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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: 333-58854
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CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-2298116
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
50 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10020
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
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, PAR VALUE $0.001 PER SHARE
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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 124,065,362 shares at March 8, 2005.
As of March 8, 2005, there are 126,202,464 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 15 INCORPORATED
PART I
This Annual Report on Form 10-K contains certain forward-looking statements
relating to Corporate Property Associates 15 Incorporated. As used in this
Annual Report on Form 10-K, the terms "the Company," "we," "us" and "our"
include Corporate Property Associates 15 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 and
industrial real estate leased to companies domestically and internationally. As
of December 31, 2004, our portfolio consisted of 306 properties leased to 83
tenants and totaled more than 29 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
- guarantees from parent companies.
We were formed as a Maryland corporation on February 26, 2001. Between November
7, 2001 and November 8, 2002, we sold a total of 39,930,312 shares of common
stock for a total of $399,303 in gross offering proceeds. Between March 20, 2003
and August 7, 2003, we completed an offering for an additional 64,687,294 shares
of our common stock to the public, for total gross proceeds of $646,873. We have
used and will continue to use the proceeds of our two public offerings, combined
with limited recourse mortgage debt, to acquire and own commercial and
industrial 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 us with office
space and other facilities. 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 14 Incorporated ("CPA(R):14"),
Corporate Property Associates 16 - Global Incorporated ("CPA(R):16 - Global")
and Carey Institutional Properties Incorporated ("CIP(R)") until its merger into
us in September 2004 (collectively, including us, the "CPA(R) REITs"). WPC is
listed on the New York Stock Exchange under the symbol "WPC."
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CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
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.
Significant Developments During 2004
ACQUISITIONS. On January 2, 2004, we purchased land and buildings in
Concordville, Pennsylvania and Oceanside, California for $9,843 and entered into
a net lease with Plumbmaster, Inc. The lease obligations are unconditionally
guaranteed by Wolverine Brass, Inc. and Professional Plumbing Group, Inc. The
lease has an initial term of 20 years followed by one nine-year and eleven-month
renewal option and one four-year renewal option, and provides for an initial
annual rent of $855. The lease provides for a stated rent increase in the second
lease year as well as rent increases based on a formula indexed to increases in
the CPI in the second lease year and annually thereafter. We obtained $6,300 of
limited recourse mortgage financing on the property.
On January 2, 2004, we purchased land and buildings in Mons, Belgium for $12,120
(based on the exchange rate for the Euro on the date of acquisition) and entered
into a net lease with the Regie des Batiments. The lease has an initial term of
18 years and provides for an initial annual rent of $1,088. The lease provides
for annual rent increases based on a formula indexed to increases in the Belgian
CPI. Limited recourse mortgage financing of $11,231 was obtained in connection
with this acquisition.
On January 8, 2004, we purchased land and buildings in Peoria, Illinois for
$12,565 and entered into a net lease with Affina Corporation. The lease has an
initial term of 20 years followed by two ten-year renewal options, and provides
for initial annual rent of $1,254. The lease provides for annual rent increases
based on a formula indexed to increases in the CPI.
On February 6, 2004, we purchased land in Rancho Cucamonga, California and
entered into a build-to-suit commitment and net lease with UTI Holdings, Inc.
The total cost of construction is $22,815. Upon completion in September 2004, an
initial lease term of 15 years commenced. Initial annual rent is $1,936, with
increases every three years based on a formula indexed to increases in the CPI.
The lease provides for four five-year renewal terms. We also completed
build-to-suit projects for other properties leased to UTI Holdings, Inc. in
Pennsylvania and Arizona during the third quarter that will provide combined
initial annual rent of $4,472. We obtained $14,000 and $18,600 of limited
recourse mortgage financing on the California and Arizona properties,
respectively.
On March 26, 2004, we purchased land and building in Peachtree City, Georgia for
$8,699 and entered into a net lease with World Airways, Inc. The lease has an
initial term of 15 years followed by two ten-year renewal options and provides
for initial annual rent of $853 with annual increases based on a formula indexed
to increases in the CPI. Limited recourse mortgage financing of $5,500 was
obtained in connection with this acquisition.
On April 14, 2004, we purchased land and buildings in Mentor, Ohio and Franklin,
Tennessee for $7,168 and entered into a net lease with Worthington Precision
Metals, Inc. The lease obligations are unconditionally guaranteed by
Worthington's parent company, WPM Holding Corp. The lease has an initial term of
20 years followed by two ten-year renewal options and provides for initial
annual rent of $788 with annual increases based on a formula indexed to
increases in the CPI. Limited recourse mortgage financing of $4,600 was obtained
in connection with this acquisition.
On April 29, 2004, along with two affiliates, CPA(R):14 and CPA(R):16-Global,
through a limited partnership in which we own a 57.69% 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 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 of 10 years with two 10-year renewal options and provides for annual
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CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
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 increases in
the CPI.
On May 7, 2004, we purchased land in La Vista, Nebraska and entered into a
build-to-suit commitment and net lease with Oriental Trading Company, Inc. The
total cost of construction is estimated to amount to approximately $31,000. Upon
completion, expected to be in July 2005, an initial lease term of 20 years will
commence with four five-year renewal terms. If the entire project costs are
used, initial annual rent will be $2,728, with annual increases beginning on the
third anniversary based on a formula indexed to increases in the CPI. We
obtained a loan facility of $16,400 which may be drawn upon to fund construction
of the property.
On May 26, 2004, we purchased land and building in Pleasanton, California for
$32,461 and entered into a net lease with Shaklee Corporation. The lease
obligations are unconditionally guaranteed by Shaklee Japan Kabushiki Kaisha.
The lease has an initial term of 20 years with two seven-year renewal options
and provides for initial annual rent of $2,679 with stated rent increases of 5%
every three years. Limited recourse mortgage financing of $18,800 was obtained
in connection with this acquisition.
On July 8, 2004, we and CPA(R):16-Global, with 60% and 40% interests,
respectively, purchased two properties in Finland for $97,370 (based on the
exchange rate for the Euro as of the date of acquisition, of which our share is
$58,422) and entered into two net leases with TietoEnator plc. Both leases have
an initial term of 12.5 years at an initial aggregate rent of $6,985 (of which
our share is $4,191). Mortgage financing of $70,739 (of which our share is
$42,444) was obtained in connection with the purchase of the properties.
On July 26, 2004 and August 3, 2004, we and CPA(R):16 - Global, with 65% and 35%
interests, respectively, purchased five properties in France for $103,200 (based
on the exchange rate of the Euro as of the dates of the acquisition, of which
our share is $67,080) and assumed existing leases with Thales S.A. The leases
expire between December 2010 and December 2011 and each lease has a nine-year
renewal option. Annual rent is $9,715 (of which our share is $6,315). Mortgage
financing of $76,835 (of which our share is $49,943) was obtained in connection
with the purchase of the properties.
See Note 8 of the accompanying financial statements for additional information
on 2004 acquisitions.
MORTGAGE FINANCING ACTIVITIES. On February 24, 2004, we obtained $23,171 (based
on the exchange rate for the British Pound as of the date of acquisition) of
limited recourse mortgage financing collateralized by properties leased to
Qualceram Shires Ltd. The loan provides for quarterly payments of principal and
interest totaling $497 (based on the exchange rate for the Pound as of the date
of acquisition). The loan is a variable rate obligation that was structured with
an interest rate swap, a derivative instrument designated as a cash flow hedge,
that effectively converted the variable rate obligation to a fixed rate
obligation of 6.948%. The loan has a ten-year term at which time a balloon
payment is scheduled.
During the fourth quarter we obtained $34,600 on three limited recourse mortgage
loans, each collateralized by domestic properties which were acquired prior to
2004 and leased on a single tenant basis. The loans provide for annual interest
rates ranging from 5.54% to 7.78% and mature and amortize over 20 years.
DISPOSITIONS. In December 2003, we purchased a 99.99% interest in a limited
partnership which purchased property in Germany and entered into a net lease
with Actuant Corporation. Under the limited partnership agreement, CPA(R):16 -
Global, an affiliate, had an option to purchase, subject to certain conditions,
up to a 75% interest in the limited partnership. In May 2004, CPA(R):16 - Global
exercised its option and increased its ownership interest from 0.01% to 50%. In
connection with the sale of our interest, we incurred a loss on sale of $48
primarily due to the impact of foreign currency fluctuations.
In December 2004, we sold a property in Rantoul, Illinois to a third party for
approximately $11,041, net of selling costs, and recognized a gain on sale of
$478. This property was acquired from CIP(R) and was leased to Bell Sports, Inc.
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CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
In December 2004, we entered into an agreement with a third party to sell a
vacant property in Miami, Florida formerly leased to Transworld Center, Inc. In
connection with the proposed sale, the property has been reclassified as an
asset held for sale and an impairment charge of $5,000 has been recognized. The
proposed buyer is currently performing its due diligence.
SEC INVESTIGATION. As previously reported by us, 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.
MERGER WITH CIP(R). On September 1, 2004, through a subsidiary we owned together
with CIP(R), we completed a merger with CIP(R) ("Merger"), an affiliate,
pursuant to a Merger agreement dated June 4, 2004 between the companies. The
Merger provided a liquidation option for CIP(R) shareholders and provided for
the continued growth and enhancement of our investment portfolio. Under the
terms of the Merger, which was approved by the shareholders of both companies at
special meetings of the shareholders of each company held on August 24, 2004,
our subsidiary is the surviving company. The total purchase price for CIP(R) was
$519,477, which was comprised of 17,420,571 shares ($174,206 based on $10 per
share) of our common stock, $140,913 in consideration for CIP(R) shareholders
who redeemed their interests, fair value of debt assumed of $202,186 and
transaction costs of $2,172. Prior to the completion of the Merger, CIP(R)'s
interests in certain real estate assets that did not meet our investment
objectives were sold to WPC.
Under the terms of the Merger agreement, each CIP(R) shareholder had the option
of receiving either 1.09 newly issued shares of our common stock or $10.90 in
cash for each CIP(R) common share that he or she owned as of August 31, 2004.
The exchange ratio for issuing shares was based on a third party valuation of
CIP(R) and pursuant to fairness opinions that each company received from
separate investment banking firms. Shareholders holding 15,982,176 shares of
CIP(R) common stock received 17,420,571 shares of our common stock and
shareholders holding 12,927,812 shares of CIP(R) common stock elected to receive
cash of $140,913 in consideration for redeeming their CIP(R) interests.
We have accounted for the Merger under the purchase method of accounting. The
purchase price has been allocated to the assets acquired and liabilities assumed
based upon their fair values. The assets acquired primarily consist of
commercial real estate assets net leased to single tenants, cash, a subordinated
interest in a mortgage loan securitization, receivables and deposits. The
liabilities assumed primarily consist of mortgage notes payable, accrued
interest, accounts payable, security deposits and amounts due to former CIP(R)
shareholders. The amounts due to former CIP(R) shareholders were paid prior to
September 30, 2004.
(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
lease 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 our equity 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
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CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
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 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 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 RENT. 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 mandatory rental increases on specific dates, or 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 location.
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 investments. 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
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CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
individuals serve on its investment committee and we do not invest in a
transaction unless it is approved by the investment committee.
The following people serve on the investment committee:
- George E. Stoddard, Chairman, 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 plus all 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 performing 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. Currently, the majority of our limited recourse mortgage
obligations bear interest at fixed rates, including a loan which has a fixed
rate as the result of entering into an interest rate swap agreement.
Accordingly, our cash flow should not be adversely affected by increases in
interest rates, which are near historical lows. However, financings on future
acquisitions will likely bear higher rates of interest. 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 help us to limit the exposure of all of our assets to any one
debt obligation. Management believes that the strategy of combining equity and
limited recourse mortgage debt will allow us to meet our short-term and
long-term liquidity needs and will help to diversify our portfolio and,
therefore, reduce concentration of risk in any particular lessee.
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CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
WPC will seek opportunities and consider alternative financing techniques to
finance properties not currently subject to debt, refinance debt, reduce
interest expense or improve our 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 to eleven years after the
proceeds of our public offerings are substantially invested, subject to market
conditions. Pursuant to this intention, the board of directors will consider
whether to list the shares, liquidate or devise an alternative liquidity
strategy. For two prior REITs managed by WPC, listing on NASDAQ was not pursued.
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,
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
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CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
with the environmental provisions of the lease or environmental remediation
relating to the tenant's operations and to 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.
We expect that most of our properties will each be 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 have to find 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
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CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
- 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.
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 against
further 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.
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CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
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.
- 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 of equity investees, for the next five years are
as follows:
2005 - $163
2006 - $0
2007 - $0
2008 - $0
2009 - $114,331
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 in which 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.
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CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
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.
INVESTMENTS IN PROPERTIES OUTSIDE OF THE UNITED STATES SUBJECT US TO FOREIGN
CURRENCY RISKS WHICH MAY IMPACT DISTRIBUTIONS.
