755 33,641 29,575 18,041 21,304
Basic earnings from continuing operations
per share .58 .51 .44 .35 .59
Net income 38,940 33,820 30,266 18,377 21,577
Basic earnings per share .58 .51 .45 .36 .60
Cash dividends paid 50,973 50,173 48,581 32,811 21,466
Cash dividends declared per share .76 .76 .75 .71 .67
Payment of mortgage principal (3) 11,046 9,234 6,543 2,557 628
BALANCE SHEET DATA:
Total assets $1,346,355 $1,345,747 $1,319,897 $1,097,238 $645,762
Long-term obligations (4) 707,610 710,346 678,401 471,942 224,015
(1) Prior year balances have been reclassified to conform to the current year
presentation of excluding interest income from revenues.
(2) Includes loss from sale of real estate in 2001.
(3) Represents scheduled mortgage principal amortization paid.
(4) Represents mortgage obligations and deferred acquisition fee installments
that are due after more than one year.
-2-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(In thousands except share and per share amounts)
The following discussion and analysis of financial condition and results of
operations of Corporate Property Associates 14 Incorporated should be read in
conjunction with the consolidated financial statements and notes thereto for the
year ended December 31, 2004. As used in this Annual Report on Form 10-K, the
terms "the Company," "we," "us" and "our" include Corporate Property Associates
14 Incorporated, its consolidated subsidiaries and predecessors, unless
otherwise indicated. The following discussion includes forward-looking
statements. Forward-looking statements, which are based on certain assumptions,
describe future plans, strategies and our expectations. Forward-looking
statements discuss matters that are not historical facts. Because they discuss
future events or conditions, forward-looking statements may include words such
as "anticipate," "believe," "estimate," "intend," "could," "should," "would,"
"may," "seeks," "plans" or similar expressions. Do not unduly rely on
forward-looking statements. They give our expectations about the future and are
not guarantees, and speak only as of the date they are made. Such statements
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, performance or achievement to be materially different from
the results of operations or plan expressed or implied by such forward looking
statements. While we cannot predict all of the risks and uncertainties, they
include, but are not limited to, those described in Item 1 of this 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
our objectives and plans will be achieved.
EXECUTIVE OVERVIEW
Nature of Business
We were formed in 1997 for the purpose of engaging in the business of investing
in and owning commercial and industrial real estate. In furtherance of that
purpose, we acquire properties and lease them, primarily to single tenants.
Between November 1997 and November 2001, we raised $657,943 in two "best
efforts" public offerings of common stock. We used the proceeds from the public
offerings along with limited recourse mortgage financing to purchase properties
and enter into long-term net leases with corporate tenants. Substantially all of
our leases have been structured to place certain economic burdens of ownership
on these corporate tenants by requiring them to pay the costs of maintenance and
repair, insurance and real estate taxes. The lease obligations are
unconditional. When possible, we also negotiate guarantees of the obligations
from the parent company of the lessee. The leases have generally been structured
to include periodic rent increases that are stated or based on increases in the
consumer price index ("CPI") or equivalent foreign index, or in a stated amount,
or, for certain retail properties, may provide for additional rents based on
sales in excess of a specified base amount. In addition to investing directly,
we may also acquire interests in real estate through joint ventures. These joint
ventures are generally with affiliates.
As a real estate investment trust ("REIT"), we are not subject to federal income
taxes on amounts distributed to shareholders provided we meet certain conditions
including distributing at least 90% of our REIT taxable income to our
shareholders. Our primary objectives are to:
- fund dividends to shareholders; and
- protect our shareholders from the effects of inflation through rent
escalation provisions, property appreciation, tenant credit
improvement and regular paydown of limited recourse mortgage debt.
We cannot guarantee that our objectives will be ultimately realized.
We are advised by W. P. Carey & Co. LLC ("WPC"), an affiliate, pursuant to an
advisory agreement. Our advisory agreement is renewable annually as determined
by independent directors who are elected by our shareholders. In connection with
each renewal, WPC is required to provide the independent directors with a
comparison of the fee structure with several similar companies. The advisory
agreement also provides, commencing in 2003, that a third party portfolio
valuation be performed annually. The portfolio valuation is used to determine
the asset base for calculating asset management and performance fees that we pay
to WPC. We also reimburse WPC for expenses, including overhead, incurred in
connection with its services. Prior to 2003, the fees were calculated based on
the historical cost of the purchased real estate assets.
-3-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
How We Earn Revenue
The primary source of our revenue is from leasing real estate. We acquire and
own commercial properties that are then leased to companies domestically and
internationally, primarily on a net lease basis. Revenue is subject to
fluctuation because of lease expirations, lease terminations, the timing of new
lease transactions and sales of property.
How Management Evaluates Results of Operations
Management evaluates our results with a primary focus on the ability to generate
cash flow necessary to meet our objectives of funding dividends to our
shareholders and overall property appreciation. 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 or
derivative instruments when evaluating its ability to fund dividends.
Management's evaluation of our potential for generating cash flow is based on
long-term assessments.
Our 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:
2004 2003 2002
--------- ---------- --------
Per Statements of Income:
Rental income $ 113,228 $ 108,282 $ 97,693
Interest income from direct financing leases 13,430 13,010 11,798
Adjustments:
Share of lease revenues applicable to minority
interest (7,975) (7,838) (7,629)
Share of lease revenues from equity investments 33,807 30,556 13,279
--------- ---------- --------
$ 152,490 $ 144,010 $115,141
========= ========== ========
In 2004, 2003 and 2002, we earned our share of net lease revenues (i.e., rental
income and interest income from direct financing leases) from our direct and
indirect ownership of real estate from the following lease obligations:
2004 % 2003 % 2002 %
-------- ---- -------- ----- -------- ----
Carrefour France, SAS (a) (e) $ 13,696 9% $ 11,597 8% $ 6,671 6%
Starmark Camhood, L.L.C. (b) (c) 7,492 5 6,713 5 - -
Nortel Networks Limited 6,001 4 6,001 4 6,001 5
Petsmart, Inc. (d) 5,812 4 5,812 4 6,228 5
Clear Channel Communications, Inc. (c) 5,660 4 5,660 4 - -
True Value Company (c) 5,065 3 5,056 4 11 -
Atrium Companies, Inc. 4,574 3 4,457 3 4,451 4
Caremark Rx, Inc. 4,300 3 4,300 3 4,300 4
Federal Express Corporation (d) 4,001 3 3,958 3 3,915 3
Tower Automotive, Inc. (f) 3,895 3 3,895 3 2,813 2
Katun Corporation (e) 3,815 3 3,739 3 1,746 2
Dick's Sporting Goods, Inc. 3,811 3 3,811 3 3,811 3
Perkin Elmer, Inc. (e) 3,394 2 2,985 2 2,494 2
Collins & Aikman Corporation 3,373 2 3,296 2 3,249 3
Metaldyne Company LLC 3,307 2 3,207 2 3,142 3
Advanced Micro Devices, Inc. (c) 3,259 2 3,259 2 3,259 3
Applied Materials, Inc. (c) 3,249 2 3,097 2 3,099 3
APW North America Inc. 2,954 2 2,857 2 2,761 2
Amerix Corp. 2,497 2 2,477 2 2,458 2
Mayo Foundation (g) 2,421 2 2,421 2 2,421 2
-4-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
2004 % 2003 % 2002 %
-------- ---- -------- --- -------- ----
Waddington North America, Inc. 2,280 2 2,038 1 1,811 2
Other (c) (d) (e) (h) 57,634 35 53,374 36 50,500 44
-------- ---- -------- --- -------- ---
$152,490 100% $144,010 100% $115,141 100%
======== ==== ======== === ======== ===
(a) An expansion at a Carrefour France, SAS property was completed in July
2003.
(b) The Starmark interest was acquired in February 2003.
(c) Represents our proportionate share of lease revenues from its equity
investments.
(d) Net of minority interest of an affiliate.
(e) Revenue amounts are subject to fluctuations in foreign currency exchange
rates.
(f) Tower Automotive filed for Chapter 11 bankruptcy protection in February
2005.
(g) Lease was assumed from Celestica Corporation effective January 1, 2004.
(h) Net of unaffiliated third party's minority interest.
Current Developments and Trends
Competition for investments continues to remain 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 CPI,
which over time will result in increased revenue and partially
offset the impact of declining property values; and
- The impact of rising interest rates would be mitigated through our
use of fixed interest rates on the majority of our debt.
For the year ended December 31, 2004, cash flow generated from operations and
equity investments was sufficient to fund dividends paid and meet other
obligations including paying scheduled mortgage principal payments and making
distributions to minority interests. Management expects based on its current
assessments that over the long-term, cash flow from operations and equity
investments will meet the objective of increasing the distribution rate and
meeting other cash obligations. We have cash and cash equivalent balances of
$36,395 and auction-rate marketable securities of $7,000 as of December 31, 2004
which can be utilized for working capital needs and other commitments and may be
used for future real estate purchases.
Management believes that as the portfolio matures there is a potential for an
increase in the value of the portfolio and that any increase may not be
reflected in the financial statements.
RESULTS OF OPERATIONS
Lease Revenue
2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003, lease
revenues (rental income and interest income from direct financing leases)
increased by $5,366 primarily as a result of the completion of several
build-to-suit projects ($2,094), scheduled rent increases ($1,806), new leases
($1,158) and the impact of favorable changes in foreign exchange rates on rents
from foreign properties ($1,669). These increases were partially offset by a
$1,337 decrease in lease revenues due to the termination of leases with Scott
Companies, Inc. and Fleming Companies, Inc. in 2003.