We will be subject to foreign currency risk due to potential fluctuations in
exchange rates between foreign currencies and the U.S. dollar. Although we are
not prohibited from doing so, we do not currently intend to engage in direct
hedging activities to mitigate the risks of exchange rate fluctuations. We
attempt to mitigate the risk of currency fluctuation by financing our properties
in the local currency denominations, although there can be no assurance that
this will be effective. As a result, changes in the relation of any such foreign
currency to U.S. dollars will affect our revenues, operating margins and
distributions and may also affect the book value of our assets and the amount of
shareholders' equity. Also, if, in the future, we were to engage in foreign
currency exchange rate hedging activities, any income recognized with respect to
these hedges (as well as any foreign currency gain recognized with respect to
changes in exchange rates) will generally not qualify as eligible income for
purposes of either the 75% gross income test or the 95% gross income test that
we must satisfy annually in order to qualify and maintain our status as a REIT.
Changes in foreign currency exchange rates used to value the REIT's foreign
assets would be considered changes in the value of the REIT's assets, and
therefore, may adversely affect our status as a REIT. Further, keeping bank
accounts in foreign currency which are not considered cash or cash equivalents
may adversely affect our status as 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.
WE WERE INCORPORATED IN FEBRUARY 2001 AND HAVE A LIMITED OPERATING HISTORY.
We did not commence property acquisitions until the beginning of 2002. We can
not guarantee that we will continue to find suitable property investments, or
that all of our tenants will fulfill all of their lease obligations. Our failure
to timely invest the proceeds of our public offerings or to invest in quality
properties could diminish returns to investors.
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.
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CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
Under Statement of Financial Accounting Standard No. 13, "Accounting for
Leases", if the present value of a company's minimum lease payments equal 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 into 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 cause a delay in
investing the remainder of our offering proceeds, and make it more difficult for
us to enter into new leases on terms we find favorable.
OUR SUCCESS WILL BE 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;
- 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;
and
- 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:
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CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
- 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.
A delay in investing funds may adversely affect or cause a delay in our ability
to deliver expected returns to investors and may adversely affect our
performance.
We have not yet identified all of the properties to be purchased with the
proceeds of our two completed "best efforts" public offerings. Therefore, there
could be a substantial delay between the time investors invested in shares and
the time all public offering proceeds are invested. This could cause a
substantial delay in the time it takes for an investment to realize its full
potential return, and could adversely affect an investor's total return.
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 in multiple countries and we may purchase
additional properties located outside the U.S. Foreign real estate investments
involve certain risks not generally associated with investments in the U.S.
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 in 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 a 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.
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
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CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
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 WILL BE BASED ON INFORMATION THAT OUR ADVISOR PROVIDES TO A
THIRD PARTY.
Beginning in 2006, our asset management and performance fees will be 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 19 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.cpa15.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.
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CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
ITEM 2. PROPERTIES.
Set forth below is certain information relating to CPA(R):15's properties
owned as of December 31, 2004.
RENT PER SHARE OF
LESSEE (LEASE OBLIGOR)/ SQUARE SQUARE CURRENT INCREASE LEASE MAXIMUM
LOCATION OWNERSHIP INTEREST FOOTAGE FOOT ANNUAL RENTS(1) FACTOR TERM TERM
- --------------------------------- --------------------- --------- -------- --------------- -------- ---------- ----------
MERCURY PARTNERS, LP (2) 3,779,262 4.91 10,702,139 CPI Apr. 2024 Apr. 2034
78 Properties in 24 States 57.69% interest in a
limited partnership
owning
U-HAUL MOVING PARTNERS INC. (2) 2,035,000 4.91 5,763,231 CPI Apr. 2014 Apr. 2034
--------- ----------
78 Properties in 24 States land and
buildings(10)
Total: 5,814,262 16,465,370
CARREFOUR FRANCE, SAS (2)
Cholet, Ploufragan, Colomiers, 50.375% in a limited 2,551,833 5.95 7,648,641(3,8) INSEE(9) Dec. 2011 Dec. 2011
Crepy en Vallois, Lens, Nimes, liability company
and Thuit Hebert, France owning land
and buildings(10) 388,265 6.05 1,183,310(3) INSEE(9) Nov. 2012 Nov. 2012
--------- ----------
Nimes, France 2,940,098 8,831,951
MARRIOTT INTERNATIONAL, INC.
Albuquerque, NM; Spokane, WA; 47.34% interest in a
Newark, NJ; Las Vegas, NV; real estate
Indianapolis, IN; Louisville, investment trust
KY; Linthicum, MD; Des owning land and 1,115,923 15.97 8,439,236 Stated Feb. 2012 Feb. 2032
Plaines, IL; Orlando, FL (2); buildings(11)
Sacramento, Irvine and San
Diego, CA
UTI HOLDINGS, INC.
Rancho Cucamonga, CA (2) 189,516 10.22 1,936,379 Sept. 2019 Sept. 2039
Glendale Heights, IL (2) 101,194 13.67 1,383,387 Nov. 2012 Nov. 2032
Glendale, Heights, IL 100% 38,143 10.85 413,685 CPI Sept. 2015 Sept. 2035
Upper Uwchlan, PA 160,000 11.42 1,827,363 July 2024 July 2029
Avondale, AZ (2) 279,015 9.48 2,644,951 July 2024 July 2029
--------- ----------
Total: 767,868 8,205,765
STARMARK CAMHOOD, L.L.C. (2)
Tampa and Boca Raton, FL;
Newton, MA; Bloomington (2), 44% interest in a
Brooklyn Center, Bumsville, limited liability
Eden Prairie (2), Fridley, company owning land 1,652,151 11.06 8,039,855 CPI Feb. 2023 Feb. 2053
Minnetonka and St. Louis Park, and buildings(10)
MN; Albuquerque, NM (4)
THALES, S.A. (2)
Aubagne, Conflans, 65% interest in a
Ymare, Laval, France limited liability
company owning land 1,209,129 4.48 3,520,984(3) INSEE(4) Dec. 2011 Dec. 2020
and buildings(10)
Guyancourt, France 410,483 13.74 3,666,024(3) INSEE(4) Dec. 2010 Dec. 2019
--------- ----------
1,619,612 7,187,008
SFX ENTERTAINMENT, INC.
(CLEAR CHANNEL COMMUNICATIONS,
INC.)(2)
New York, NY 60% interest in a
limited partnership
owning land and 227,685 47.94 6,548,587 Stated Sep. 2020 Sep. 2040
buildings(10)
TRUE VALUE COMPANY (2)
Kingman, AZ; Springfield, OR; 50% interest in three
Fogelsville, PA; Jonesboro, limited partnerships
GA; Kansas City, MO; Woodland, owning land and 3,628,156 3.36 6,091,537 Stated Dec. 2022 Nov. 2042
CA; Corsicana, TX buldings(10)
-15-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
RENT PER SHARE OF
LESSEE (LEASE OBLIGOR)/ SQUARE SQUARE CURRENT INCREASE LEASE MAXIMUM
LOCATION OWNERSHIP INTEREST FOOTAGE FOOT ANNUAL RENTS(1) FACTOR TERM TERM
- --------------------------------- --------------------- --------- -------- --------------- -------- ---------- ----------
FOSTER WHEELER REALTY SERVICES,
INC. (FOSTER WHEELER LTD.,
FOSTER WHEELER INC. AND FOSTER
WHEELER INTERNATIONAL
HOLDINGS, INC.) (2)
Clinton, NJ 100% 292,000 17.91 5,230,850 CPI Aug. 2022 Aug. 2042
TIETOENATOR, PLC (2)
Espoo, Finland 60% interest in a
limited liability
company owning land 466,483 16.52 4,623,495(3) CPI Dec. 2016 Dec. 2031
and buildings(10)
LIFETIME FITNESS, INC. (2)
Rochester Hills, MI 100% 278,982 15.22 4,247,100 Stated Oct. 2023 Oct. 2053
LILLIAN VERNON CORP. (2)
Virginia Beach, VA 100% 827,000 4.65 3,848,000 CPI Jul. 2023 Jul. 2043
OMNICOM GROUP, INC. (2)
Playa Vista, CA 100% 120,000 29.54 3,544,533 CPI Sept. 2018 Sept. 2038
MEDICA-FRANCE, SA (2)
Paris, Rueil Malmaison, 65% interest in a
Sarcelles, Poissy, Chatou, and limited liability
Rosny sous Bois, France company owning land 336,889 16.06 3,516,288(3) INSEE(4) Jun. 2010 Jun. 2010
and buildings(10)
ADVANCED MICRO DEVICES, INC. (2)
Sunnyvale, CA 33.33% interest in a
limited liability
company owning land 362,000 27.01 3,258,938 CPI Dec. 2018 Dec. 2038
and buildings(10)
BERRY PLASTICS CORP. (2)
Alsip-Main and Alsip-North, 100% 862,862 3.76 3,243,981 CPI Dec. 2023 Dec. 2043
IL; Geddes, NY; Tolleson, AZ
BEST BUY CO, INC. (2)
Fort Collins, CO; Matteson and
Schaumburg, IL; North
Attleboror, MA; Nashua, NH; 63% interest in a
Albuquerque, NM; Arlington, general partnership
Beaumont, Dallas, Fort Worth owning land and 512,281 9.94 3,206,467 Stated Apr. 2018 Apr. 2038
and Houston, TX; Virginia buildings(10)
Beach, VA
EDS CUSTOMER RELATIONSHIP
MGMT. (2)
Louisville, CO 100% 403,871 7.87 3,179,732 CPI Dec. 2014 Dec. 2034
QUALCERAM SHIRES LTD (2)
Dublin, Ireland; Bradford,
Belfast, Darwen, 100% 820,889 3.85 3,158,372(3) Stated Apr. 2028 Apr. 2028
Stoke-on-Trent and Rochdale,
United Kingdom
DICK'S SPORTING GOODS, INC. (2)
Buffalo, NY (6) 100% 80,312 8.07 648,359 CPI Jan. 2024 Jan. 2049
Greenwood, IN (6) 100% 84,482 7.59 641,641 CPI Jan. 2024 Jan. 2054
Greenwood, IN 100% 76,129 10.29 783,094 CPI Jan. 2025 Jan. 2055
-16-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
RENT PER SHARE OF
LESSEE (LEASE OBLIGOR)/ SQUARE SQUARE CURRENT INCREASE LEASE MAXIMUM
LOCATION OWNERSHIP INTEREST FOOTAGE FOOT ANNUAL RENTS(1) FACTOR TERM TERM
- --------------------------------- --------------------- ------- -------- --------------- -------- ---------- ----------
Freehold, NJ(6) 100% 100,047 9.94 994,500 CPI Jan. 2026 Jan. 2055
------- ---------
Total: 340,970 3,067,594
DANKA OFFICE IMAGING COMPANY (2)
St. Petersburg, FL(3) 100% 337,727 9.06 3,060,000 CPI Jul. 2018 Jul. 2038
OVERLAND STORAGE, INC.(2)
San Diego, CA 100% 158,585 17.36 2,752,349 Stated Feb. 2014 Feb. 2019
INSULATED STRUCTURES INVESTMENTS
LIMITED(2)
Birmingham, United Kingdom 100% 206,000 8.92 1,837,777(3) Stated Oct. 2033 Nov. 2033
Brierley Hill, United Kingdom 100% 120,646 7.18 865,943(3) Stated Oct. 2033 Nov. 2033
------- ---------
Total: 326,646 2,703,720
SHAKLEE CORPORATION (SHAKLEE
JAPAN KABUSHIKI KAISHA)(2)
Pleasanton, CA 100% 123,750 21.65 2,679,000 Stated May 2024 May 2038
MEADOWBROOK MEAT COMPANY
(FAST FOOD MERCHANDISERS, INC.
AND PROFICIENT FOOD
COMPANY, INC.)(2)
Orlando, FL; Macon, GA; Rocky 100% 575,858 4.62 2,660,000 Stated Jan. 2018 Jan. 2038
Mount, NC (2); Lewisville, TX
PRECISE TECHNOLOGY, INC.(2)
Excelsior Springs, MO;
St Petersburg, FL; West
Lafayette, IN; N. Versailles
Twp, PA;
Buffalo Grove, IL 100% 616,031 4.04 2,486,392 CPI Oct. 2023 Oct. 2043
STARMARK CAMHOOD II, L.L.C.(2)
Atlanta, GA; Bel Air, MD 100% 186,000 13.14 2,443,505 CPI Nov. 2023 Nov. 2053
24 HOUR FITNESS USA, INC.(2)
Englewood, CO 49,248 18.56 914,028 Stated Apr. 2022 Apr. 2032
Memphis, TN 100% 43,311 19.13 828,755 Stated July 2013 July 2037
Bedford, TX 46,658 14.02 654,325 Stated Oct. 2019 Oct. 2039
------- ---------
Total: 139,217 2,397,108
TOWER AUTOMOTIVE, INC.(2)
Auburn, IN; Bluffton, OH;
Milan, TN 100% 844,166 2.79 2,355,875 CPI Apr. 2020 Apr. 2040
PETSMART, INC.(2)
Phoenix, AZ; Westlake Village,
CA; Boca Raton, Lake Mary,
Tallahassee and Plantation,
FL; Evanston, IL; Braintree, 30% interest in two
MA; Oxon Hill, MD; Flint, limited partnerships
MI; Fridley, MN; Dallas and owning land and
Southlake, TX buildings(10) 946,177 7.68 2,178,825 Stated Nov. 2021 Nov. 2041
MEDIMEDIA USA, INC.(2)
Lower Makefield Twp., PA 100% 107,000 19.73 2,111,376 Stated Dec. 2017 Dec. 2037
-17-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
RENT PER SHARE OF
LESSEE (LEASE OBLIGOR)/ SQUARE SQUARE CURRENT INCREASE LEASE MAXIMUM
LOCATION OWNERSHIP INTEREST FOOTAGE FOOT ANNUAL RENTS(1) FACTOR TERM TERM
- --------------------------------- --------------------- ------- -------- --------------- -------- ---------- ----------
HOLOGIC, INC.(2)
Danbury, CT; Bedford MA 64% interest in a
jointly controlled
tenancy-in-common(10) 269,042 11.73 2,019,802 CPI Aug. 2022 Aug. 2042
SHOPRITE SUPERMARKETS, INC.(2)
Greenport, NY 100% 59,772 10.65 636,515 Stated Dec. 2017 Dec. 2037
Ellenville and Warwick, NY 55% interest in a
limited liability
company owning land
and buildings(10) 136,818 14.81 1,348,177 Stated Oct. 2024 Oct. 2044
------- ---------
Total: 196,590 1,984,692
GARDEN RIDGE, L.P.(2)
Round Rock, TX 100% 152,500 4.94 752,724 Dec. 2013 Dec. 2038
Oklahoma City, OK 100% 141,585 6.36 901,017 CPI Nov. 2015 Nov. 2035
------- ---------
Total: 294,085 1,653,741
LEARNING CARE GROUP, INC. (F/K/A
CHILDTIME CHILDCARE, INC.)(2)
Alhambra, Chino, Garden Grove
and Tustin, CA; Chandler,
and Tuscon, AZ; Lewisville, 66.07% interest in a
Carrollton and Sterling limited partnership 83,912 16.59 919,761 CPI Jan 2016 Jan. 2041
Cuncanville, TX; Westland, owning land and
Heights and Westland, MI buildings(10)
Newport News, Centreville,
Manassas and Century Oaks,
VA; Naperville, IL 100% 37,360 18.65 696,838 CPI Aug. 2015 Aug. 2025
------- ---------
Total: 121,272 1,616,599
AMERICAN PAD & PAPER, L.L.C.(2)
Holyoke and Westfield, MA; 100% 923,249 1.71 1,578,504 CPI Sept. 2023 Sept. 2043
Matoon, IL; Morristown, TN
GESTAMP ALABAMA, INC. (F/K/A
OXFORD AUTOMOTIVE)(2, 6)
McCalla, AL 100% 390,000 4.04 1,575,000 CPI Dec. 2018 Dec. 2038
GRANDE COMMUNICATIONS
NETWORKS, INC.(2)
Corpus Christi, Odessa,
San Marcos and Waco, TX 100% 134,009 11.64 1,559,408 CPI Aug. 2023 Aug. 2043
BE AEROSPACE, INC.(2)
Miami, FL 100% 188,065 8.01 1,506,826 Stated Sep. 2017 Sep. 2037
DEL MONTE CORP.(2)
Mendota, IL; Yakima, WA;
Toppenish, WA; Plover, WI 50%(7) 735,756 4.02 1,477,714 CPI June 2016 June 2046
BARNES & NOBLE, INC.(2)
Braintree, MA 100% 19,661 35.14 690,845 Stated Feb. 2014 Feb. 2024
Farmington, CT 21,600 36.36 785,400 Stated Feb. 2013 Feb. 2028
------- ---------
Total: 41,261 1,476,245
MERIT MEDICAL SYSTEMS, INC.(2)
South Jordan, UT 100% 172,925 8.47 1,465,404 CPI Jan. 2020 Jan. 2025
WINCUP HOLDINGS, INC. (F/K/A
POLAR PLASTICS)(2)
-18-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
RENT PER SHARE OF
LESSEE (LEASE OBLIGOR)/ SQUARE SQUARE CURRENT INCREASE LEASE MAXIMUM
LOCATION OWNERSHIP INTEREST FOOTAGE FOOT ANNUAL RENTS(1) FACTOR TERM TERM
- ---------------------------------------- -------------------- ------- -------- --------------- -------- --------- ---------
Mooresville, NC 100% 384,600 3.80 1,460,200 CPI Mar. 2023 Mar. 2043
COMPUCOM SYSTEMS, INC.(2)
Dallas, TX 33.33% interest in a
limited liability
company owning land
and buildings(10) 255,378 16.54 1,408,043 CPI Mar. 2019 Mar. 2029
RACAL INSTRUMENTS, INC. (RIG LIMITED)(2)
Irvine, CA 100% 98,631 13.94 1,374,520 Stated May 2022 May 2052
KERR GROUP, INC.(2)
Bowling Green, KY; Jackson, TN 100% 394,130 3.48 1,370,521 Stated Aug. 2021 Aug. 2051
ELECTRONIC ASSEMBLY CORP.(2)
Neenah, WI 100% 179,250 7.58 1,357,906 CPI Aug. 2014 Aug. 2044
INTEGRACOLOR, LTD.(2)
Mesquite, TX (3) 100% 358,987 3.68 1,320,292 CPI Jun. 2022 Jun. 2042
PEMSTAR INC.(2)
Rochester, MN 100% 260,287 5.01 1,303,560 Stated Feb. 2023 Mar. 2043
RAVE MOTION PICTURES BATON ROUGE, L.L.C.
(RAVE MOTION PICTURES L.L.C.)(2)
Baton Rouge, LA 100% 73,292 17.54 1,285,607 CPI Aug. 2023 Aug. 2043
ADVANTIS TECHNOLOGIES, INC.
(ROCKWOOD SPECIALTIES GROUP)(2)
Alpharetta, GA 100% 191,975 6.64 1,275,000 CPI Jun. 2017 Jun. 2037
AFFINA CORPORATION
Peoria, IL 100% 110,581 11.34 1,254,000 CPI Feb. 2024 Feb. 2044
INFORMATION RESOURCES, INC.(2)
Chicago, IL 66.67% interest in a
limited partnership
owning land and
buildings(10) 252,000 19.57 1,205,600 CPI Oct. 2010 Oct. 2015
REGIE DES BATIMENTS(2)
Mons, Belgium 100% 122,335 8.87 1,084,510(3) CPI Dec 2021 Jan. 2021
SPORTRACK LLC(2)
Shelby Township and Port Huron, MI 100% 294,883 3.54 1,045,000 CPI Nov. 2023 Nov. 2033
PSC SCANNING, INC.(2)
Eugene, OR 100% 110,665 8.38 927,407 CPI May 2014 May 2014
CUSTOM FOOD PRODUCTS, INC.(2)
-19-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
RENT PER SHARE OF
LESSEE (LEASE OBLIGOR)/ SQUARE SQUARE CURRENT INCREASE LEASE MAXIMUM
LOCATION OWNERSHIP INTEREST FOOTAGE FOOT ANNUAL RENTS(1) FACTOR TERM TERM
- ---------------------------------------- -------------------- ------- -------- --------------- ---------- --------- ---------
Owingsville, KY 100% 37,094 24.73 917,368 CPI June 2020 June 2035
DETROIT DIESEL CORP.
Hollywood and Orlando, FL 100% 81,318 11.17 908,037 CPI Dec. 2019 Dec. 2039
ACTUANT CORPORATION(2)
Kahl am Main, Germany 50% interest in a
limited partnership
owning land and
buildings(10) 305,692 5.83 891,473(3) German CPI Jan. 2021 Jan. 2031
HUMCO HOLDING GROUP, INC.(2)
Orem, UT 100% 40,528 9.29 376,400 CPI Dec. 2016 Dec. 2016
Texarkana, TX 100% 124,037 4.02 498,949 CPI Feb. 2016 Feb. 2016
------- -------
Total: 164,565 875,349
TRENDS CLOTHING CORP.(2)
Miami, FL 100% 247,264 3.47 858,642 CPI Jun. 2017 Jun. 2037
PLUMBMASTER, INC.(2)
Oceanside, CA; Concordville, PA 100% 161,458 5.30 855,400 Stated Jan. 2024 Jan. 2038
WORLD AIRWAYS, INC.(2)
Peachtree City, GA 100% 59,473 14.34 852,600 CPI Mar. 2019 Mar. 2039
NEW WAVE(2)
Rotherham, UK 100% 120,000 7.06 847,039(3) Stated Dec. 2019 Dec. 2019
WAREHOUSE ASSOCIATES, INC.(2)
Lima, OH 100% 273,949 3.02 826,842 CPI Mar. 2016 Mar. 2041
WORTHINGTON PRECISION METALS, INC. (WPM
HOLDING CORP.)(2)
Mentor, OH; Franklin, TN 100% 245,815 3.20 787,500 CPI May 2024 May 2044
ISA WHOLESALE PLC(2)
Little Germany, UK 100% 41,432 18.37 761,007(3) CPI May 2014 May 2014
SUPERIOR TELECOMMUNICATIONS, INC.(2)
Brownwood, TX 100% 315,252 2.12 668,758 CPI Dec. 2013 Dec. 2038
QUALSERV CORP.
Fort Smith, AR 100% 440,159 1.51 666,500 CPI Jul. 2018 Jul. 2032
WNA AMERICAN PLASTIC INDUSTRIES, INC.
Chattanooga, TN 100% 238,585 2.67 637,500 CPI Mar. 2022 Mar. 2042
BUILDERS FIRSTSOURCE - ATLANTIC GROUP,
INC. AND BUILDERS FIRSTSOURCE - OHIO
VALLEY, INC.
(BUILDERS FIRSTSOURCE, INC.)(2)
Norcross, GA; Elkwood, VA; 40% interest in a
Cincinnati, OH limited partnership
owning land and
buldings(10) 389,261 3.70 575,859 CPI Dec. 2017 Dec. 2037
-20-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
RENT PER SHARE OF
SQUARE SQUARE CURRENT INCREASE LEASE MAXIMUM
LESSEE (LEASE OBLIGOR)/LOCATION OWNERSHIP INTEREST FOOTAGE FOOT ANNUAL RENTS(1) FACTOR TERM TERM
- ------------------------------- ------------------- ------- -------- --------------- -------- --------- ----------
SSG PRECISION OPTRONICS, INC.
(TINSLEY LABORATORIES, INC.)
Wilmington, MA 100% 37,796 14.17 535,407 CPI Nov. 2022 Nov. 2036
SOCIETE HOTELIERE TOURISME GRAND NOBLE (2)
Toulouse, France 65% interest in a
limited liability
company owning land
and buildings(10) 69,300 11.15 502,247(3) CPI July 2013 July 2013
GART SPORTS COMPANY
(F/K/A OSHMAN'S SPORTING GOODS)
Plano, TX 100% 47,054 10.17 478,752 Stated Jan. 2013 Jan. 2033
THE KROGER CO.
Conway and Little Rock, AR 100% 78,075 6.10 475,975 CPI Feb. 2017 Feb. 2037
THE UPPER DECK CO. (2)
Carlsbad, CA 50% interest in a
limited liability
company owning land
and buildings(10) 48,111 9.85 237,002 CPI Dec. 2020 Dec. 2040
COGNITIVE SOLUTIONS, INC. (2)
Golden, Co 100% 42,628 4.84 206,320 Stated Oct. 2014 Sept. 2020
Vacant 107,137
-------
Total: 149,765
TULSA, OK (2), (9)
Vacant 100% 757,784
ORIENTAL TRADING COMPANY, INC.(5)
La Vista, NE 100% 600,000 CPI June 2025 June 2045
1. Share of Current Annual Rents is the product of the Square Footage, the
Rent per Square Foot, and the Ownership Interest percentage.
2. This property is encumbered by a mortgage note payable.
3. Based on exchange rates at December 31, 2004.
4. INSEE construction index, an index published quarterly by the French
Government.
5. Under construction on build-to-suit basis.
6. Tenant name change during the year due to an acquisition, merger or
assignment.
7. Mendota, Plover and Toppenish properties are owned through an interest in a
limited liability company and the Yakima property is owned as a
tenant-in-common.
8. Includes percentage of sales rents.
9. Excludes tenant that leases less than 1% of total square footage on
month-to-month basis.
10. Remaining interest in this property is owned by an affiliate(s).
11. Remaining interest in this property is owned by a non-affiliated third
party.
-21-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
ITEM 3. 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 our shares, Carey
Financial and its retail distributors sold certain securities without an
effective registration statement. Specifically, the staff alleged that the
delivery of investor funds into escrow after completion of the first phase of
the offering (the "Phase I Offering"), completed in the fourth quarter of 2002
but before a registration statement with respect to the second phase of the
offering (the "Phase II Offering") became effective in the first quarter of
2003, constituted sales of securities in violation of Section 5 of the
Securities Act of 1933. In addition, in the March 2004 letter the staff raised
issues about whether actions taken in connection with the Phase II offering were
adequately disclosed to investors in the Phase I Offering. In the event the SEC
pursues these allegations, or if our affected investors bring a similar private
action, we 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 us, Carey Financial would
be required to return to us the commissions paid by us 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. There can be no assurance that the effect, if
any, would not be material.