During 2003, we completed build-to-suit projects at properties leased to
Carrefour France, SAS, Waddington North America, Inc., Career Education
Corporation and Rave Reviews Cinemas LLC. In November 2004, we completed a
build-to-suit project at a property leased to Metaldyne Company LLC. The
completion of these projects contributed an additional $2,094 in lease revenue
in 2004. The expansion at the Metaldyne property will generate $184 of
additional annual lease revenues. Scheduled rent increases at several properties
contributed $1,806 of the increase in
-5-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
lease revenues. Rent increases are generally determined by formulas that are
indexed to increases in the CPI. New leases with the Retail Distribution Group,
Wavetronix LLC and Moonlight Molds at properties that were previously vacant or
only partially occupied contributed an additional $1,158 in lease revenue in
2004 (see below). Lease revenues from our properties in Europe and the United
Kingdom benefited from the changes in foreign exchange rates, with $1,669 of the
increase in lease revenues attributable to the favorable changes in the average
exchange rates for the Euro and the British Pound as compared with average
exchange rates in 2003.
We entered into a net lease with Retail Distribution in January 2004 for a
property in Grand Rapids, Michigan in which we own a 60% interest. The Retail
Distribution lease provides for initial annual rent of $903, of which our share
is $542, and has an initial term through August 2009. The Retail Distribution
lease provides for reductions to its rent as it vacated another property in
order to lease the Grand Rapids property. Reductions to rent will be adjusted
for any rentals Retail Distribution receives from the other property or upon its
sale of the other property. The Grand Rapids property was formerly leased to
Fleming Companies and had been vacant since May 2003. In December 2003, we
entered into a net lease with Wavetronix for a portion of a partially vacant
property in Lindon, Utah. The Wavetronix lease began contributing $301 of annual
lease revenues in June 2004 when improvements at the property were completed,
and has an initial term through November 2009. In September 2004, we entered
into a net lease with Moonlight Molds for a property in Gardena, California. The
Moonlight Molds lease provides for initial annual rent of $356 and has an
initial term through November 2009. The Gardena property was previously leased
to Scott Companies, Inc. and had been vacant since February 2004.
BLP Group plc leases a manufacturing and distribution facility in the United
Kingdom which it may purchase at its option in 2006. Earle M. Jorgensen Company
has an option to purchase the Kansas City, Missouri distribution and warehouse
facility it leases from us in 2007. We have not received any indication that
these purchase options will be exercised. Best Buy Co., Inc. has exercised a
five-year renewal option on its lease for a retail property in Torrance,
California which was scheduled to expire in 2005. The current Best Buy lease
contributes $1,900 of annual lease revenues. The renewal option will commence in
February 2005 and will contribute $2,152 of annual lease revenues through
January 2010. In February 2005, Tower Automotive, which contributed
approximately $3,895 in 2004 lease revenues, filed for Chapter 11 bankruptcy
protection. We cannot predict whether Tower Automotive will affirm or terminate
its lease in connection with its Chapter 11 reorganization.
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002, lease
revenues increased by $11,801, primarily as a result of real estate acquisitions
($7,921), completing build-to-suit commitments ($1,874), scheduled rent
increases at several properties ($988) and the impact of favorable changes in
foreign exchange rates on rents from foreign properties ($1,810). These
increases were partially offset by a $1,135 decrease in lease revenues due to
the termination of leases with Scott Companies, Inc. and Fleming Companies, Inc.
in 2003.
During 2002, we purchased properties and entered into leases with Carrefour, UTI
Holdings, Inc., Tower Automotive, PW Eagle, Inc., American Tire Distributors,
Inc. and Katun Corporation, which provided for $7,921 of the increase in lease
revenues in 2003. In July 2003, we funded the expansion of an existing property
leased to Carrefour that contributed $573 of additional lease revenues in 2003.
We also completed build-to-suit projects with Waddington North America, Career
Education Corporation and Rave Reviews Cinemas during 2003 which provided an
increase in lease revenues of $1,301.
In March 2003, Fleming Companies filed a voluntary petition of bankruptcy and
subsequently terminated its lease at a property in Grand Rapids, Michigan. Our
share of annual rent from the Fleming lease was $925. The Grand Rapids property
has been re-leased to Retail Distribution as described above. In November 2003,
Scott Companies entered into liquidation proceedings and subsequently terminated
its lease at a property in Gardena, California. The Scott Companies lease had
provided lease revenues of $737. The property has been re-leased to Moonlight
Molds as described above. We own a property in Rochester, Minnesota which had
been leased to Celestica Corporation. In July 2003, Celestica vacated the
property but continued to pay its $2,194 annual rent. In January 2004, we agreed
to assign the Celestica lease to the Mayo Foundation in exchange for payments to
the Mayo Foundation of $150 from us and a payment from Celestica. We believe
that this provides an overall benefit because of Mayo's strong credit rating and
its unique stature in Rochester.
-6-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
Other Operating Income
2004 VS. 2003 - Other operating income generally consists of costs reimbursable
by tenants, 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 estimated. Reimbursable costs are
recorded as both income and property expense and, therefore, have no impact on
net income. For the comparable years ended December 31, 2004 and 2003, other
operating income decreased $2,553, primarily due to the recognition of $2,588
from the forfeiture of a security deposit in 2003.
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002, other
operating income increased $5,484, primarily as a result of the forfeited
security deposit and an increase of $2,672 in costs reimbursable by tenants.
General and Administrative Expenses
2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003,
general and administrative expenses decreased by $2,249, primarily due to a
$1,583 reduction in payments to broker dealers, which reflected the
discontinuance of payments to a broker dealer of account maintenance fees. These
account maintenance fees are among the payments that are a subject of the SEC
investigation described in Item 3 - Legal Proceedings. General and
administrative expenses also benefited from a $231 decline in expenses of WPC
allocated to us due to a decline in time dedicated to us by WPC employees, and a
$196 reduction in acquisition expenses. The foregoing effects were offset in
part by increased state and local income taxes.
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002,
general and administrative expenses increased by $1,966, primarily as a result
of increases in personnel cost reimbursements, broker dealer payments as
described above, auditing services and our share of rental expenses under an
office-sharing agreement. These increases were partially offset by decreases in
acquisition expenses.
Property Expense
2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003,
property expense increased by $1,573, primarily due to a $1,980 increase in
asset management and performance fees which was the result of both the growth of
our asset base and the appreciation of existing properties as determined by the
initial third party valuation of our portfolio as of December 31, 2003. This
increase was partially offset by lower provisions for uncollected rents.
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002,
property expense increased $6,459, primarily due to a $4,072 increase in asset
management and performance fees caused by the growth of our asset base. Property
expenses also increased by $2,672 as a result of costs reimbursable by tenants,
which are recorded as both revenue and expense and which have no effect on net
income. These increases were partially offset by a decrease in real estate
taxes.
Impairment Charge on Real Estate
2004 VS. 2003 - During 2003, we recognized impairment charges of $3,103,
primarily related to a $2,900 charge on the property in Gardena, California
formerly leased to Scott Companies Inc. This property was written down to its
estimated fair value following Scott's default on its lease. No impairment
charges were recognized in 2004.
2003 VS. 2002 - During 2003, we recognized impairment charges of $3,103 as
described above. No impairment charges were recognized in 2002.
Income from Equity Investments
2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003,
income from equity investments increased by $1,312, of which $652 results from
our April 2004 acquisition of an 11.54% interest in a newly-formed limited
partnership which purchased 78 self-storage and truck leasing facilities. The
facilities are leased under two master leases to lessees that operate the
properties under the U-Haul brand name. The acquisition of the Starmark
-7-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
Camhood, LLC investment in February 2003 contributed an additional $309 to
income from equity investments in 2004 as it was held for the full year, and
rent increases at properties leased to Applied Materials, Inc. and Special
Devices, Inc. contributed an additional $258.
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002,
income from equity investments increased by $7,672, primarily as the result of
acquiring interests in properties leased to True Value Company and Clear Channel
Communications, Inc. in December 2002 and Starmark in February 2003.
Interest Expense
2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003,
interest expense increased $1,084 primarily due to interest on new mortgages
obtained in 2003 and increases in foreign currency exchanges rates for the Euro
and the British Pound. These increases were partially offset by an $11,046
reduction in mortgage notes payable balances as a result of making scheduled
mortgage principal payments. During 2003, we obtained $27,477 of new mortgages
collateralized by properties leased to Carrefour, Career Education Group and UTI
Holdings.
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002,
interest expense increased $7,528, primarily as a result of obtaining $27,477
and $198,455 of new mortgage financing in 2003 and 2002, respectively.
Net Income
2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003, net
income increased $5,120, primarily due to an increase in total revenues of
$2,813 in 2004 and the recognition of impairment charges on real estate of
$3,103 in 2003, both of which are described above.
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002, net
income increased $3,554, primarily due to increases in total revenue of $17,285
and income from equity investments of $7,672. These increases were partially
offset by increases in interest expense of $7,528 and property expense of
$6,459. We also recognized impairment charges on real estate of $3,103 in 2003.
These fluctuations are described above. We also incurred additional general and
administrative expenses of $1,966 and recognized additional depreciation of
$2,096 in 2003.
FINANCIAL CONDITION
Uses of Cash During the Year
There has been no material change in our financial condition since December 31,
2003. Cash and cash equivalents totaled $36,395 as of December 31, 2004, a
decrease of $2,330 from the December 31, 2003 balance. We believe we have
sufficient cash balances to meet our working capital needs. Our use of cash
during the period is described below.
Operating Activities
One of our objectives is to use the cash flow from net leases (including equity
investments) to meet operating expenses, service debt and fund dividends to
shareholders. Cash flows from continuing operations and equity investments of
$72,746 were sufficient to pay dividends to shareholders of $50,973, meet
scheduled mortgage principal installments of $11,046 and distribute $2,735 to
minority interest partners.