The staff also alleged in the March 2004 letter that the prospectus delivered
with respect to the Phase I Offering contained material misrepresentations and
omissions in violation of Section 17 of the Securities Act of 1933 and Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder in that
the prospectus failed to disclose that (i) the proceeds of the Phase I Offering
would be used to advance commissions and expenses payable with respect to the
Phase II Offering, and (ii) the payment of dividends to Phase II shareholders
whose funds had been held in escrow pending effectiveness of the registration
statement resulted in significantly higher annualized rates of return than were
being earned by Phase I shareholders. Carey Financial has reimbursed us for the
interest cost of advancing the commissions that were later recovered by us from
the Phase II Offering proceeds.
In June 2004, the Division of Enforcement of the SEC ("Enforcement Staff")
commenced an investigation into compliance with the registration requirements of
the Securities Act of 1933 in connection with the public offerings of our shares
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 us 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, CPA(R): 14, and us), 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.
-22-
CORPORATE PROPERTY ASSOCIATES 15 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 40 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 15 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 risk and currency exchange rates.
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.
We own marketable securities through 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 interests in CCMT had a fair value of
$12,150. At December 31, 2004, we own $20,000 of auction-rate securities which
are long-term securities that provide a resetting of their interest rate at
intervals (typically ranging between weekly and semi-annually) and provide a
market mechanism which allows a holder to sell at the interest reset date.
Because of the interest reset, auction-rate securities are priced and traded as
short-term investments. There is no assurance that an auction-rate security will
be sold at par nor can sellers force issuers to redeem if sell orders exceed buy
orders at an interest rate reset date.
Substantially all of our long-term debt of $1,309,126 either bears interest at
fixed rates or is hedged through the use of interest rate swap instruments that
convert variable rate debt service obligations to a fixed rate. The fair value
of these instruments is affected by changes in 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 5.09% to 10.00%. The interest rate
on the variable rate debt as of December 31, 2004 was 3.624%.
2005 2006 2007 2008 2009 Thereafter Total Fair Value
------- ------- ------- ------- ------- ---------- ---------- ----------
Fixed rate debt $23,630 $25,978 $28,557 $31,054 $69,736 $1,119,335 $1,298,290 $1,302,308
Weighted average
interest rate 6.22% 6.19% 6.17% 6.15% 6.76% 6.23%
Variable rate debt $ 234 $ 267 $ 334 $ 334 $ 334 $ 9,333 $ 10,836 $ 10,836
-23-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
Annual interest expense from variable rate debt would increase or decrease by
approximately $108 for each change of 1% in annual interest rates. We have an
interest rate swap contract with a notional amount of $23,646 at December 31,
2004 (based on the exchange rate at December 31, 2004) on a variable rate
obligation with a balance at December 31, 2004 of $23,646 which is therefore not
affected by changes in interest rates and which is included in the fixed rate
debt amount in the above table. A change in interest rates of 1% would impact
the fair value of our fixed rate debt at December 31, 2004 by approximately
$50,351.
FOREIGN CURRENCY EXCHANGE RATE RISK
We have foreign operations in France, Germany, Ireland, Belgium, Finland and the
United Kingdom 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 both the Euro and the Pound we are a net receiver of
the foreign currency (we receive more cash then we pay out) and therefore we
benefit from a weaker U.S. dollar and are adversely affected by a stronger U.S.
dollar relative to the Euro and the Pound. Realized and unrealized gains from
foreign currency transactions totaled $5,516 in 2004.
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. We have either obtained limited recourse mortgage financing at a
fixed rate of interest in the local currency or entered into interest rate swap
contracts which effectively convert variable rate debt obligations to a fixed
interest rate. To the extent that currency fluctuations affect rental revenues
as translated to dollars, the change in debt service, as translated to dollars,
will partially offset the fluctuations in revenue, and, to some extent mitigate
the risk from changes in foreign currency 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) $37,039 $37,039 $37,039 $37,039 $37,039 $122,230 $307,425
Interest income from direct
financing leases (1) 5,375 5,427 5,480 5,593 5,875 157,718 185,468
Scheduled principal payments for the mortgage notes payable during each of the
next five years following December 31, 2004 and thereafter are as follows:
2005 2006 2007 2008 2009 Thereafter Total
------ ------ ------ ------- ------- ---------- --------
Fixed rate debt (1) $7,407 $8,636 $9,836 $11,189 $12,885 $360,773 $410,726
Variable rate debt (1) 234 267 334 334 334 9,333 10,836
(1) Based on December 31, 2004 exchange rate. The 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 16 to 39 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 Statements of Shareholders' Equity for the period from 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
-24-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
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.
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.
-25-
CORPORATE PROPERTY ASSOCIATES 15 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 the 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 the our fiscal
year, and is hereby incorporated by reference.
-26-
CORPORATE PROPERTY ASSOCIATES 15 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 at December 31, 2004 and 2003.
Consolidated Statements of Income for the years ended December 31, 2004, 2003
and 2002.
Consolidated Statements 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 16 to 39 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 37 to 42 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.
-27-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
(a) 4. 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 Incorporation of Registrant Exhibit 3.1 to Registration Statement
(Form S-11) No. 333-58854
3.2 Amended and Restated Bylaws of Registrant Exhibit 3.2 to Amendment No. 1 to
Registration Statement (Form S-11/A) No.
333-100525 dated May 1, 2003
4.1 2001 Dividend Reinvestment and Stock Exhibit 4.1 to Amendment No. 1 to
Purchase Plan of Registrant Registration Statement (Form S-11/A) No.
333-58854 dated November 1, 2001
10.1 Form of Sales Agency Agreement Exhibit 10.1 to Amendment No. 1 to
Registration Statement (Form S-11/A) No.
333-58854 dated November 1, 2001
10.2 Form of Selected Dealer Agreement Exhibit 10.1 to Registration Statement
(Form S-11) No. 333-100525
10.2(a) Form of Selected Dealer Agreement Exhibit 10.2 to Amendment No. 1 to
Registration Statement (Form S-11/A) No.
333-58854 dated November 1, 2001
10.2(6) Form of Escrow Agreement Exhibit 10.2 to Registration Statement
(Form S-11) No. 333-100525
10.3 Form of Investment Advisor Agreement Exhibit 10.3 to Registration Statement
(Form S-11) No. 333-100525
10.4 Sales Agency Agreement Exhibit 10.4 to Registration Statement
(Form S-11) No. 333-100525
-28-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
10.5 Form of Escrow Agreement Exhibit 10.5 to Amendment No. 1 to
Registration Statement (Form S-11/A) No.
333-58854 dated November 1, 2001
10.5(a) Advisory Agreement Exhibit 10.5 to Registration Statement
(Form S-11) No. 333-100525
10.6 Form of Selected Investment Adviser Exhibit 10.6 to Amendment No. 1 to
Agreement Registration Statement (Form S-11/A) No.
333-58854 dated November 1, 2001
10.6(a) Wholesaling Agreement Exhibit 10.6 to Registration Statement
(Form S-11) No. 333-100525
10.7 Amended and Restated Limited Partnership Exhibit 10.7 to Amendment No. 1 to
Agreement of Goldfish (DE) LP Registration Statement (Form S-11/A) No.
333-100525 dated November 21, 2002
10.8 Agreement of DE Limited Partnership of Exhibit 10.8 to Amendment No. 1 to
Labrador (AZ) LP Registration Statement (Form S-11/A) No.
333-100525 dated November 21, 2002
10.9 Amended and Restated Wholesaling Exhibit 10.9 to Post-Effective Amendment
Agreement No. 2 to Registration Statement (Form
S-11/A) No. 333-58854 dated April 30, 2002
10.9(a) Agreement of DE Limited Partnership of Exhibit 10.9 to Amendment No. 1 to
BFS (DE) LP Registration Statement (Form S-11/A) No.
333-100525 dated November 21, 2002
10.10 Lease Agreement by and between Grocery Exhibit 10.10 to Amendment No. 2 to
(OK) QRS 15-5, Inc., a Delaware Registration Statement (Form S-11/A) No.
corporation, as Landlord and Fleming 333-100525 dated December 18, 2002
Companies, Inc., an Oklahoma corporation,
as Tenant
10.11 Lease Agreement by and between Module Exhibit 10.11 to Amendment No. 2 to
(DE) Limited Partnership, a Delaware Registration Statement (Form S-11/A) No.
limited partnership, as Landlord and 333-100525 dated December 18, 2002
Tower Automotive Products Company, Inc.,
a Delaware corporation, and Tower
Automotive Tool LLC, a Michigan limited
liability company, collectively as Tenant
-29-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
10.12 Lease Agreement by and between Chassis Exhibit 10.12 to Amendment No. 2 to
(DE) Limited Partnership, a Delaware Registration Statement (Form S-11/A) No.
limited partnership, as Landlord and 333-100525 dated December 18, 2002
Tower Automotive Products Company, Inc.,
a Delaware corporation, and Tower
Automotive Tool LLC, a Michigan limited
liability company, collectively as Tenant
10.13 Lease Agreement by and between Energy Exhibit 10.13 to Amendment No. 2 to
(NJ) QRS 15-10, Inc., a Delaware Registration Statement (Form S-11/A) No.
corporation, as Landlord and Foster 333-100525 dated December 18, 2002
Wheeler Realty Services, Inc., a Delaware
corporation, as Tenant
10.14 Lease between Massachusetts Mutual Life Exhibit 10.14 to Amendment No. 2 to
Insurance Company, Landlord and SFX Registration Statement (Form S-11/A) No.
Entertainment, Inc., Tenant as assumed by 333-100525 dated December 18, 2002
Clear (NY) LP
10.15 Leasehold Mortgage and Security Agreement Exhibit 10.15 to Amendment No. 3 to
between ENERGY (NJ) QRS 15-10, Inc., as Registration Statement (Form S-11/A) No.
mortgagor, and Morgan Stanley Dean Witter 333-100525 dated January 15, 2003
Mortgage Capital, Inc., as mortgagee,
dated as of August 16, 2002, with respect
to the property leased to Foster Wheeler
Realty Services, Inc. in Clinton,
New Jersey
10.16 Mortgage and Security Agreement between Exhibit 10.16 to Amendment No. 3 to
CLEAR (NY) L.P., as mortgagor, and Lehman Registration Statement (Form S-11/A) No.
Brothers Bank, FSB, as mortgagee, dated 333-100525 dated January 15, 2003
as of December 12, 2002, with respect to
the property leased to SFX Entertainment,
Inc. in New York, New York
10.17 Mortgage and Security Agreement between Exhibit 10.17 to Amendment No. 3 to
GROCERY (OK) QRS 15-5, Inc., as Registration Statement (Form S-11/A) No.
mortgagor, and Morgan Stanley Dean Witter 333-100525 dated January 15, 2003
Mortgage Capital, Inc., as mortgagee,
dated as of June 28, 2002, with respect
to the property leased to Fleming
Companies, Inc. in Tulsa, Oklahoma
10.18 Mortgage and Security Agreement between Exhibit 10.18 to Amendment No. 3 to
GOLDFISH (DE) LP, as mortgagor and Morgan Registration Statement (Form S-11/A) No.
Stanley Bank, as mortgagee, dated as of 333-100525 dated January 15, 2003
November 28, 2002, with respect to the
property leased to PETsMART, Inc. in
Fridley, Minnesota
10.19 Deed of Trust and Security Agreement Exhibit 10.19 to Amendment No. 3 to
among LABRADOR (AZ) LP, as grantor, the Registration Statement (Form S-11/A) No.
trustee of such trust, and Morgan Stanley 333-100525 dated January 15, 2003
Bank, as beneficiary, dated as of
November 28, 2002, with respect to the
property leased to PETsMART, Inc. in
Phoenix, Arizona
10.20 Mortgage between GOLDFISH (DE) LP, as Exhibit 10.20 to Amendment No. 3 to
mortgagor and Morgan Stanley Bank, as Registration Statement (Form S-11/A) No.
mortgagee, dated as of November 28, 2002, 333-100525 dated January 15, 2003
with respect to the property leased to
PETsMART, Inc. in Flint, Michigan
-30-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
10.21 Mortgage and Security Agreement between Exhibit 10.21 to Amendment No. 3 to
GOLDFISH (DE) LP, as mortgagor and Morgan Registration Statement (Form S-11/A) No.
Stanley Bank, as mortgagee, dated as of 333-100525 dated January 15, 2003
November 28, 2002, with respect to the
property leased to PETsMART, Inc. in
Tallahassee, Florida
10.22 Mortgage and Security Agreement between Exhibit 10.22 to Amendment No. 3 to
GOLDFISH (DE) LP, as mortgagor and Morgan Registration Statement (Form S-11/A) No.
Stanley Bank, as mortgagee, dated as of 333-100525 dated January 15, 2003
November 28, 2002, with respect to the
property leased to PETsMART, Inc. in
Sawgrass, Florida
10.23 Mortgage and Security Agreement between Exhibit 10.23 to Amendment No. 3 to
GOLDFISH (DE) LP, as mortgagor and Morgan Registration Statement (Form S-11/A) No.
Stanley Bank, as mortgagee, dated as of 333-100525 dated January 15, 2003
November 28, 2002, with respect to the
property leased to PETsMART, Inc. in Lake
Mary, Florida
10.24 Mortgage and Security Agreement between Exhibit 10.24 to Amendment No. 3 to
GOLDFISH (DE) LP, as mortgagor and Morgan Registration Statement (Form S-11/A) No.
Stanley Bank, as mortgagee, dated as of 333-100525 dated January 15, 2003
November 28, 2002, with respect to the
property leased to PETsMART, Inc. in Boca
Raton, Florida
10.25 Mortgage and Security Agreement between Exhibit 10.25 to Amendment No. 3 to
GOLDFISH (DE) LP, as mortgagor and Morgan Registration Statement (Form S-11/A) No.
Stanley Bank, as mortgagee, dated as of 333-100525 dated January 15, 2003
November 28, 2002, with respect to the
property leased to PETsMART, Inc. in
Evanston, Illinois
10.26 Mortgage and Security Agreement between Exhibit 10.26 to Amendment No. 3 to
GOLDFISH (DE) LP, as mortgagor and Morgan Registration Statement (Form S-11/A) No.
Stanley Bank, as mortgagee, dated as of 333-100525 dated January 15, 2003
November 28, 2002, with respect to the
property leased to PETsMART, Inc. in
Braintree, Massachusetts
10.27 Deed of Trust and Security Agreement Exhibit 10.27 to Amendment No. 3 to
among GOLDFISH (DE) LP, as grantor, the Registration Statement (Form S-11/A) No.
trustee of such trust, and Morgan Stanley 333-100525 dated January 15, 2003
Bank, as beneficiary, dated as of
November 28, 2002, with respect to the
property leased to PETsMART, Inc. in Oxon
Hill, Maryland
10.28 Deed of Trust and Security Agreement Exhibit 10.28 to Amendment No. 3 to
among GOLDFISH (DE) LP, as grantor, the Registration Statement (Form S-11/A) No.
trustee of such trust, and Morgan Stanley 333-100525 dated January 15, 2003
Bank, as beneficiary, dated as of
November 28, 2002, with respect to the
property leased to PETsMART, Inc. in
Dallas, Texas
10.29 Deed of Trust and Security Agreement Exhibit 10.29 to Amendment No. 3 to
among GOLDFISH (DE) LP, as grantor, the Registration Statement (Form S-11/A) No.
trustee of such trust, and Morgan Stanley 333-100525 dated January 15, 2003
Bank, as beneficiary, dated as of
November 28, 2002, with respect to the
property leased to PETsMART, Inc. in
Southlake, Texas
-31-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
10.30 Deed of Trust, Assignment of Leases and Exhibit 10.30 to Amendment No. 3 to
Rents, Security Agreement and Fixture Registration Statement (Form S-11/A) No.
Filing among GOLDFISH (DE) LP, as 333-100525 dated January 15, 2003
trustor, the trustee of such trust, and
Morgan Stanley Bank, as beneficiary,
dated as of November 28, 2002, with
respect to the property leased to
PETsMART, Inc. in Westlake Village,
California
10.31 Lease between BOLT (DE) LIMITED Exhibit 10.31 to Amendment No. 3 to
PARTNERSHIP and True Value Company dated Registration Statement (Form S-11/A) No.
December 26, 2002 333-100525 dated January 15, 2003
10.32 Lease between HAMMER (DE) LIMITED Exhibit 10.32 to Amendment No. 3 to
PARTNERSHIP and True Value Company dated Registration Statement (Form S-11/A) No.
December 26, 2002 333-100525 dated January 15, 2003
10.33 Lease between WRENCH (DE) LIMITED Exhibit 10.33 to Amendment No. 3 to
PARTNERSHIP and True Value Company dated Registration Statement (Form S-11/A) No.
December 26, 2002 333-100525 dated January 15, 2003
10.34 Summary of Lease Agreement dated December Exhibit 10.34 to Amendment No. 3 to
27, 2002 between Societe Logidis and Registration Statement (Form S-11/A) No.
Societe SCI Carlog. (Original document is 333-100525 dated January 15, 2003
in French only)
10.35 Summary of Lease Agreement dated December Exhibit 10.35 to Amendment No. 3 to
27, 2002 between Societe Logidis and Registration Statement (Form S-11/A) No.
Societe SCI Carlog. (Original document is 333-100525 dated January 15, 2003
in French only)
10.36 Summary of Lease Agreement dated December Exhibit 10.36 to Amendment No. 3 to
27, 2002 between Societe Logidis and Registration Statement (Form S-11/A) No.
Societe SCI Carlog. (Original document is 333-100525 dated January 15, 2003
in French only)
10.37 Summary of Lease Agreement dated December Exhibit 10.37 to Amendment No. 3 to
27, 2002 between Societe Logidis and Registration Statement (Form S-11/A) No.
Societe SCI Carlog. (Original document is 333-100525 dated January 15, 2003
in French only)
10.38 Summary of Lease Agreement dated December Exhibit 10.38 to Amendment No. 3 to
27, 2002 between Societe Logidis and Registration Statement (Form S-11/A) No.
Societe SCI Carlog. (Original document is 333-100525 dated January 15, 2003
in French only)
10.39 Summary of Lease Agreement dated December Exhibit 10.39 to Amendment No. 3 to
27, 2002 between Societe Logidis and Registration Statement (Form S-11/A) No.
Societe SCI Carlog. (Original document is 333-100525 dated January 15, 2003
in French only)
10.40 Summary of Lease Agreement dated December Exhibit 10.40 to Amendment No. 3 to
27, 2002 between CV logistique and Registration Statement (Form S-11/A) No.
Societe SCI Carlog. (Original document is 333-100525 dated January 15, 2003
in French only)
10.41 Summary of Mortgage terms with respect to Exhibit 10.41 to Amendment No. 3 to
the financing of properties leased to Registration Statement (Form S-11/A) No.
Carrefour France SAS. (Original documents 333-100525 dated January 15, 2003
are in French only)
21.1 Subsidiaries of Registrant as of Filed herewith
March 11, 2005
23.1 Consent of PricewaterhouseCoopers LLP Filed herewith
31.1 Certification of Co-Chief Executive Filed herewith
Officers
31.2 Certification of Chief Financial Officer Filed herewith
-32-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
32.1 Section 906 Certification of Co-Chief Filed herewith
Executive Officers
32.2 Section 906 Certification of Chief Filed herewith
Financial Officer
-33-
CORPORATE PROPERTY ASSOCIATES 15 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 15 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 15 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/ Anne R. Coolidge
- ------- -----------------------------------------
Date Anne R. Coolidge
President
3/15/05 BY: /s/ Elizabeth P. Munson
- ------- -----------------------------------------
Date Elizabeth P. Munson
Director
3/15/05 BY: /s/ Charles E. Parente
- ------- -----------------------------------------
Date Charles E. Parente
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)
-34-
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (THE "ACT") BY REGISTRANTS WHICH
HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
THE REGISTRANT'S PROXY STATEMENT HAS NOT BEEN SENT TO SECURITY HOLDERS, AND IS
TO BE FURNISHED TO SECURITY HOLDERS SUBSEQUENT TO THE FILING OF THE ANNUAL
REPORT ON THIS FORM.
-35-
Report of Independent Registered Public Accounting Firm on
Financial Statement Schedule
To the Board of Directors and Shareholders of
Corporate Property Associates 15 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 15 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
-36-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2004
Costs
Initial Cost to Company Capitalized (Decreases)
------------------------- Subsequent to Increases in
Description Encumbrances Land Buildings Acquisition (a) Investment (b) Land
----------- ------------ ----------- ------------ --------------- -------------- -----------
Operating Method:
Industrial facilities leased to Tower
Automotive, Inc. $ 11,788,973 $ 1,180,000 $ 19,815,621 $ 16,543 $ 1,180,000
Office facility leased to Racal
Instruments, Inc. 3,232,162 4,930,000 4,930,000
Office facility leased to Advantis
Technologies, Inc. 8,290,637 1,750,000 11,339,005 1,750,000
Vacant distribution and warehouse
facility in Tulsa, Oklahoma 29,583,005 1,000,000 52,870,063 2,016,978 (24,000,000) 1,000,000
Distribution and warehouse facility
leased to Trends Clothing Corp. 8,091,909 3,800,000 11,069,110 33,983 3,800,000
Leasehold interest in office facility
leased to Foster Wheeler Realty
Services, Inc. 28,512,276 -- 47,015,707 3,164
Industrial facility leased to BE
Aerospace, Inc. 10,248,335 6,600,000 8,870,072 40,192 6,600,000
Office facilities leased to Danka Office
Imaging Company 20,269,489 1,750,000 7,408,115 22,485,011 3,200,000
Movie Theatre leased to Rave Motion
Pictures Baton Rouge LLC -- 4,767,250 6,912,077 (43,038) 4,767,250
Office, light engineering and warehouse
facilities leased to Overland
Storage, Inc. 19,527,679 8,050,000 22,046,836 24,257 8,050,000
Warehouse, distribution and office
facilities leased to SSG Precision
Optronics, Inc. 870,000 4,097,653 870,000
Assisted-living facilities leased to
Medica-France, SA 44,881,011 5,329,401 35,001,068 11,290,457 6,561,377 7,268,490
Office facilities leased to SFX
Entertainment, Inc. 82,944,859 48,000,000 104,041,885 2,768,236 (2,800) 48,000,000
Warehouse and distribution facilities
leased to Carrefour France, SAS 129,519,561 11,249,761 95,122,572 49,900,670 15,790,319 16,817,099
Warehouse, distribution and office
facilities leased to Meadowbrook Meat
Company 17,602,233 3,440,000 26,975,009 3,440,000
Industrial facilities leased to WNA
American Plastic Industries, Inc. -- 540,000 5,880,961 540,000
Industrial facility leased to WinCup
Holdings, Inc. (formerly Polar Plastics
Inc.) 9,080,739 600,000 13,836,806 600,000
Gross Amount at which Carried Life on which
at Close of Period (e) Depreciation in
------------------------------ Latest Statement
Accumulated of Income
Description Buildings Total Depreciation (e) Date Acquired is Computed
----------- ------------ ------------ ---------------- ------------------ ----------------
Operating Method:
Industrial facilities leased to Tower
Automotive, Inc. $ 19,832,164 $ 21,012,164 $1,442,701 April 10, 2002 40 years
Office facility leased to Racal
Instruments, Inc. 4,930,000 -- May 21, 2002
Office facility leased to Advantis
Technologies, Inc. 11,339,005 13,089,005 800,124 June 25, 2002 40 years
Vacant distribution and warehouse
facility in Tulsa, Oklahoma 30,887,041 31,887,041 2,674,916 June 28, 2002 40 years
Distribution and warehouse facility
leased to Trends Clothing Corp. 11,103,093 14,903,093 783,732 July 22, 2002 40 years
Leasehold interest in office facility
leased to Foster Wheeler Realty
Services, Inc. 47,018,871 47,018,871 2,956,274 August 16, 2002 40 years
Industrial facility leased to BE
Aerospace, Inc. 8,910,264 15,510,264 604,593 September 12, 2002 40 years
Office facilities leased to Danka Office
Imaging Company 28,443,126 31,643,126 1,417,147 September 27, 2002 40 years
Movie Theatre leased to Rave Motion
Pictures Baton Rouge LLC 6,869,039 11,636,289 264,331 October 9, 2002 40 years
Office, light engineering and warehouse
facilities leased to Overland
Storage, Inc. 22,071,093 30,121,093 1,521,282 October 15, 2002 40 years
Warehouse, distribution and office
facilities leased to SSG Precision
Optronics, Inc. 4,097,653 4,967,653 236,650 November 20, 2002 40 years
Assisted-living facilities leased to
Medica-France, SA 50,913,813 58,182,303 3,257,413 December 4, 2002 40 years
Office facilities leased to SFX
Entertainment, Inc. 106,807,321 154,807,321 5,767,130 December 12, 2002 40 years
Warehouse and distribution facilities
leased to Carrefour France, SAS 155,246,223 172,063,322 8,855,911 December 27, 2002 40 years
Warehouse, distribution and office
facilities leased to Meadowbrook Meat
Company 26,975,009 30,415,009 1,559,821 December 31, 2002 40 years
Industrial facilities leased to WNA
American Plastic Industries, Inc. 5,880,961 6,420,961 275,670 February 12, 2003 40 years
Industrial facility leased to WinCup
Holdings, Inc. (formerly Polar Plastics
Inc.) 13,836,806 14,436,806 648,600 February 25, 2003 40 years
-37-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2004
Costs
Initial Cost to Company Capitalized (Decreases)
------------------------ Subsequent to Increases in