Annual operating cash flow is expected to continue to increase as a result of
new leases signed in 2004. Annual cash flow from the April 2004 U-Haul
transaction (lease revenues, net of property-level debt service) is expected to
approximate $1,500. We also entered into leases with Retail Distribution,
Wavetronix and Moonlight Molds at properties that were previously vacant or only
partially occupied. These three leases will contribute annual cash flow (lease
revenues, net of property-level debt service) of approximately $424 and reduce
or eliminate our absorbing property carrying costs such as real estate taxes and
insurance. Scheduled rent increases, most of which are based on increases in the
CPI, at existing properties will also contribute to increased operating cash
flow.
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
Investing Activities
Our investing activities are generally comprised of real estate transactions
(purchases and sales), payment of our annual installment of deferred acquisition
fees and the purchase and sale of marketable securities. In April 2004, we used
$15,045 to purchase our interest in the U-Haul transaction. In November 2004, we
used $1,369 to fund an expansion at a property in Plymouth, Michigan leased to
Metaldyne. Other real estate related payments included $457 to fund leasehold
improvements at the Lindon, Utah building in connection with signing the
Wavetronix lease and $166 to pay final construction costs for the Waddington
North America and Rave Reviews Cinemas build-to-suit projects, which were placed
in service in 2003, and additional capitalized costs at other properties of
$158. The annual installment of deferred acquisition fees is paid each January
and was $3,266 in 2004. We purchased and sold $10,825 and $19,775 of
auction-rate marketable securities. Management believes that these securities
are relatively liquid and provide a more favorable yield than many market
instruments. We expect to use cash from operations to fund our annual deferred
acquisition installment obligation.
Financing Activities
In addition to making scheduled mortgage principal payments, paying dividends to
shareholders and making distributions to minority partners, we used $3,924 to
purchase treasury shares through a redemption plan which allows shareholders to
sell shares back to us, subject to certain limitations. Additionally, $1,617 was
used to pay off a payable for refundable value added taxes in connection with
the Carrefour expansion. We also obtained $5,698 as a result of issuing shares
through our Distribution Reinvestment and Share Purchase Plan.
We hold a participation in a mortgage pool consisting of $172,335 of newly
issued mortgage debt collateralized by properties and lease assignments on
properties owned by us and three affiliates. With these affiliates, we also
purchased subordinated interests of $24,129 in which we own a 25% interest. The
subordinated interests are payable only after all other classes of ownership
receive their stated interest and related principal payments. The subordinated
interests, therefore, could be affected by any defaults or nonpayment by
lessees. As of December 31, 2004, there have been no defaults. Three Garden
Ridge Corporation properties that are owned by affiliates are included in the
mortgage pool and the lessee has filed a petition of bankruptcy. In the event
the Garden Ridge leases are terminated, cash flow from this investment might be
adversely affected. We have entered into agreements with Garden Ridge to modify
the leases; however, the modifications are subject to the approval of the
bankruptcy court. In the event that the modifications are not approved, Garden
Ridge could still pursue termination of the leases.
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
Cash Resources
As of December 31, 2004, we have $36,395 in cash and cash equivalents and $7,000
of auction-rate securities, which may be converted to cash, that can be used for
working capital needs and other commitments and may be used for future real
estate purchases. In addition, debt may be incurred on unleveraged properties
with a carrying value of $55,881 as of December 31, 2004 and any proceeds may be
used to finance future real estate purchases.
Cash Requirements
During the next twelve months, cash requirements will include scheduled mortgage
principal payment installments (we have no mortgage balloon payments scheduled
until June 2006 for $6,930, which represents our pro rata share of a mortgage
obligation on an equity investee), paying dividends to shareholders, making
distributions to minority partners and paying other normal recurring operating
expenses. We may also seek to use our cash to purchase new properties to further
diversify our portfolio and maintain cash balances sufficient to meet working
capital needs. Based on our current cash balances, we may use existing cash
reserves to satisfy future balloon payment obligations.
We conduct business in Europe. While we recognized foreign currency transaction
gains of $1,447 in 2004 in connection with the transfer of cash from foreign
subsidiaries, foreign currency transaction gains and losses were not material to
our results of operations for the year ended December 31, 2004. We were not
subject to material foreign currency exchange rate risk from the effects of
changes in exchange rates. To date, we have not entered into any foreign
currency forward exchange contracts or other derivative financial instruments to
hedge the effects of adverse fluctuations in foreign currency exchange rates. We
have 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 December 31, 2004, Carrefour, which leases properties in France,
contributed 9% of lease revenues. The leverage used on the limited recourse
financing of the Carrefour investments is higher than the average leverage on
our domestic real estate investments.
OFF-BALANCE SHEET AND AGGREGATE CONTRACTUAL AGREEMENTS
The table below summarizes our contractual obligations as of December 31, 2004
and the effect that such obligations are expected to have on our liquidity and
cash flow in future periods.
Total Less than 1 Year 1-3 Years 3-5 Years More than 5 years
Limited recourse mortgage
notes payable (1) $ 1,062,591 $ 64,261 $ 128,769 $ 173,691 $ 695,870
Deferred acquisition fees 24,281 4,595 8,808 6,990 3,888
Subordinated disposition fees (2) 240 - - - 240
Operating leases (3) 7,617 479 1,185 1,283 4,670
----------- ----------- --------- --------- -------------
$ 1,094,729 $ 69,335 $ 138,762 $ 181,964 $ 704,668
=========== =========== ========= ========= =============
(1) Amounts are inclusive of principal and interest.
(2) Payable, subject to meeting contingencies, in connection with any
liquidity event.
(3) Operating lease obligations consist primarily of our share of minimum
rents payable under an office cost-sharing agreement with certain
affiliates for the purpose of leasing office space used for the
administration of real estate entities.
As of December 31, 2004, we have no material capital lease obligations, either
individually or in the aggregate.
In connection with the purchase of its properties, we require 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
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
properties have been subject to some degree of contamination, principally in
connection with either leakage from underground storage tanks, surface spills
from facility activities or historical on-site activities. In most instances
where contamination has been identified, tenants are actively engaged in the
remediation process and addressing identified conditions. Tenants are generally
subject to environmental statutes and regulations regarding the discharge of
hazardous materials and any related remediation obligations. In addition, our
leases generally require tenants to indemnify us from all liabilities and losses
related to the leased properties with provisions of such indemnification
specifically addressing environmental matters. The leases generally include
provisions which allow for periodic environmental assessments, paid for by the
tenant, and allow us to extend leases until such time as a tenant has satisfied
its environmental obligations. Certain of the leases allow us require financial
assurances from tenants such as performance bonds or letters of credit if the
costs of remediating environmental conditions are, in our estimation, in excess
of specified amounts. Accordingly, we believe that the ultimate resolution of
any environmental matter 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
assumptions or factors change. Certain accounting policies, while significant,
may not require the use of estimates. Those accounting policies that require
significant estimation and/or judgment are listed below.
Classification of Real Estate Assets
We classify our directly owned leased assets for financial reporting purposes 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 calculation of the present value of future minimum rents
includes determining a lease's implicit interest rate, which requires an
estimate of the residual value of leased assets as of the end of the
non-cancelable lease term. Different estimates of residual value result in
different implicit interest rates and could possibly affect the financial
reporting classification of leased assets. The contractual terms of our leases
are not necessarily different for operating and direct financing leases; however
the classification is based on accounting pronouncements which are intended to
indicate whether the risks and rewards of ownership are retained by the lessor
or substantially transferred to the lessee. Management believes that it retains
certain risks of ownership regardless of accounting classification. Assets
classified as net investment in direct financing leases are not depreciated and,
therefore, the classification of assets may have a significant impact on net
income even though it has no effect on cash flows.
Identification of Tangible and Intangible Assets in Connection with Real Estate
Acquisitions
In connection with the acquisition of properties, purchase costs will be
allocated to tangible and intangible assets and liabilities acquired based on
their estimated fair values. The value of tangible assets, consisting of land,
buildings and tenant improvements, will be 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 will be recorded at their relative fair
values. Below-market value of leases are also recorded at their relative fair
values and are included in other liabilities in the accompanying financial
statements.
The value attributed to tangible assets will be 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 will assume that the disinterested party would sell
the property at the end of a market lease term. Assumptions used in the model
will be property-specific as it is available; however, when certain necessary
information is not available, we will use available regional and property-type
information. Assumptions and estimates will include a discount rate or internal
rate of return, marketing period necessary to put a lease in place,
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
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 will be based on the difference
between the market rent and the contractual rents and will be discounted to a
present value using an interest rate reflecting our assessment of the risk
associated with the lease acquired. If we acquire properties subject to net
leases, we will consider the credit of the lessee in negotiating the initial
rent.
The total amount of other intangibles will be 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 will consider 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 our estimates will be used to determine these values. Intangibles
for above-market and below-market leases, in-place lease intangibles and tenant
relationships will be 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 include the estimated carrying costs of the property during a
hypothetical expected lease-up period, current market conditions and costs to
execute similar leases. Estimated carrying costs include real estate taxes,
insurance, other property operating costs and estimates of lost rentals at
market rates during the hypothetical expected lease-up periods, based on
assessments of specific market conditions. Estimated costs to execute leases
include commissions and legal costs to the extent that such costs are not
already incurred with a new lease that has been negotiated in connection with
the purchase of the property.
Impairments
Impairment charges may be recognized on long-lived assets, including but not
limited to, real estate, direct financing leases, equity investments and assets
held for sale. 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 circumstances. As our investment objective is to
hold properties on a long-term basis, holding periods used in the analyses
generally range from five to ten years. Depending on the assumptions made and
estimates used, the future cash flow projected in the evaluation of long-lived
assets can vary within a range of outcomes. We will consider the likelihood of
possible outcomes in determining the best possible estimate of future cash
flows. Because in most cases, each of our properties is leased to one tenant, we
are more likely to incur significant writedowns when circumstances change
because of the possibility that a property will be vacated in its entirety and,
therefore, it is different from the risks related to leasing and managing
multi-tenant properties. Events or changes in circumstances can result in
further noncash writedowns and impact the gain or loss ultimately realized upon
sale of the assets.