Description Encumbrances Land Buildings Acquisition (a) Investment (b) Land
----------- ------------ ---------- ----------- --------------- -------------- -----------
Industrial/Manufacturing facility leased
to Gestamp Alabama, Inc. 8,392,968 1,750,000 13,545,266 1,750,000
Office facility lease to MediMedia USA,
Inc. 13,593,700 900,000 20,120,153 900,000
Land leased to Qualceram Shires Ltd. 1,059,821 1,782,741 148,453 1,931,194
Warehouse and distribution facility
leased to Lillian Vernon Corp. 23,247,085 3,000,000 32,240,854 3,000,000
Industrial facilities leased to Qualserv
Corp. -- 980,000 7,261,961 980,000
Retail stores leased to Dick's Sporting
Goods, Inc. 12,954,860 14,676,332 4,840,580
Industrial facilities leased to Kerr
Group, Inc. 8,317,695 680,000 11,723,270 680,000
Warehouse, distribution and industrial
facilities leased to American Pad and
Paper LLC 9,231,042 1,230,000 15,707,324 1,230,000
Technical training institutes leased to
UTI Holdings, Inc. 33,625,331 12,932,338 7,030,296 53,158,723 12,932,338
Health clubs leased to Lifetime Fitness,
Inc. 26,612,656 9,791,000 32,779,723 9,791,000
Industrial facilities leased to Precise
Technology, Inc. 16,800,536 4,980,000 21,905,469 1,500 4,980,000
Health clubs leased to Starmark Camhood
II LLC 15,358,169 5,262,000 20,113,107 5,262,000
Industrial facilities leased to Berry
Plastics Corp. 21,151,562 4,210,000 23,910,675 3,106,915 4,210,000
Health clubs leased to 24-Hour Fitness
USA, Inc. 10,610,309 4,392,140 9,314,293 4,392,140
Warehouse/Distribution facility leased to
Plumbmaster, Inc. 6,285,606 2,575,000 5,490,166 5,400 2,575,000
Office facility leased to Regie des
Batiments 12,920,868 2,231,886 8,796,248 126,600 1,104,483 2,467,859
Office facility leased to Affina
Corporation -- 4,460,000 7,479,708 16,900 4,460,000
Office facility leased to World Airways,
Inc. 5,436,989 990,000 6,873,893 (2,500) 990,000
Gross Amount at which Carried Life on which
at Close of Period (e) Depreciation in
------------------------------ Latest Statement
Accumulated of Income
Description Buildings Total Depreciation (e) Date Acquired is Computed
----------- ----------- ----------- ---------------- ------------------ ----------------
Industrial/Manufacturing facility leased
to Gestamp Alabama, Inc. 13,545,266 15,295,266 267,073 March 28, 2003 40 years
Office facility lease to MediMedia USA,
Inc. 20,120,153 21,020,153 859,298 April 1, 2003 40 years
Land leased to Qualceram Shires Ltd. 1,931,194 -- April 29, 2003
Warehouse and distribution facility
leased to Lillian Vernon Corp. 32,240,854 35,240,854 1,175,448 July 2, 2003 40 years
Industrial facilities leased to Qualserv
Corp. 7,261,961 8,241,961 264,759 July 31, 2003 40 years
Retail stores leased to Dick's Sporting August 8 and
Goods, Inc. 19,516,912 19,516,912 528,430 August 19, 2003 40 years
Industrial facilities leased to Kerr
Group, Inc. 11,723,270 12,403,270 402,987 August 13, 2003 40 years
Warehouse, distribution and industrial
facilities leased to American Pad and
Paper LLC 15,707,324 16,937,324 539,939 August 19, 2003 40 years
September 15, and
December 16, 2003
Technical training institutes leased to February 6, and
UTI Holdings, Inc. 60,189,019 73,121,357 617,690 September 1, 2004 40 years
Health clubs leased to Lifetime Fitness,
Inc. 32,779,723 42,570,723 1,058,512 September 30, 2003 40 years
Industrial facilities leased to Precise
Technology, Inc. 21,906,969 26,886,969 671,942 October 29, 2003 40 years
Health clubs leased to Starmark Camhood
II LLC 20,113,107 25,375,107 565,681 November 7, 2003 40 years
Industrial facilities leased to Berry
Plastics Corp. 27,017,590 31,227,590 707,673 November 20, 2003 40 years
December 22, 2003
Health clubs leased to 24-Hour Fitness and
USA, Inc. 9,314,293 13,706,433 196,976 September 1, 2004 40 years
Warehouse/Distribution facility leased to
Plumbmaster, Inc. 5,495,566 8,070,566 131,642 January 2, 2004 40 years
Office facility leased to Regie des
Batiments 9,791,358 12,259,217 234,326 January 2, 2004 40 years
Office facility leased to Affina
Corporation 7,496,608 11,956,608 179,489 January 8, 2004 40 years
Office facility leased to World Airways,
Inc. 6,871,393 7,861,393 135,996 March 26, 2004 40 years
-38-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2004
Costs
Initial Cost to Company Capitalized (Decreases)
------------------------ Subsequent to Increases in
Description Encumbrances Land Buildings Acquisition (a) Investment (b) Land
----------- ------------ ---------- ----------- --------------- -------------- -----------
Self-Storage/Trucking facilities leased
to U-Haul Moving Partners, Inc. and
Mercury Partners, LP 181,380,837 69,080,000 189,081,967 69,080,000
Office facility leased to Shaklee
Corporation 18,716,799 16,230,366 14,052,294 4,950 16,230,366
Office facility leased to Grande
Communications Networks, Inc. 225,000 1,180,311 225,000
Office facility leased to TietoEnator plc 77,868,082 16,765,973 68,556,272 8,356,899 18,497,205
Office facility leased to Thales, SA 86,097,904 21,869,180 65,212,672 10,874,562 24,705,191
Retail facilities leased to Garden Ridge,
L.P. (d) 10,183,891 5,360,994 7,679,933 5,360,994
Land leased to Best Buy Co., Inc. (d) 12,058,562 36,964,334 36,964,334
Office facility leased to Information
Resources, Inc. (d) 24,185,408 4,909,953 32,973,752 4,909,953
Retail facility leased to The Kroger Co.
(d) -- 771,730 771,730
Industrial/Manufacturing facility leased
to EDS Customer Relationship Mgmt. (d) 15,194,822 1,891,528 19,612,333 1,891,528
Distribution/warehouse facility leased to
Detroit Diesel Corp. (d) -- 1,244,411 2,489,948 1,244,411
Office facility leased to Omnicom Group,
Inc. (d) 19,165,960 20,949,767 7,328,797 20,949,767
Industrial/Manufacturing facility leased
to Cognitive Solutions, Inc. (d) 3,417,202 1,719,448 4,689,478 524 1,719,448
Manufacturing/warehouse facilities leased
to Humco Holding Group (d) 3,650,878 615,508 3,722,603 615,508
Industrial/Manufacturing facility leased
to PSC Scanning Inc. (d) 5,310,496 1,008,711 6,739,117 1,008,711
Warehouse/distribution facility leased to
New Wave (d) 3,367,656 347,168 2,590,770 212,938 372,331
Distribution/warehouse leased to ISA
Wholesale plc (d) 4,531,341 102,602 3,978,297 295,776 110,038
Manufacturing facility leased to
Electronics Assembly Corp. (d) 5,321,794 261,941 4,727,765 261,941
Land leased to Barnes & Noble, Inc. (d) 1,653,320 2,972,411 2,972,411
Industrial/Manufacturing facility leased
to Merit Medical Systems, Inc. (d) 8,645,452 2,476,637 5,828,723 2,476,637
Gross Amount at which Carried Life on which
at Close of Period (e) Depreciation in
------------------------------ Latest Statement
Accumulated of Income
Description Buildings Total Depreciation (e) Date Acquired is Computed
----------- ----------- ----------- ---------------- ------------------ ----------------
Self-Storage/Trucking facilities leased
to U-Haul Moving Partners, Inc. and
Mercury Partners, LP 189,081,967 258,161,967 3,348,304 April 29, 2004 40 years
Office facility leased to Shaklee
Corporation 14,057,244 30,287,610 219,607 May 26, 2004 40 years
Office facility leased to Grande
Communications Networks, Inc. 1,180,311 1,405,311 15,983 June 24, 2004 40 years
Office facility leased to TietoEnator plc 75,181,939 93,679,144 861,460 July 8, 2004 40 years
Office facility leased to Thales, SA 73,251,223 97,956,414 785,971 July 26, 2004 40 years
Retail facilities leased to Garden Ridge,
L.P. (d) 7,679,933 13,040,927 56,000 September 1, 2004 40 years
Land leased to Best Buy Co., Inc. (d) 36,964,334 September 1, 2004
Office facility leased to Information
Resources, Inc. (d) 32,973,752 37,883,705 240,434 September 1, 2004 40 years
Retail facility leased to The Kroger Co.
(d) 771,730 September 1, 2004
Industrial/Manufacturing facility leased
to EDS Customer Relationship Mgmt. (d) 19,612,333 21,503,861 143,007 September 1, 2004 40 years
Distribution/warehouse facility leased to
Detroit Diesel Corp. (d) 2,489,948 3,734,359 18,156 September 1, 2004 40 years
Office facility leased to Omnicom Group,
Inc. (d) 7,328,797 28,278,564 53,439 September 1, 2004 40 years
Industrial/Manufacturing facility leased
to Cognitive Solutions, Inc. (d) 4,690,002 6,409,450 34,195 September 1, 2004 40 years
Manufacturing/warehouse facilities leased
to Humco Holding Group (d) 3,722,603 4,338,111 27,144 September 1, 2004 40 years
Industrial/Manufacturing facility leased
to PSC Scanning Inc. (d) 6,739,117 7,747,828 49,139 September 1, 2004 40 years
Warehouse/distribution facility leased to
New Wave (d) 2,778,545 3,150,876 20,260 September 1, 2004 40 years
Distribution/warehouse leased to ISA
Wholesale plc (d) 4,266,637 4,376,675 31,111 September 1, 2004 40 years
Manufacturing facility leased to
Electronics Assembly Corp. (d) 4,727,765 4,989,706 34,473 September 1, 2004 40 years
Land leased to Barnes & Noble, Inc. (d) 2,972,411 September 1, 2004
Industrial/Manufacturing facility leased
to Merit Medical Systems, Inc. (d) 5,828,723 8,305,360 42,501 September 1, 2004 40 years
-39-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2004
Costs
Initial Cost to Company Capitalized
----------------------------- Subsequent to
Description Encumbrances Land Buildings Acquisition (a)
----------- -------------- ------------ -------------- ---------------
Childcare centers leased to Learning Care
Group, Inc. (formerly Childtime
Childcare, Inc.) (d) 6,600,361 5,830,334 3,270,020
Warehouse facility leased to Petsmart,
Inc. (d) 2,870,148 189,779 4,512,341
Hotel facility leased to Societe
Hoteliere Tourisme Grand Noble (d) 10,836,210 643,429 14,141,894
-------------- ------------ -------------- ------------
$1,150,229,188 $378,434,721 $1,193,640,585 $146,734,668
============== ============ ============== ============
Gross Amount at which Carried
at Close of Period (e)
(Decreases) ----------------------------------
Increases in Accumulated
Description Investment (b) Land Buildings Total Depreciation (e)
----------- -------------- ------------ -------------- -------------- -----------------
Childcare centers leased to Learning Care
Group, Inc. (formerly Childtime
Childcare, Inc.) (d) 5,830,334 3,270,020 9,100,354 23,844
Warehouse facility leased to Petsmart,
Inc. (d) 189,779 4,512,341 4,702,120 32,903
Hotel facility leased to Societe
Hoteliere Tourisme Grand Noble (d) 1,608,902 713,445 15,680,780 16,394,225 114,341
----------- ------------ -------------- -------------- -----------
$24,012,286 $392,445,432 $1,350,376,828 $1,742,822,260 $47,756,428
=========== ============ ============== ============== ===========
Life on which
Despcription in
Latest Statement
of Income
Description Date Acquired is Computed
----------- ----------------- ----------------
Childcare centers leased to Learning Care
Group, Inc. (formerly Childtime
Childcare, Inc.) (d) September 1, 2004 40 years
Warehouse facility leased to Petsmart,
Inc. (d) September 1, 2004 40 years
Hotel facility leased to Societe
Hoteliere Tourisme Grand Noble (d) September 1, 2004 40 years
-40-
Initial Cost to Company Costs Capitalized
-------------------------- Subsequent
Description Encumbrances Land Buildings to Acquisition (a)
- ----------- ------------ ----------- ------------ ------------------
Direct Financing Method:
Office facility leased to Racal Instruments, Inc. $ 6,048,378 $ 8,525,497 $ 69,300
Distribution and warehouse facility leased to IntegraColor, Ltd. 6,922,103 $ 1,513,400 10,842,621
Warehouse and distribution facilities leased to Insulated
Structures Investments Limited 26,011,027 6,314,610 25,925,871 754,224
Industrial facility lease to Pemstar, Inc. 7,186,481 2,250,000 10,327,518
Industrial facilities leased to Qualceram Shires Ltd. 22,586,566 5,113,187 32,122,912 57,601
Office facilities leased to Grande Communications Network, Inc. 7,326,174 1,800,000 12,021,990
Retail store leased to Dick's Sporting Goods, Inc. 5,989,532 9,610,772
Industrial facilities leased to SportsRack LLC 7,383,270 1,330,000 10,301,807 19,150
Industrial facilities leased to Worthington Precision Metals,
Inc 4,579,642 1,060,000 6,107,539
Retail stores leased to Best Buy Co., Inc. (d) 15,507,262 48,230,827
Office buildings and supermarkets leased to The Kroger Co. (d) 5,204,233
Office/warehouse facility leased to Warehouse Associates, Inc.