We perform a review of our estimate of residual value of our direct financing
leases at least annually to determine whether there has been an other than
temporary decline in the current estimate of residual value of the underlying
real estate assets (i.e., the estimate of what we could realize upon sale of the
property at the end of the lease term). If the review indicates a decline in
residual value, that is other than temporary, a loss is recognized and the
accounting for the direct financing lease will be revised to reflect the
decrease in the expected yield using the changed estimate, that is, a portion of
the future cash flow from the lessee will be recognized as a return of principal
rather than as revenue. While an evaluation of potential impairment of real
estate accounted for under 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 termination of a lease. We may also
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
(In thousands except share and per share amount)
assess properties for impairment because a lessee is experiencing financial
difficulty and because management expects that there is a reasonable probability
that the lease will be terminated in a bankruptcy organization or a property
remains vacant for a period that exceeds the period anticipated in a prior
impairment evaluation.
Investments in unconsolidated joint ventures are accounted for under the equity
method and are recorded initially at cost, as equity investments and are
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 an other
than temporary impairment has occurred, the charge is measured as the excess of
the carrying amount of the investment over the fair value of the investment.
When we identify assets as held for sale, we discontinue depreciating the assets
and estimate the sales price, net of selling costs, of such assets. If in our
opinion, the net sales price of the assets which have been identified for sale
is less than the net book value of the assets, an impairment charge is
recognized and a valuation allowance is established. To the extent that a
purchase and sale agreement has been entered into, the allowance is based on the
negotiated sales price. To the extent that we have adopted a plan to sell an
asset but have not entered into a sales agreement, we 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.
No impairments were recorded in 2004.
Provision for Uncollected Amounts from Lessees
On an ongoing basis, we assess our ability to collect rent and other
tenant-based receivables and determine an appropriate allowance for uncollected
amounts. Because our real estate operations have a limited number of lessees, we
believe that it is necessary to evaluate the collectibility of these receivables
based on the facts and circumstances of each situation rather than solely use
statistical methods. We generally recognize a provision for uncollected rents
and other tenant receivables that typically range between 0.25% and 1% of lease
revenues (rental income and interest income from direct financing 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 recorded a provision equal to approximately 1%
of lease revenues.
Fair Value of Assets and Liabilities
In 2002, we acquired a subordinated interest in a mortgage trust that consists
of limited recourse loans on 62 properties that we own or three of our
affiliates own. 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 and the fair value would be adjusted.
We measure derivative instruments, including certain derivative instruments
embedded in other contracts, if any, at fair value and record them as an asset
or liability, depending on our right 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 (i.e., the forecasted event occurs). For derivatives
designated as cash flow hedges, the effective portions of the derivatives are
reported in other comprehensive income and are subsequently reclassified into
earnings when the hedged item affects earnings. Changes in the fair value of
derivative instruments not designated as hedging and ineffective portions of
hedges are recognized in earnings in the
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
affected period. To determine the value of warrants for common stock which are
classified as derivatives, various estimates are included in the options pricing
model used to determine the value of a warrant.
RECENT ACCOUNTING PRONOUNCEMENTS
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 statement 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 six 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 at December 31, 2004 and 2003 is $12,356 and
$12,368, respectively. The fair value of these minority interests at December
31, 2004 and 2003 is $18,437 and $13,815, respectively. We adopted FAS 150 in
July 2003 and it did not have a significant impact on our consolidated financial
statements.
-14-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Corporate Property Associates 14 Incorporated:
We have completed an integrated audit of Corporate Property Associates 14
Incorporated'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.
Consolidated financial statements
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 Corporate Property
Associates 14 Incorporated 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 management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, 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 reporting 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 material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control - Integrated Framework
issued by the COSO. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on 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
-15-
accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
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 misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
New York, New York
March 15, 2005
-16-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
December 31,
-------------
2004 2003
---- ----
ASSETS:
Real estate leased to others:
Accounted for under the operating method
Land $ 195,656 $ 194,450
Buildings 890,417 878,093
----------- -----------
1,086,073 1,072,543
Less, accumulated depreciation 86,212 62,105
----------- -----------
999,861 1,010,438
Net investment in direct financing leases 116,343 114,907
Equity investments 134,905 120,388
Asset held for sale 3,797 -
Cash and cash equivalents 36,395 38,725
Marketable securities 13,904 22,742
Other assets, net of accumulated amortization of $3,459
and $2,360 and allowance for uncollected rents of
$729 and $619 at December 31, 2004 and 2003 41,150 38,547
----------- -----------
Total assets $ 1,346,355 $ 1,345,747
=========== ===========
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS'
EQUITY:
Liabilities:
Mortgage notes payable $ 701,181 $ 702,175
Mortgage note payable on asset held for sale 2,190 -
Accrued interest 4,612 4,461
Due to affiliates 4,925 4,559
Accounts payable and accrued expenses 5,184 5,968
Prepaid rental income and security deposits 22,233 19,607
Deferred acquisition fees payable to affiliate 20,012 22,530
Dividends payable 12,894 12,662
----------- -----------
Total liabilities 773,231 771,962
----------- -----------
Minority interest 26,426 27,356
----------- -----------
Shareholders' equity:
Common stock, $.001 par value; authorized, 120,000,000
shares; issued and outstanding, 68,982,023 and
67,694,702 shares at December 31, 2004 and 2003 69 68
Additional paid-in capital 620,366 606,380
Dividends in excess of accumulated earnings (76,301) (64,036)
Accumulated other comprehensive income 13,621 11,150
----------- -----------
557,755 553,562
Less, treasury stock at cost, 1,191,490 and 802,642 shares
at December 31, 2004 and 2003 (11,057) (7,133)
----------- -----------
Total shareholders' equity 546,698 546,429
----------- -----------
Total liabilities, minority interest and
shareholders' equity $ 1,346,355 $ 1,345,747
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
-17-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONSOLIDATED STATEMENTS of INCOME
(In thousands except share and per share amounts)
For the years ended December 31,
--------------------------------
2004 2003 2002
---- ---- ----
Revenues:
Rental income $ 113,228 $ 108,282 $ 97,693
Interest income from direct financing leases 13,430 13,010 11,798
Other operating income 3,579 6,132 648
------------ ------------ ------------
130,237 127,424 110,139
------------ ------------ ------------
Operating Expenses:
Depreciation 23,426 22,728 20,632
General and administrative 6,155 8,404 6,438
Property expense 22,559 20,986 14,527
Impairment charges on real estate - 3,103 -
------------ ------------ ------------
52,140 55,221 41,597
------------ ------------ ------------
Income from continuing operations before interest income,
minority interest, equity investments, interest expense
and gains 78,097 72,203 68,542
Interest income 1,239 1,630 2,269
Minority interest in income (1,805) (1,489) (1,724)
Income from equity investments 14,304 12,992 5,320
Interest expense (53,799) (52,715) (45,187)
------------ ------------ ------------
Income from continuing operations before gains 38,036 32,621 29,220
(Loss) gain on derivative instruments, net (728) (49) 355
Gain on foreign currency transactions, net 1,447 1,069 -
------------ ------------ ------------
Income from continuing operations 38,755 33,641 29,575
Discontinued operations:
Income from operation of discontinued properties 185 179 358
Gain on sale of real estate - - 333
------------ ------------ ------------
Income from discontinued operations 185 179 691
------------ ------------ ------------
Net income $ 38,940 $ 33,820 $ 30,266
============ ============ ============
Basic earnings per share:
Earnings from continuing operations $ .58 $ .51 $ .44
Earnings from discontinued operations - - .01
------------ ------------ ------------
Net income $ .58 $ .51 $ .45
============ ============ ============
Weighted average shares outstanding - basic 67,447,812 66,638,026 66,193,674
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
-18-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONSOLIDATED STATEMENT of SHAREHOLDERS' EQUITY
(In thousands except share amounts)
For the years ended December 31, 2002, 2003, and 2004
Dividends in Accumulated
Excess of Other
Common Additional Comprehensive Accumulated Comprehensive Treasury
Stock Paid-in Capital Income Earnings Income Stock Total
------ --------------- ------------- ------------- -------------- --------- -----
Balance at December 31, 2001 $ 66 $ 593,487 $ (28,023) $ (101) $ (2,950) $562,479
520,686 shares issued $.001 par, at
$10 per share, net of offering costs 1 4,365 4,366
Dividends declared (49,751) (49,751)
Purchase of treasury stock, 190,935
shares (1,685) (1,685)
Comprehensive income:
Net income $ 30,266 30,266 30,266
-------------
Other comprehensive income:
Unrealized appreciation on
marketable securities 257
Foreign currency translation
adjustment 5,957
-------------
6,214 6,214 6,214
-------------
$ 36,480
------ ------------ ============= ----------- ---------- -------- --------
Balance at December 31, 2002 67 597,852 (47,508) 6,113 (4,635) 551,889
------ ------------ ----------- ---------- --------- --------
858,550 shares issued $.001 par, at
$11.30 per share, net of offering
costs 1 8,528 8,529
Dividends declared (50,348) (50,348)
Purchase of treasury stock, 281,731
shares (2,498) (2,498)
Comprehensive income:
Net income $ 33,820 33,820 33,820
-------------
Other comprehensive income:
Unrealized appreciation on
marketable securities 641
Foreign currency translation
adjustment 4,396
-------------
5,037 5,037 5,037
-------------
$ 38,857
------ ------------ ============= ----------- ---------- -------- --------
Balance at December 31, 2003 68 606,380 (64,036) 11,150 (7,133) 546,429
------ ------------ ----------- ---------- --------- --------
1,287,321 shares issued $.001 par, at
$10 per share, net of offering costs 1 13,986 13,987
Dividends declared (51,205) (51,205)
Purchase of treasury stock, 388,848
shares (3,924) (3,924)
Comprehensive income:
Net income $ 38,940 38,940 38,940
-------------
Other comprehensive income:
Unrealized appreciation on
marketable securities 217
Foreign currency translation
adjustment 2,254
-------------
2,471 2,471 2,471
-------------
$ 41,411
------ ------------ ============= ----------- ---------- -------- --------
Balance at December 31, 2004 $ 69 $ 620,366 $ (76,301) $ 13,621 $(11,057) $546,698
====== ============ =========== ========== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
-19-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONSOLIDATED STATEMENTS of CASH FLOWS
(In thousands)
For the year ended December 31,
-------------------------------
2004 2003 2002
---- ---- ----
Cash flows from operating activities:
Net income $ 38,940 $ 33,820 $ 30,266
Adjustments to reconcile net income to net cash provided by continuing
operations:
Income from discontinued operations, including gain on sale of real
estate (185) (179) (691)
Depreciation and amortization 24,571 23,890 21,477
Straight-line rent adjustments (4,349) (3,965) (4,201)
Income from equity investments in excess of distributions received (1,162) (1,529) (30)
Minority interest in income 1,805 1,489 1,724
Issuance of shares to affiliate in satisfaction of current and accrued
performance fees 8,289 7,105 5,092
Impairment charge on real estate - 3,103 -
Increase (decrease) in prepaid rents and security deposits 2,584 (1,727) 2,545
Realized gain on foreign currency transactions (1,357) (349) -
Unrealized loss (gain) on derivative instruments and foreign currency
transactions, net 638 (671) (355)
Change in other operating assets and liabilities, net 560 (1,830) 4,311
--------- --------- ---------
Net cash provided by continuing operations 70,334 59,157 60,138
Net cash provided by discontinued operations 256 253 431
--------- --------- ---------
Net cash provided by operating activities 70,590 59,410 60,569
--------- --------- ---------
Cash flows from investing activities:
Equity distributions received in excess of equity income 2,412 1,178 1,456
Capital distributions received from equity investments - 8,722 -
Purchases of real estate and equity investments and other
capitalized costs, net (a) (17,195) (50,385) (269,117)
Value added taxes recoverable on purchase of real estate - 827 1,448
Purchase of securities (10,825) (15,000) (57,405)
Proceeds from sale of real estate and securities 19,775 21,059 32,998
Payment of deferred acquisition fees (3,266) (2,373) (1,638)
--------- --------- ---------
Net cash used in investing activities (9,099) (35,972) (292,258)
--------- --------- ---------
Cash flows from financing activities:
Dividends paid (50,973) (50,173) (48,581)
Proceeds from stock issuance, net of costs 5,698 1,424 (1,725)
Prepayment of mortgage principal - - (3,800)
Release of mortgage funds by lenders 167 2,776 -
Proceeds from mortgages - 21,582 196,596
Repayment of proceeds from note (1,617) 1,617 -
Payments of mortgage principal (11,046) (9,234) (6,543)
Funding of defeasance escrow account - - (2,537)
Deferred financing costs and mortgage deposits - - (4,050)
Purchase of treasury stock (3,924) (2,498) (1,685)
(Distributions paid to) contributions from minority interest partner, net (2,735) (3,340) 7,661
--------- --------- ---------
Net cash (used in) provided by financing activities (64,430) (37,846) 135,336
--------- --------- ---------
- Continued -
-20-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONSOLIDATED STATEMENTS of CASH FLOWS, Continued
Effect of exchange rates on cash 609 1,035 756
--------- --------- ---------
Net decrease in cash and cash equivalents (2,330) (13,373) (95,597)
Cash and cash equivalents, beginning of year 38,725 52,098 147,695
--------- --------- ---------
Cash and cash equivalents, end of year $ 36,395 $ 38,725 $ 52,098
========= ========= =========
Noncash operating, investing and financing activities:
During 2002, a security deposit of $5,288 was assigned to a lender.
(a) Included in the cost basis of real estate and equity investments acquired
in 2004, 2003 and 2002 are deferred acquisition fees payable to WPC of
$749, $1,733 and $6,146, respectively.
Supplemental cash flow information:
Interest paid, excluding capitalized interest, was $52,923, $51,261 and $43,281
in 2004, 2003 and 2002, respectively. Capitalized interest was $357 in 2003 and
$808 in 2002. No capitalized interest was recognized in 2004.
A dividend of $.19020 per share for the quarter ended December 31, 2004 was
declared in December 2004 and paid in January 2005.
The accompanying notes are an integral part of the consolidated financial
statements.
-21-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
Amounts in thousands, except share and per share amounts
1. Organization:
Corporate Property Associates 14 Incorporated (the "Company") was formed on June
4, 1997 under the General Corporation Law of Maryland for the purpose of
engaging in the business of investing in and owning industrial and commercial
real estate. Subject to certain restrictions and limitations, the business of
the Company is managed by W. P. Carey & Co. LLC (the "Advisor").
An initial offering of the Company's shares which commenced on November 10, 1997
concluded on November 10, 1999 at which time the Company had issued an aggregate
of 29,440,594 shares ($294,406). On November 17, 1999, the Company commenced an
offering for a maximum of 40,000,000 shares of common stock. The shares were
offered to the public on a "best efforts" basis at a price of $10 per share. The
second offering concluded on November 15, 2001, by which time 36,353,686 shares
($363,537) were issued.
2. Summary of Significant Accounting Policies:
BASIS OF CONSOLIDATION
The consolidated financial statements include the Company, its wholly owned
subsidiaries and controlling majority-owned interests in limited liability
companies and partnerships (collectively, the "Company"). The Company is not the
primary beneficiary of any variable interest entity ("VIE"). All material
inter-entity transactions have been eliminated.
For acquisitions of an interest in an entity, the Company evaluates its equity
interest to determine if the entity is deemed a VIE, or 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.
For entities where the Company is not deemed to be the primary beneficiary 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.
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's financial statement presentation. Certain auction-rate securities have
been reclassified from cash equivalents to short-term marketable securities.
Auction-rate securities are variable rate bonds tied to short-term interest
rates with maturities on the face of the securities in excess of 90 days.
Auction-rate securities have interest rate resets through a modified Dutch
auction at predetermined short-term intervals. These securities trade at par
value and are callable at par value on any interest payment date at the option
of the issuer. Although these securities are issued and rated as long term
bonds, they are priced and traded as short-term instruments because of the
liquidity provided through the interest rate interest rate reset. The Company
had historically classified these securities as cash equivalents if the period
between interest rate resets was 90 days or less, which was based on its ability
to either liquidate or roll the security over to the next reset period. Based on
the Company's re-evaluation of the maturity dates associated with the underlying
bonds, the Company has reclassified its auction-rate securities as short-term
marketable securities for each period presented in the accompanying consolidated
financial statements.
PURCHASE PRICE ALLOCATION
In connection with the Company's acquisition of properties, purchase costs will
be allocated to the tangible and intangible assets and liabilities acquired
based on their estimated fair values. The value of the tangible assets,
consisting of land, buildings and tenant improvements, will be 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 will be recorded at
their relative fair values. Below-market value of leases are also recorded at
their relative fair values and are included in other liabilities in the
accompanying financial statements.
Above-market and below-market in-place lease values for owned properties will be
recorded based on the present value (using an interest rate reflecting the risks
associated with the leases acquired) of the difference between (i) the
contractual amounts to be paid pursuant to the leases negotiated and in place at
the time of acquisition of the properties and (ii) management's estimate
-22-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
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 will be amortized as a reduction of rental
income over the remaining non-cancelable term of each lease. The capitalized
below-market lease value will be 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 will be 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 will be 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. Management will also consider
information obtained about a property in connection with its pre-acquisition due
diligence. Estimated carrying costs include real estate taxes, insurance, other
property operating costs and estimates of lost rentals at market rates during
the hypothetical expected lease-up periods, based on management's assessment of
specific market conditions. Estimated costs to execute leases including
commissions and legal costs to the extent that such costs are not already
incurred with a new lease that has been negotiated in connection with the
purchase of the property will also be considered.
The value of in-place leases will be amortized to expense over the remaining
initial term of each lease. The value of tenant relationship intangibles will be
amortized to expense over the initial and expected renewal terms of the leases
but no amortization period for intangibles will exceed the remaining depreciable
life of the building.
OPERATING REAL ESTATE
Land and buildings and personal property are carried at cost less accumulated
depreciation. Renewals and improvements are capitalized, while replacements,
maintenance and repairs that do not improve or extend the lives of the
respective assets are expensed as incurred.
REAL ESTATE UNDER CONSTRUCTION AND REDEVELOPMENT
For properties under construction, operating expenses including interest charges
and other property expenses, including real estate taxes, are capitalized rather
than expensed and 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 borrowings to the average amount of
accumulated expenditures for properties under construction during the period.
CASH EQUIVALENTS
The Company considers all short-term, highly liquid investments that are both
readily convertible to cash and have a maturity of three months or less at the
time of purchase to be cash equivalents. Items classified as cash equivalents
include commercial paper and 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 two financial institutions and which balances, at times, exceed
federally insurable limits. The Company mitigates this risk by depositing funds
with major financial institutions.
MARKETABLE SECURITIES
Marketable securities, which consist of an interest in collateralized mortgage
obligations (see Note 7) and auction-rate 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 (loss) until realized.
-23-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
OTHER ASSETS
Included in other assets are deferred charges and deferred rental income.
Deferred charges are costs incurred in connection with mortgage financings and
refinancings and are amortized over the terms of the mortgages using the
effective interest rate method and included in interest expense in the
accompanying consolidated financial statements. Deferred rental income is the
aggregate difference for operating leases between scheduled rents, which vary
during the lease term, and rent recognized on a straight-line basis.