(d) 8,536,594 657,202 12,731,121
Retail store leased to Gart Sports Company (d) 1,118,667 4,165,136
Health club leased to 24-Hour Fitness USA, Inc. (d) 3,331,968 6,510,896
Food processing/warehouse facility leased to Custom Food
Products, Inc. (d) 166,539 15,867 4,916,983
Retail stores leased to Barnes & Noble, Inc. (d) 6,590,767 12,616,923
Daycare centers leased to Learning Care Group, Inc. (formerly
Childtime Childcare, Inc.) (d) 4,322,117 6,733,797
Manufacturing facility leased to Superior Telecommunications,
Inc. (d) 4,474,161 142,089 5,141,275
Supermarkets leased to ShopRite Supermarkets, Inc. (d) 15,148,335 1,938,527 17,077,906
Technical training institute leased to UTI Holdings, Inc. (d) 2,194,462 9,435,058
------------ ----------- ------------ --------
$154,305,378 $23,253,549 $258,550,682 $900,275
============ =========== ============ ========
Gross Amount
at which
Carried at
Close of
Period (d)
Increases (Decreases) in ------------
Description Net Investment (b) Total Date Acquired
- ----------- ------------------------ ------------ --------------------
Direct Financing Method:
Office facility leased to Racal Instruments, Inc. $ 630,760 $ 9,225,557 May 21, 2002
Distribution and warehouse facility leased to IntegraColor, Ltd. 12,356,021 June 14, 2002
Warehouse and distribution facilities leased to Insulated January 28 and March
Structures Investments Limited 5,271,755 38,266,460 3, 2003
Industrial facility lease to Pemstar, Inc. 302,125 12,879,643 March 28, 2003
Industrial facilities leased to Qualceram Shires Ltd. 3,863,294 41,156,994 April 29, 2003
Office facilities leased to Grande Communications Network, Inc. (114,681) 13,707,309 August 7, 2003
Retail store leased to Dick's Sporting Goods, Inc. (3,994) 9,606,778 August 8, 2003
Industrial facilities leased to SportsRack LLC (255,051) 11,395,906 November 24, 2003
Industrial facilities leased to Worthington Precision Metals,
Inc 7,167,539 April 14, 2004
Retail stores leased to Best Buy Co., Inc. (d) (694,838) 47,535,989 September 1, 2004
Office buildings and supermarkets leased to The Kroger Co. (d) (4,958) 5,199,275 September 1, 2004
Office/warehouse facility leased to Warehouse Associates, Inc.
(d) (53,041) 13,335,282 September 1, 2004
Retail store leased to Gart Sports Company (d) (23,520) 5,260,283 September 1, 2004
Health club leased to 24-Hour Fitness USA, Inc. (d) (85,285) 6,425,611 September 1, 2004
Food processing/warehouse facility leased to Custom Food
Products, Inc. (d) (14,734) 4,918,116 September 1, 2004
Retail stores leased to Barnes & Noble, Inc. (d) (89,130) 12,527,793 September 1, 2004
Daycare centers leased to Learning Care Group, Inc. (formerly
Childtime Childcare, Inc.) (d) (58,130) 6,675,667 September 1, 2004
Manufacturing facility leased to Superior Telecommunications,
Inc. (d) (29,303) 5,254,061 September 1, 2004
Supermarkets leased to ShopRite Supermarkets, Inc. (d) 180,336 19,196,769 September 1, 2004
Technical training institute leased to UTI Holdings, Inc. (d) (158,976) 9,276,082 September 1, 2004
----------- ------------
$ 8,662,629 $291,367,135
=========== ============
-41-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES to SCHEDULE III - REAL ESTATE
and ACCUMULATED DEPRECIATION
(a) Consists of the costs of improvements subsequent to purchase and
acquisition costs including construction costs on build-to-suit
transactions, legal fees, appraisal fees, title costs and other related
professional fees.
(b) The (decrease) increase 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, impairment
charges and foreign currency translation adjustments.
(c) At December 31, 2004, the aggregate cost of real estate owned by CPA(R):15
and its subsidiaries for Federal income tax purposes is $1,156,755,640.
(d) Acquired September 1, 2004 in connection with merger with Carey
Institutional Properties Incorporated.
(e)
Reconciliation of Real Estate Accounted for
Under the Operating Method December 31,
--------------------------------------------
2004 2003 2002
-------------- ------------ ------------
Balance at beginning of year $ 883,461,568 $559,521,150 $ --
Additions 749,153,305 285,402,611 588,387,050
Impairment charge (5,000,000) (24,000,000) --
Dispositions (6,519,663) -- (11,614,766)
Foreign currency translation adjustment 40,335,665 31,355,297 4,618,045
Reclassification of real estate under
construction 100,844,508 31,182,510 --
Reclassification from direct financing lease 7,069,591 -- --
Reclassification to equity investment (6,933,374) -- (21,869,179)
Reclassification to assets held for sale (19,589,340) -- --
-------------- ------------ ------------
Balance at close of year $1,742,822,260 $883,461,568 $559,521,150
============== ============ ============
Reconciliation of Accumulated Depreciation
December 31,
------------------------------------------
2004 2003 2002
----------- ----------- ----------
Balance at beginning of year $18,725,233 $ 2,323,336 $ --
Depreciation expense 28,070,194 15,973,840 2,569,741
Depreciation expense included in
discontinued operations 204,407 -- --
Reclassification of accumulated depreciation
to assets held for sale (204,407) -- (247,910)
Foreign currency translation adjustment 961,001 428,057 1,505
----------- ----------- ----------
Balance at close of year $47,756,428 $18,725,233 $2,323,336
=========== =========== ==========
-42-
APPENDIX A TO FORM 10-K
CORPORATE PROPERTY ASSOCIATES 15 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 and share amounts)
2004 (1) 2003 2002 2001 (2)
---------- ---------- -------- --------
OPERATING DATA:
Revenues(3) $ 159,539 $ 79,120 $ 12,947 $ --
Income (loss) from continuing
operations 43,648 3,752 5,767 (69)
Basic earnings (loss) from continuing
operations per share .39 .05 .29 (3.42)
Net income (loss) 38,886 4,647 5,767 (69)
Basic earnings (loss) per share .34 .06 .29 (3.42)
Cash dividends paid(4) 67,797 40,498 6,179 --
Cash dividends declared per share(4) .63 .62 .61 --
Payment of mortgage principal(5) 13,206 7,864 385 --
BALANCE SHEET DATA:
Total assets $2,718,396 $1,639,152 $806,298 $2,206
Long-term obligations(6) 1,313,912 607,739 382,918 --
(1) Includes the impact of the merger with CIP(R) in September 2004 (see Item 1
of this Annual Report).
(2) For the period from inception (February 26, 2001) through December 31,
2001.
(3) Prior year balances have been reclassified to conform to the current year
presentation of excluding interest income from revenues.
(4) We paid our first dividend in April 2002.
(5) Represents scheduled mortgage principal amortization paid.
(6) 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 15 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
15 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 our future plans, strategies and 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," "expect," "estimate," "intend," "could," "should,"
"would," "may," "seeks," "plans" or similar expressions. Do not unduly rely on
forward-looking statements. They give our expectations about the future and are
not guarantees, and speak only as of the date they are made. Such statements
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, performance or achievement to be materially different from
the results of operations or plan expressed or implied by such forward-looking
statements. While we cannot 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 2001 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. We
raised $1,046,176 from our public offerings, which we used and will continue to
use along with limited recourse mortgage financing to purchase properties and
enter into long-term net leases with corporate tenants. We structure our leases
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 parent company of the lessee. We
negotiate leases that may provide for periodic rent increases that are stated or
based on increases in the consumer price index ("CPI") 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 stockholders.
Our primary objectives are to:
- Own a diversified portfolio of net leased properties;
- Increase the equity in our real estate portfolio by obtaining mortgage
debt that provides for scheduled principal payment installments;
- 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 are advised by W. P. Carey & Co. LLC ("WPC"), an affiliate, pursuant to an
advisory agreement. Our advisory agreement with WPC 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 that a third party portfolio valuation be
performed after a stated period and annually thereafter. 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. Until the initial
valuation is performed, the fees are based on the cost of the properties. Our
initial valuation will be performed as of December 31, 2005 and fees in 2006
will be based on this initial valuation.
-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 our 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 the lease
revenues for the years ended December 31, 2004, 2003 and 2002 is as follows:
2004 2003 2002
-------- -------- -------
Per Statements of Income:
Rental income from operating leases $131,452 $ 65,912 $11,372
Interest from direct financing leases 18,096 6,845 1,322
Adjustments:
Share of lease revenues applicable to minority interests (27,643) (10,382) (235)
Share of lease revenues from equity investments 24,899 19,505 2,638
-------- -------- -------
$146,804 $ 81,880 $15,097
======== ======== =======
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 %
-------- --- ------- --- ------- ---
Mercury Partners and U-Haul Moving Partners (b) (f) $ 11,075 8%
Starmark Camhood, L.L.C. (a) (e) 10,672 7 $ 7,204 9%
Clear Channel Communications, Inc. (b) 8,491 6 8,491 10 $ 352 2%
Carrefour France, SAS (b) (c) (h) 7,650 5 8,253 10 148 1
True Value Company (a) 7,236 5 7,236 9 16 --
Foster Wheeler Realty Services, Inc. 5,273 4 5,256 6 1,962 13
Lifetime Fitness, Inc. (e) 4,928 3 1,187 2 -- --
Qualceram Shires Ltd. (e) (h) 3,983 3 2,284 3 -- --
Lillian Vernon Corp. (e) 3,848 3 1,910 2 -- --
Medica - France, SA (b) (c) (e) 3,263 2 3,175 4 300 2
Danka Office Imaging Company (e) 3,060 2 1,819 2 227 2
Meadowbrook Meat Company 3,008 2 3,008 4 7 --
Overland Storage, Inc. 2,992 2 2,992 4 608 4
Berry Plastics Corp. (e) 2,962 2 289 -- -- --
Thales S.A. (b) (g) (h) 2,950 2 -- -- -- --
Precise Technology, Inc. (e) 2,657 2 453 -- -- --
Petsmart, Inc. (a) 2,491 2 2,491 3 2,076 14
Tower Automotive, Inc. (i) 2,356 2 2,356 3 1,701 11
MediMedia USA, Inc. (e) 2,335 2 1,751 2 -- --
Other (a) (b) (d) (h) 55,574 36 21,725 27 7,700 51
-------- --- ------- --- ------- ---
$146,804 100% $81,880 100% $15,097 100%
======== === ======= === ======= ===
-4-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
- --------------------------------------------------------------------------------
(In thousands except share and per share amounts)
(a) Represents our proportionate share of lease revenues from our equity
investment (see Note 7).
(b) Net of rental amount applicable to minority interests.
(c) Until March 12, 2003, we owned 100% interests in the applicable
properties at which time minority interests were sold to an affiliate.
(d) Includes the real estate interests acquired in the September 2004
Merger.
(e) We placed into service or acquired our interest in this property
during 2003.
(f) We acquired our interest in these properties during the second quarter
of 2004.
(g) We acquired our interest in these properties during the third quarter
of 2004.
(h) Revenue amounts are subject to fluctuations in foreign currency
exchange rates.
(i) Tower Automotive filed for Chapter 11 bankruptcy protection in
February 2005.
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;
- The impact of rising interest rates would be mitigated through our use
of fixed interest rates on the majority of our debt.
- Rising interest rates would likely enable us to achieve higher rates
of return on new investments, which would be partially offset by
increased debt costs associated with increased interest rates.
We will continue to pursue our objectives through long-term transactions and
diversifying our portfolio. We expect to continue investing in the international
commercial real estate market, as we believe the international market provides
for favorable opportunities relative to risk/return as compared to U.S.
opportunities. In addition, financing terms are generally more favorable for
international transactions. Financing terms for international transactions
generally provide for lower interest rates and greater flexibility to finance
the underlying property. These benefits are partially offset by shorter loan
maturities. Investing in additional international properties is also expected to
increase our exposure to fluctuations in foreign currency exchange rates (the
Euro and the British Pound).