DEFERRED ACQUISITION FEES
Fees are payable for services provided by W. P. Carey & Co. LLC (the "Advisor"),
an affiliate, 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 annual installments with each installment equal to
..25% of the purchase price of the properties over no less than eight years
following the first anniversary of the date a property was purchased. Payment of
such fees is subject to the Preferred Return (see Note 3).
ACCUMULATED OTHER COMPREHENSIVE INCOME
As of December 31, 2004 and 2003, accumulated other comprehensive income
reflected in the Company's shareholders' equity is comprised of the following:
As of December 31,
------------------
2004 2003
---- ----
Unrealized appreciation on marketable securities $ 1,115 $ 898
Foreign currency translation adjustment 12,506 10,252
------- -------
Accumulated other comprehensive income $13,621 $11,150
======= =======
TREASURY STOCK
Treasury stock is recorded at cost.
REAL ESTATE LEASED TO OTHERS
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 $13,120.
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 revenues. 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 (see Notes 4 and 5):
Direct financing method - Leases accounted for under the direct financing method
are recorded at their net investment (Note 5). Unearned income is deferred and
amortized to income over the lease terms so as to produce a constant periodic
rate of return on 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 leases, and expenses (including depreciation) are charged to
operations as incurred.
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
0.25% and 1% of lease revenues (rental income and interest income
-24-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
from direct financing leases) and will measure 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.
DEPRECIATION
Depreciation is computed using the straight-line method over the estimated
useful lives of the properties - generally 40 years. Depreciation of tenant
improvements is computed using the straight-line method over the remaining term
of the lease.
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.
Investments in unconsolidated joint ventures are accounted for under the equity
method and are recorded initially at cost, as equity investments and are
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 an other
than temporary impairment has occurred, the charge is measured as the excess of
the carrying amount of the investment over the fair value of the investment.
When the Company identifies assets as held for sale, it discontinues
depreciating the assets and estimates the sales price, net of selling costs, of
such assets. If in the 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 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, the Company decides not to sell a property
previously classified as held for sale, the property is reclassified as held and
used. A property that is reclassified is measured and recorded individually at
the lower of (a) its carrying amount before the property was classified as held
for sale, adjusted for any depreciation expense that would have been recognized
had the property been continuously classified as held and used, (b) the fair
value at the date of the subsequent decision not to sell, or (c) the current
carrying value.
FOREIGN CURRENCY TRANSLATION
The Company consolidates its real estate investments in The Netherlands,
Finland, France and the United Kingdom. The functional currencies for these
investments are the Euro and British Pound. The translation from these local
currencies to the U.S. dollar 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 shareholders' equity. As of December 31,
2004 and 2003, the cumulative foreign currency translation adjustment gain was
$12,506 and $10,252, respectively.
Foreign currency transactions may produce receivables or payables that are fixed
in terms of the amount of foreign currency that will be received or paid. A
change in the exchange rates between the functional currency and the currency in
which a transaction is denominated increases or decreases the expected amount of
functional currency cash flows upon settlement of that transaction. That
increase or decrease in the expected functional currency cash flows is a foreign
currency transaction gain or loss that generally will be included in determining
net income for the period in which the exchange rate changes. Likewise, a
transaction gain or loss (measured from the transaction date or the most recent
intervening balance sheet date, whichever is
-25-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
later), realized upon settlement of a foreign currency transaction generally
will be included in net income for the period in which the transaction is
settled. Foreign currency transactions that are (i) designated as, and are
effective as, economic hedges of a net investment and (ii) 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
Company's financial statements will not be included in determining net income
but will be accounted for in the same manner as foreign currency translation
adjustments and reported as a component of other comprehensive income as part of
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 repayments,
are included in the determination of net income, and the Company recognized
unrealized gains of $90 and $720 from such transactions in the years ended
December 31, 2004 and 2003, respectively. In the years ended December 31, 2004
and 2003, the Company recognized realized gains of $1,357 and $349,
respectively, on foreign currency transactions in connection with the transfer
of cash from foreign operations of subsidiaries to the parent company. No such
realized or unrealized gains were recognized in 2002.
DERIVATIVE INSTRUMENTS
The Company accounts for its derivative instruments in accordance with FASB No.
133 "Accounting for Derivative Instruments and Hedging Activities," as amended
("FAS 133"). Certain stock warrants which were granted to the Company by lessees
in connection with structuring the initial lease transactions are defined as
derivative instruments because such stock warrants are readily convertible to
cash or provide for net settlement upon conversion. Pursuant to FAS 133, changes
in the fair value of such derivative instruments are determined using an option
pricing model and are recognized currently in earnings as gains or losses.
Changes in fair value for the years ended December 31, 2004 and 2003 generated
unrealized losses of $64 and $20, respectively, and an unrealized gain of $385
as of December 31, 2002. As of December 31, 2004, warrants issued to the Company
by PW Eagle, Inc., American Tire Distributors, Inc. and Consolidated Theaters
Holding, G.P. are classified as derivative instruments. The Company also holds
stock warrants that were not defined as derivative instruments and have been
recorded at nominal values. The Company has only recognized unrealized gains or
losses on stock warrants that are derivative instruments.
A lease for a property located in The Netherlands provides the Company with an
option to receive a portion of rental payments in Euros or U.S. dollars.
Pursuant to the adoption of FAS 133, the option is a derivative instrument and
changes in the fair value of the option are recognized in earnings as gains or
losses. Unrealized losses of $9, $29 and $30 were recognized in 2004, 2003 and
2002, respectively. As of December 31, 2004, the Company's cumulative unrealized
foreign currency gain was $10.
Changes in the fair value of an interest swap instrument on a variable rate loan
with a notional amount of $8,883 are included in the determination of net
income. For the year ended December 31, 2004, an unrealized loss of $655 was
recognized.
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 11).
If circumstances arise that previously were considered unlikely and, as a
result, the Company decides not to sell a property previously classified as held
for sale, the property is reclassified as held and used. A property that is
reclassified is measured and recorded individually at the lower of (a) its
carrying amount before the property was classified as held for sale, adjusted
for any depreciation expense that would have been recognized had the property
been continuously classified as held and used, (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 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.
-26-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
FEDERAL INCOME TAXES
The Company has elected to be treated as a REIT under Sections 856 through 860
of the Internal Revenue Code of 1986, as amended (the "Code"). In order to
maintain its qualification as a REIT, the Company is required to, among other
things, distribute at least 90% of its REIT taxable income to its shareholders
and meet certain tests regarding the nature of its income and assets. As a REIT,
the Company is not subject to federal income tax with respect to that portion of
its income which meets certain criteria and is distributed annually to the
shareholders. Accordingly, no provision for federal income taxes is included in
the accompanying consolidated financial statements. The Company has and intends
to continue to operate so that it meets the requirements for taxation as a REIT.
Many of these requirements, however, are highly technical and complex. If the
Company were to fail to meet these requirements, the Company would be subject to
federal income tax. The Company is subject to certain state, local and foreign
taxes. Provision for such taxes has been included in general and administrative
expenses in the Company's Consolidated Statements of Income.
EARNINGS PER SHARE
The Company has a simple equity capital structure with only common stock
outstanding. As a result, the Company has presented basic per-share amounts only
for all periods presented in the accompanying consolidated financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
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 statement 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 six 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 at December 31, 2004 and 2003 is $12,356 and
$12,368, respectively. The fair value of these minority interests at December
31, 2004 and 2003 is $18,437 and $13,815, respectively. We adopted FAS 150 in
July 2003 and it did not have a significant impact on our consolidated financial
statements.
3. Transactions with Related Parties:
In connection with performing services on behalf of the Company, the Advisory
Agreement between the Company and the Advisor provides that the Advisor receive
asset management and performance fees, each of which are -1/2 of 1/% of Average
Invested Assets as defined in the Advisory Agreement. The performance fee is
subordinated to the Preferred Return, a cumulative rate of cash flow from
operations of 7%. The Advisor has elected at its option to receive the
performance fee in restricted shares of common stock of the Company rather than
cash. Effective in 2005, the Advisory Agreement was amended to allow the Advisor
to elect to receive restricted stock for any fee due from the Company. The
Advisor is also reimbursed for the actual cost of personnel needed to provide
administrative services necessary to the operation of the Company. The Company
incurred asset management fees of $8,540, $7,550 and $5,514 in 2004, 2003 and
2002, respectively, with performance fees in like amount. The Company incurred
personnel reimbursements of $2,856, $3,088 and $2,234 in 2004, 2003 and 2002,
respectively. Asset management fees and personnel reimbursement costs are
included in property expense and general and administrative expense,
respectively, in the accompanying consolidated financial statements
Fees are payable to the Advisor for services provided to the Company relating to
the identification, evaluation, negotiation, financing and purchase of
properties and refinancing of mortgages. A portion of such fees are deferred and
payable in equal installments over no less than eight years following the first
anniversary of the date a property was purchased. Such deferred fees are only
payable if the Preferred Return has been met. The unpaid portion of the deferred
fees bears interest at an annual rate of 6% from the date of acquisition of a
property until paid. For transactions and refinancings that were completed in
2004, 2003 and 2002, current fees were $936, $2,166 and $8,489, respectively and
deferred fees were $749, $1,733 and $6,773, respectively.
The Advisor is obligated to reimburse the Company for the amount by which
operating expenses of the Company exceed the 2%/25% Guidelines (the greater of
2% of Average Invested Assets or 25% of Net Income) as defined in the Advisory
Agreement for any twelve-month period. If in any year the operating expenses of
the Company exceed the 2%/25% Guidelines, the Advisor will have an obligation to
reimburse the Company for such excess, subject to certain conditions. If the
Independent
-27-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
Directors find that such excess expenses were justified based on any unusual and
nonrecurring factors which they deem sufficient, the Advisor may be paid in
future years for the full amount or any portion of such excess expenses, but
only to the extent that such reimbursement would not cause the Company's
operating expenses to exceed this limit in any such year. Charges related to
asset impairment, bankruptcy of lessees, lease payment defaults, extinguishment
of debt or uninsured losses are generally not considered unusual and
nonrecurring. A determination that a charge is unusual and nonrecurring, such as
the costs of significant litigation that are not associated with day-to day
operations, or uninsured losses that are beyond the size or scope of the usual
course of business based on the event history and experience of the Advisor and
Independent Directors, is made at the sole discretion of the Independent
Directors. The Company will record any reimbursement of operating expenses as a
liability until any contingencies are resolved and will record the reimbursement
as a reduction of asset management and performance fees at such time that a
reimbursement is fixed, determinable and irrevocable. The operating expenses of
the Company have not exceeded the amount that would require the Advisor to
reimburse the Company.
The Advisor will be entitled to receive subordinated disposition fees based upon
the cumulative proceeds arising from the sale of Company assets since the
inception of the Company, subject to certain conditions. Pursuant to the
subordination provisions of the Advisory Agreement, the disposition fees may be
paid only after the shareholders receive 100% of their initial investment from
the proceeds of asset sales and a cumulative annual return of 6% (based on an
initial share price of $10) since the inception of the Company. The Advisor's
interest in such disposition fees amounts to $240 as of December 31, 2004 and
2003. Payment of such amount, however, cannot be made until the subordination
provisions are met. The Company has concluded that payment of such disposition
fees is probable and all fees from completed property sales have been accrued.
Subordinated disposition fees are included in the determination of realized gain
or loss on the sale of properties. The obligation for disposition fees is
included in due to affiliates in the accompanying consolidated financial
statements.
The Company owns interests in entities which range from 11.54% to 90% and a
jointly-controlled 50% tenancy-in-common interest in two properties subject to a
net lease with the remaining interests held by affiliates.
The Company is a participant in an agreement with certain affiliates for the
purpose of leasing office space used for the administration of real estate
entities and for 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 the relative gross revenues of the affiliates. Expenses
incurred in 2004, 2003 and 2002 were $500, $470 and $376, respectively. The
Company's current share of future minimum lease payments is $7,617 through 2016.
As previously reported by the Advisor, the Advisor and Carey Financial
Corporation ("Carey Financial"), the wholly-owned broker-dealer subsidiary of
the Advisor, are currently subject to an investigation by the United States
Securities and Exchange Commission ("SEC") into payments made to third party
broker dealers in connection with the distribution of REITs managed by the
Advisor and other matters. Although no regulatory action has been initiated
against the Advisor or Carey Financial in connection with the matters being
investigated, it is possible that the SEC may pursue an action in the future.
The potential timing of any such action and the nature of the relief or remedies
the SEC may seek cannot be predicted at this time. If such an action is brought,
it could materially affect the Advisor and the REITs managed by the Advisor,
including the Company.
4. Real Estate Leased to Others Accounted for Under the Operating Method:
Scheduled future minimum rents, exclusive of renewals and expenses paid by
tenants, under non-cancelable operating leases amount are approximately as
follows:
Year Ending December 31,
2005 $ 103,897
2006 104,457
2007 105,889
2008 105,413
2009 105,061
Thereafter through 2023 928,146
Contingent rentals (including CPI-based increases) were approximately $3,649 in
2004, $1,405 in 2003 and $532 in 2002.
5. Net Investment in Direct Financing Leases:
Net investment in direct financing leases is summarized as follows:
December 31,
------------
2004 2003
---- ----
Minimum lease payments receivable $ 233,681 $ 246,161
Unguaranteed residual value 112,688 111,645
--------- ---------
346,369 357,806
Less: unearned income (230,026) (242,899)
--------- ---------
$ 116,343 $ 114,907
========= =========
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CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
Scheduled future minimum rents, exclusive of renewals and expenses paid by
tenants, under non-cancelable direct financing leases are approximately as
follows:
Year Ending December 31,
2005 $ 12,545
2006 12,636
2007 12,724
2008 12,724
2009 12,724
Thereafter through 2031 170,328
Contingent rents (including CPI-based increases) were approximately $289 in
2004, $108 in 2003 and $63 in 2002.
6. Equity Investments:
The Company owns interests in single-tenant net leased properties leased to
corporations through noncontrolling interests (i) in various partnerships and
limited liability companies in which its ownership interests are 50% or less and
the Company exercises significant influence, and (ii) as tenants-in-common
subject to joint control. The ownership interests range from 11.54% 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., True Value Company, Clear Channel
Communications, Inc., Starmark Camhood, LLC, U-Haul Moving Partners, Inc.
("U-Haul") and Mercury Partners, LP ("Mercury"). The interests in the properties
leased to U-Haul and Mercury were acquired in April 2004 and are described
below.
Summarized combined financial information of the Company's equity investees is
as follows:
December 31,
------------
2004 2003
---- ----
Assets (primarily real estate) $1,122,692 $781,144
Liabilities (primarily mortgage notes payable) 682,377 471,052
---------- --------
Partners' and Members' equity $ 440,315 $310,092
========== ========
Company's share of equity investees' net assets $ 134,905 $120,388
========== ========
Year Ended December 31,
-----------------------
2004 2003 2002
---- ---- ----
Revenues (primarily rental income and interest income from direct
financing leases) $ 105,488 $ 80,329 $ 34,521
Expenses (primarily interest on mortgage and depreciation) (64,085) (46,429) (20,352)
--------- -------- --------
Net income $ 41,403 $ 33,900 $ 14,169
========= ======== ========
Company's share of net income from equity investments $ 14,304 $ 12,992 $ 5,320
========= ======== ========
On April 29, 2004, the Company, along with two affiliates, Corporate Property
Associates 15 Incorporated and Corporate Property Associates 16 - Global
Incorporated, through a limited partnership in which the Company owns an 11.54%
interest through a subsidiary, purchased 78 retail self-storage and truck rental
facilities and entered into master lease agreements with two lessees that
operate the facilities under the U-Haul brand name. The self-storage facilities
are leased to Mercury, and the truck rental facilities are leased to U-Haul. The
total cost was $312,445. In connection with the purchase, the limited
partnership obtained $183,000 of limited recourse mortgage financing
collateralized by the properties and lease assignments.
The Mercury lease has an initial term of 20 years with two 10-year renewal
options and provides for annual rent of $18,551. The Mercury lease is guaranteed
by Mercury 99, LLC, an entity that owns a 99% ownership interest in Mercury. The
U-Haul lease has an initial term of 10 years with two 10-year renewal options
and provides for annual rent of $9,990. In the event of default, termination or
expiration of the U-Haul lease, Mercury 99, LLC will automatically assume the
obligations of the U-Haul lease and Mercury 99, LLC will continue to lease the
self-storage facilities and shall lease the truck rental facilities
-29-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
pursuant to the terms (with extension) of the U-Haul lease. Upon Mercury 99,
LLC's assumption, the term of the U-Haul lease shall be deemed extended so as to
automatically become co-terminus for the term of the Mercury 99, LLC lease. Each
lease provides for rent increases every five years based on a formula indexed to
the CPI.
The loan provides for monthly payments of principal and interest of $1,230 at a
fixed annual interest rate of 6.449% and based on a 25-year amortization
schedule. The loan matures on May 1, 2014.
7. Mortgage Financing Through Loan Securitization:
In 2002, the Company and three affiliates, W.P. Carey & Co. LLC ("W. P. Carey"),
Carey Institutional Properties Incorporated ("CIP(R)") and Corporate Property
Associates 12 Incorporated ("CPA(R):12") obtained an aggregate of approximately
$172,335 of limited recourse mortgage financing collateralized by 62 leased
properties. The lender pooled the loans into a trust, Carey Commercial Mortgage
Trust, a non-affiliate, whose assets consist solely of the loans, and sold the
interests in the trust as collateralized mortgage obligations in a private
placement to institutional investors (the "Offered Interests"). The Company and
the three affiliates acquired a separate class of subordinated interests in the
trust (the "CPA(R) Interests"). The amount of CPA(R) Interests acquired by the
Company was proportional to the mortgage amounts obtained.
All of the mortgage loans provide for payments of principal and interest at an
annual rate of 7.5% and are based on a 25-year amortization schedule. Each loan
is collateralized by mortgages on the properties and lease assignments. Under
the lease assignments, the lessees direct their rent payment to the mortgage
servicing company which in turn distributes amounts in excess of debt service
requirements to the applicable lessors. Under certain limited conditions, a
property may be released from its mortgage by the substitution of another
property. Such substitution is subject to the approval of the trustee of the
trust.
The initial Offered Interests consisted of $148,206 of mortgage loan balances
with different tranches of principal entitled to distributions at annual
interest rates as follows: $119,772 - 5.97%, $9,478 - 6.58%, $9,478 - 7.18% and
$9,478 - 8.43%. The assumed final distribution dates for the four classes of
Offered Interests range from December 2011 through March 2012.
The CPA(R) Interests were purchased for $24,129 of which the Company's share was
$6,032, or 25%, and are comprised of two components, a component that will
receive payments of principal and interest and a component that will receive
payments of interest only. The CPA(R) Interests are subordinated to the Offered
Interests and will be payable only when and if all distributions to the Offered
Interests are current. The assumed final distribution date for the CPA(R)
Interests is June 30, 2012. The distributions to be paid to the CPA(R) Interests
do not have a stated rate of interest and will be affected by any shortfall in
rents received from the lessees or defaults at the mortgaged properties. As of
the purchase date, the Company's cost basis attributable to the principal and
interest and interest only components was $3,612 and $2,420, respectively. Over
the term of its ownership interest in the CPA(R) Interests, the value of the
interest only component will fully amortize and the principal and interest
component will amortize to its anticipated face value of its share in the
underlying mortgages. For financial reporting purposes, the effect of such
amortization is reflected in interest income. Interest income, including all
related amortization, is recognized using an effective interest method.
The Company is accounting for its interest in the CPA(R) Interests as an
available-for-sale security and it 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. The fair value of the Company's CPA(R)
Interests was $6,904 and $6,792, reflecting an unrealized gain of $1,115 and
$898 and accumulated amortization of $243 and $138 at December 31, 2004 and
2003, respectively. 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.
The key variable in determining the fair value of the CPA(R) Interests 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 CPA(R) Interests based on
adverse changes in the market interest rates of 1% and 2% as of December 31,
2004 is as follows:
Actual 1% Adverse Change 2% Adverse Change
------ ----------------- -----------------
Fair value of CPA(R) Interests $6,904 $6,584 $6,284
-30-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
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.
8. Mortgage Notes Payable:
Mortgage notes payable, all of which are limited recourse to the Company, are
collateralized by an assignment of various leases and by real property with a
carrying value of $1,064,118. As of December 31, 2004, mortgage notes payable
had fixed annual interest rates ranging from 5.15% to 8.85% and variable annual
interest rates ranging from 3.55% to 6.27% and maturity dates ranging from 2008
to 2026.
Scheduled principal payments during each of the five years following December
31, 2004 and thereafter are as follows:
Year Ending December 31, Total Debt Fixed Rate Debt Variable Rate Debt
- ------------------------ ---------- --------------- ------------------
2005 $ 12,185 $ 11,915 $ 270
2006 13,167 12,915 252
2007 14,152 13,892 260
2008 20,353 20,086 267
2009 63,394 63,116 278
Thereafter through 2026 580,120 553,436 26,684
-------- -------- -------
Total $703,371 $675,360 $28,011
======== ======== =======
The Company has an interest rate swap agreement on a variable rate limited
recourse mortgage obligation collateralized by a property in Midlothian,
Virginia leased to Consolidated Theaters Holding, G.P. The interest rate swap
agreement has a notional amount of $8,883 as of December 31, 2004. The fair
value of the instrument was $(655) at December 31, 2004. Changes in the fair
value of the instrument are included in the determination of net income. For the
year ended December 31, 2004, the Company recognized an unrealized loss of $655.
9. Dividends:
Dividends paid to shareholders consist of ordinary income, capital gains, return
of capital or a combination thereof for income tax purposes. For the three years
ended December 31, 2004, dividends per share reported for tax purposes were as
follows:
2004 2003 2002
---- ---- ----
Ordinary income $ .57 $ .57 $.36
Return of capital .19 .19 .38
Capital gains - - .01
----- ----- ----
$ .76 $ .76 $.75
===== ===== ====
A dividend of $.19020 per share for the quarter ended December 31, 2004 was
declared in December 2004 and paid in January 2005.
10. Impairment Charges:
2003 - The Company owns a property in Gardena, California leased to Scott
Companies Inc. Scott had rent arrearages of $474 as of December 31, 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. In September 2004, the Company entered into a lease
with Moonlight Molds for the Gardena property. The lease has an initial term
through November 2009.
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 estimated residual
value had occurred at its property in Mooresville, North Carolina leased to UTI
Holdings, Inc., and the accounting for the direct financing lease was revised
using the changed estimates. The resulting change in estimate resulted in the
recognition of an impairment charge of $203.
-31-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
11. Discontinued Operations:
In accordance with FAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the results of operations and gain or loss on sales of real
estate for properties sold or held for sale are reflected in the consolidated
statements of operations as "Discontinued Operations" for all periods presented.
As of December 31, 2004, the operations of a property in Valencia, California,
which was sold in February 2005 at a gain of approximately $195, were included
as "Discontinued Operations." At December 31, 2002, the operations from a
property in Greenville, Texas, which was sold in June 2002 at a gain of $333,
were also included as "Discontinued Operations." A summary of Discontinued
Operations for the years ended December 31, 2004, 2003 and 2002 is as follows.
Year Ended December 31,
-----------------------
2004 2003 2002
---- ---- -----
Revenues (primarily rental revenues) $ 423 $ 423 $ 571
Expenses (primarily interest on mortgages,
depreciation and property expenses) (238) (244) (213)
Gain on sale of real estate - - 333
----- ----- -----
Income from discontinued operations $ 185 $ 179 $ 691
===== ===== =====
12. Disclosures About Fair Value of Financial Instruments:
The Company's mortgage notes payable had a carrying value of $703,371 and
$702,175 and a fair value of $718,347 and $706,040 at December 31, 2004 and
2003, respectively. The Company's marketable securities, including its interest
in Carey Commercial Mortgage Trust, had a carrying value of $12,789 and $21,844
and a fair value of $13,904 and $22,742 at December 31, 2004 and 2003,
respectively. The fair value of 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 fair value of the Company's other assets and
liabilities at December 31, 2004 and 2003 approximated their carrying value.
13. Segment Information:
The Company has determined that it operates in one business segment, real estate
operations with domestic and foreign investments.
For 2004, geographic information for the real estate operations segment is as
follows:
Domestic Foreign (1) Total Company
-------- -------- -------------
Revenues $ 107,762 $ 22,475 $ 130,237
Operating expenses (45,484) (6,656) (52,140)
Income from equity investments 14,304 -- 14,304
Interest expense, net (43,441) (9,119) (52,560)
Other, net (2) (1,147) 61 (1,086)
----------- --------- -----------
Income from continuing operations $ 31,994 $ 6,761 $ 38,755
=========== ========= ===========
Total assets $ 1,130,852 $ 215,503 $ 1,346,355
Total long-lived assets 1,048,775 202,334 1,251,109
For 2003, geographic information for the real estate operations segment is as
follows:
Domestic Foreign (1) Total Company
-------- -------- -------------
Revenues (3) $ 107,630 $ 19,794 $ 127,424
Operating expenses (3) (48,951) (6,270) (55,221)
Income from equity investments 12,992 -- 12,992
Interest expense, net (42,802) (8,283) (51,085)
Other, net (2) (469) -- (469)
----------- --------- -----------
Income from continuing operations $ 28,400 $ 5,241 $ 33,641
=========== ========= ===========
Total assets $ 1,143,581 $ 202,166 $ 1,345,747
Total long-lived assets 1,055,321 190,412 1,245,733
-32-
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
For 2002, geographic information for the real estate operations segment is as
follows:
Domestic Foreign (1) Total Company
-------- -------- -------------
Revenues (3) $ 98,541 $ 11,598 $ 110,139
Expenses (3) (38,668) (2,929) (41,597)
Income from equity investments 5,320 -- 5,320
Interest expense, net (37,439) (5,479) (42,918)
Other, net (2) (1,369) -- (1,369)
----------- --------- -----------
Income from continuing operations $ 26,385 $ 3,190 $ 29,575
=========== ========= ===========
Total assets $ 1,151,723 $ 168,174 $ 1,319,897
Total long-lived assets 1,043,682 155,248 1,198,930
(1) Consists of operations in the United Kingdom, France, Finland and The
Netherlands.
(2) Consists of minority interest, (losses) gains on derivative instruments
and gains on foreign currency transactions.
(3) 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.
14. Selected Quarterly Financial Data (unaudited):
Three Months Ended
------------------
March 31, 2004 June 30, 2004 September 30, 2004 December 31, 2004
-------------- ------------- ------------------ -----------------
Revenues $31,752 $32,354 $33,568 $32,563
Operating expenses 12,503 13,186 13,902 12,549
Net income 8,989 8,905 9,903 11,143
Earnings per share - basic .13 .13 .15 .17
Dividends declared per share .1894 .1897 .1899 .1902
Three Months Ended
------------------
March 31, 2003 June 30, 2003 September 30, 2003 December 31, 2003
-------------- ------------- ------------------ -----------------
Revenues (1) $32,334 $30,399 $33,133 $31,558
Operating expenses (1) 12,332 12,047 17,837 13,005
Net income 10,604 8,666 6,124 8,426
Earnings per share - basic .16 .13 .09 .13
Dividends declared per share .1884 .1887 .1889 .1892
(1) 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.
-33-
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
There is no established public trading market for the Shares of the Company. As
of December 31, 2004, there were 21,075 holders of record of the Shares of the
Company.
DIVIDENDS
The Company is required to distribute annually at least 90% of its Distributable
REIT Taxable Income to maintain its status as a REIT. Quarterly dividends
declared by the Company for the past two years are as follows:
Cash Dividends Declared Per Share
---------------------------------
2004 2003
---- ----
First quarter $.1894 $.1884
Second quarter .1897 .1887
Third quarter .1899 .1889
Fourth quarter .1902 .1892
------ ------
$.7592 $.7552
====== ======
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
For the three-month period ended December 31, 2004, 189,998 shares were issued
to the Advisor as consideration for performance fees. Shares were issued at a
per share amount of $11.30. The Company previously reported other sales of
unregistered shares during 2004 in our quarterly reports on Form 10-Q.
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number of Shares
Purchased as Part of
Total Number of Average Price Publicly Announced
Period Shares Purchased Paid Per Share Plans or Programs (1)
------ ---------------- -------------- ---------------------
October 1, 2004 - October 31, 2004 21,752 $10.06 N/A
November 1, 2004 - November 30, 2004 3,400 10.17 N/A
December 1, 2004 - December 31, 2004 3,000 10.06 N/A
---------
Total 28,152
==========
(1) All shares were purchased pursuant to the Company's redemption plan. The
maximum amount of shares purchasable in any period depends on the
availability of funds generated by the Distribution Reinvestment and Share
Purchase Plan and other factors at the discretion of the Company's board
of directors.
REPORT ON FORM 10-K
The Advisor will supply to any shareholder, upon written request and without
charge, a copy of the Annual Report on Form 10-K ("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.
-34-