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 which hold ownership interests in several of
our properties. Refer to the "Operating Activities" section of Financial
Condition below for further analysis. Management expects, based on its current
assessments, that over the long-term, cash flow from operations and equity
investments will continue to meet the objective of increasing the distribution
rate and meeting other cash obligations. We have cash and cash equivalent
balances of $144,522 as of December 31, 2004 which can be used 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 existing portfolio and that any increase may not be
reflected in our financial statements.
RESULTS OF OPERATIONS
During the year ended December 31, 2004, we invested more than $1,000,000 in
real estate assets and equity investments, including what we acquired in our
merger transaction on September 1, 2004. Our asset base has increased from
$1,639,152 at December 31, 2003 to $2,718,396 at December 31, 2004. As a result
of this investment activity, the results of operations for 2004 are not directly
comparable to the results for 2003 and 2003 to 2002 and are not necessarily
indicative of future operating results.
-5-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
- --------------------------------------------------------------------------------
(In thousands except share and per share amounts)
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 $76,791 as a direct result of the substantial increase in our real
estate assets during 2004 and 2003. During 2004, we earned an additional $58,167
from new leases entered into during 2004 and 2003, $11,603 from the properties
acquired from the merger with Carey Institutional Properties Incorporated
("CIP(R)") in September 2004 ("Merger"), (see Significant Developments During
2004 in Item 1) and $9,015 from the completion of several build-to-suit projects
during 2004 and 2003. Fluctuations in foreign currency exchange rates did not
have a significant impact on lease revenues during 2004. These increases were
partially offset by a reduction of $4,483 due to a lease termination in August
2003 by the Fleming Companies, Inc.
During 2004, we purchased properties and entered into net leases with Affina
Corporation, Plumbmaster, Inc., World Airways, Inc., Regie des Batiments, two
lessees that operate under the U-Haul brand name, Worthington Precision Metals,
Inc., Shaklee Corporation, Grande Communications Networks, Inc., Thales S.A. and
TietoEnator plc. These leases contributed $33,389 of the increase in lease
revenues for 2004 and will provide aggregate annual lease revenues of $53,341
(subject to foreign currency fluctuations in the Euro on the Regie des
Batiments, Thales and TietoEnator properties). Properties acquired in the Merger
will provide contractual rents of $52,469 (including $2,283 subject to foreign
currency fluctuations).
Six build-to-suit projects were completed in 2004, including three for
subsidiaries of Universal Technical Institute, Inc., two for Dick's Sporting
Goods, Inc. and one for Gestamp Alabama, Inc. These projects contributed
aggregate lease revenues of $4,995 in 2004 and are expected to generate combined
annual lease revenues of $9,725. Three build-to-suit projects completed in 2003
contributed $4,020 of the increase in lease revenues in 2004.
Fleming terminated its lease for a property in Tulsa, Oklahoma in August 2003,
pursuant to its voluntary petition of bankruptcy in April 2003. Fleming's lease
termination was approved by the bankruptcy court and Fleming vacated the
property. Annual lease revenues from the Fleming lease were $5,508. This
property has been vacant for an extended period due to difficulties encountered
in remarketing the property as a result of the property's special purpose
nature.
During 2004, we entered into a build-to-suit commitment with Oriental Trading
Company, Inc. which is projected to generate $2,728 of annual lease revenues
upon completion of construction, expected in July 2005.
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002, lease
revenues increased by $60,063 as a direct result of investing approximately
$1,199,000 in real estate in 2003 and 2002. During the year ended December 31,
2003, we entered into net lease transactions with 25 tenants, including seven
build-to-suit transactions. Acquisitions completed during 2003 and 2002 will
generate aggregate annual lease revenues of $54,743 and $51,291, respectively.
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 increased by $3,628, primarily due to the forfeiture of
Fleming's $2,754 security deposit and an $842 increase in costs which are
reimbursable by tenants.
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002, other
operating income increased by $6,110 primarily due to costs reimbursable by
tenants.
-6-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
- --------------------------------------------------------------------------------
(In thousands except share and per share amounts)
Depreciation and Amortization
2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003,
depreciation and amortization expense increased by $17,587, primarily as a
result of our investment activity during 2004 and 2003. New leases in 2004 and
2003 generated $13,776 of the increase and the completion of build-to-suit
projects during 2004 and 2003 contributed $1,878. An additional $1,958 of
depreciation and amortization is attributable to properties acquired in the
Merger.
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002,
depreciation and amortization expense increased by $13,887, primarily as a
result of investment activity during 2003 and 2002.
General and Administrative Expenses
2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003,
general and administrative expenses increased by $1,212, primarily due to a
$1,707 increase in expenses of WPC allocated to us due to an increase in time
dedicated to us by WPC employees, a $501 increase in state income taxes and an
increase in our share of rental expenses under an office-sharing agreement.
These increases were offset in part by a number of reductions in elements of
general and administrative expense, including a $1,503 reduction in payments to
broker dealers and a decline in acquisition expenses. The broker dealer fees,
which reflected the discontinuance of payments to a broker dealer of account
maintenance fees, are among the payments that are a subject of the SEC
investigation described in Item 3 -- Legal Proceedings.
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002,
general and administrative expenses increased by $6,033 as a result of increases
in broker dealer fees (as described above), acquisition expenses, auditing fees
and personnel reimbursement costs.
Property Expense
2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003,
property expense increased by $8,615, primarily due to a $7,440 increase in
asset management and performance fees and an increase of $842 in costs
reimbursable by tenants. Asset management and performance fees are based on
assets invested in real estate and have increased as a result of the growth in
our asset base. Annual carrying costs on the Fleming property are $660.
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002,
property expense increased by $14,688, primarily due to a $6,848 increase in
asset management and performance fees (as described above) and an increase of
$6,112 in costs reimbursable by tenants. Carrying costs on the former Fleming
property contributed an additional $987 of property expense in 2003.
Impairment Charge on Real Estate
2004 VS. 2003 - In December 2004, we recognized an impairment charge of $5,000
on the former Transworld Center, Inc. property in Miami, Florida when we entered
into an agreement to sell the property to a third party. The proposed purchaser
is in the process of completing its due diligence. Accordingly, the property has
been reclassified to held for sale and the impairment charge is included in
discontinued operations.
2003 VS. 2002 - In 2003, we recognized an impairment charge of $24,000 on the
former Fleming property. Fleming declared bankruptcy on April 1, 2003 and
vacated the property on August 31, 2003, when the bankruptcy court approved the
termination of its lease with us.
Interest Income
2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003,
interest income decreased by $119. As a result of investing the proceeds of our
public offerings in real estate during 2004, interest income from cash and cash
equivalents decreased by $863. This decrease was partially offset by interest
income from our interest in the Carey Commercial Mortgage Trust acquired in the
Merger.
-7-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
- --------------------------------------------------------------------------------
(In thousands except share and per share amounts)
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002,
interest income increased by $1,712, primarily as a result of interest income on
uninvested cash proceeds of our public offerings.
Minority Interest in Income
2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003,
minority interest in income increased by $6,742, primarily due to the sales of
interests in properties that we previously wholly owned, acquisitions in 2004
and acquiring controlling interests in the Merger. The sale of interests in the
Carrefour France, SAS and Medica-France, SA investments to affiliates in 2003
contributed additional minority interest income of $2,910 in 2004. During 2004,
we acquired controlling interests in the U-Haul, Thales and TietoEnator
investments, which contributed $2,825 of the increase. In connection with the
Merger, we also acquired controlling interests in five investments which
contributed an additional $942 of minority interest income.
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002,
minority interest in income increased by $2,615, primarily due to minority
interest income from the Clear Channel Communications, Inc. investment, acquired
in 2002, in which an affiliate has a 40% interest.
Income from Equity Investments
2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003,
income from equity investments increased by $1,832, primarily due to $1,519 of
income from equity investments acquired in connection with the Merger.
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002,
income from equity investments increased by $7,166, of which $2,546 resulted
from equity investments acquired in 2003 and $4,620 resulted from equity
investments acquired in 2002.
Interest Expense
2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003,
interest expense increased by $31,618, primarily as a result of obtaining
$700,747 of new limited recourse mortgage financing on properties acquired
during 2004 and 2003 and assuming $202,186 of limited recourse mortgage
financing in connection with the Merger. This increase was partially offset by a
$13,206 reduction in mortgage notes payable balances as a result of making
scheduled mortgage principal payments.
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002,
interest expense increased by $21,773 as a result of obtaining $562,041 of new
mortgages on properties acquired during 2003 and 2002. This increase was
partially offset by a $7,864 reduction in mortgage notes payable balances as a
result of making scheduled mortgage principal payments.
Net Income
2004 VS. 2003 - For the comparable years ended December 31, 2004 and 2003, net
income increased by $34,239. The increase is primarily the result of additional
lease revenues resulting from our acquisition activity in 2004 and 2003, as well
as the Merger in 2004. This increase was partially offset by related increases
in various expenses such as depreciation and amortization and interest expense.
In addition, we incurred a noncash impairment charge of $5,000 in 2004 and
$24,000 in 2003. These variances are all described above.
2003 VS. 2002 - For the comparable years ended December 31, 2003 and 2002, net
income decreased by $1,120. Lease revenues and equity income increased primarily
as a result of our acquisition activity in 2003 and 2002. This increase was
partially offset by related increases in various expenses such as depreciation
and amortization and interest expense. In addition, we incurred a noncash
impairment charge of $24,000 in 2003. These variances are all described above.
During 2003, we also recognized gains on foreign currency transactions of
$3,173 and a gain on sale of real estate of $2,757.
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
- --------------------------------------------------------------------------------
(In thousands except share and per share amounts)
FINANCIAL CONDITION
Uses of Cash During the Period
Cash and cash equivalents totaled $144,522 as of December 31, 2004, a decrease
of $90,695 from the December 31, 2003 balance. Management believes we have
sufficient cash balances to meet our working capital needs including our current
distribution rate. 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 operating activities and distributions
from the operations of equity investments in excess of equity income of $92,304
were sufficient to fund dividend payments of $67,797, meet scheduled mortgage
principal installments of $13,206 and distribute $6,900 to minority interests.
Annual operating cash flow (lease revenue less property level debt service) is
expected to increase as a result of the new leases signed in 2004, including
leases acquired in connection with the Merger and completed build-to-suit
projects. Annual cash flow from the 2004 acquisitions, including completed
build-to-suit projects, is estimated to amount to approximately $30,000 in 2005.
Additionally, annual cash flow from the properties acquired in the Merger,
including the interest acquired in the Carey Commercial Mortgage Trust, is
estimated to amount to approximately $27,540 in 2005. Scheduled rent increases,
most of which are based on increases in the CPI, at existing properties will
also contribute to increased operating cash flow.
Investing Activities
Our investing activities are generally comprised of real estate transactions
(purchases and sales), payment of our annual installment of deferred acquisition
fees to WPC and the purchase and sale of short-term investments and marketable
securities which we intend to convert to cash. We used $688,335 for real estate
purchases and to fund build-to-suit projects in 2004, of which $314,646 relates
to the U-Haul transaction, $101,682 relates to the Thales transaction, $96,397
relates to the TietoEnator transaction, and $31,816 relates to the Shaklee
transaction. In connection with the Merger, we used $140,913 to purchase CIP(R)
shares and $90,913 to pay final dividend distributions to CIP(R) shareholders.
We acquired cash of $86,626 in connection with the Merger. During 2004, we
purchased $17,782 in short-term investments (i.e., money-market type investments
with maturities of more than 90 days but less than one year) and redeemed
$55,615 for a net decrease of $37,833. Amounts redeemed from short-term
investments were used to finance acquisitions and the Merger. We reduced our
holdings of auction-rate securities from $111,000 to $20,000 which we hold
because management believes they provide a more favorable yield than
money-market instruments. We received $16,828 from the sale of real estate and
$5,134 from the recovery of VAT taxes in 2004.
Financing Activities
In addition to making scheduled mortgage principal payments, paying dividends to
shareholders and making distributions to minority partners, we also used $3,923
to purchase treasury shares. We obtained $495,954 in mortgage loans to finance
acquisitions in 2004, issued $21,954 of shares through our Distribution
Reinvestment and Share Purchase Plan, and received $76,720 from minority
partners for their participation in the acquisitions of the U-Haul, Thales and
TietoEnator properties. In connection with the Merger, we assumed limited
recourse mortgage debt valued at $202,186. Annual debt service on the assumed
limited recourse mortgage is approximately $26,713.
Cash Resources
As of December 31, 2004, we have $144,522 in cash and cash equivalents and
$20,000 in auction-rate marketable securities which we expect to convert to
cash, which can be used for working capital needs, distributions and other
commitments and may be used for future real estate purchases. In addition, debt
may be incurred on unleveraged
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
- --------------------------------------------------------------------------------
(In thousands except share and per share amounts)
properties with a carrying value of $58,339 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, paying dividends to shareholders, making
distributions to minority partners, commitments of $6,528 related to
build-to-suit projects as well as other normal recurring operating expenses. We
have a $163 mortgage balloon payment due in June 2005, which will be paid from
existing cash balances. There are no further balloon payments scheduled until
2009. We expect 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 the projected increase in operating cash flows as described
above, cash flow from operations and distributions from operations of equity
investments in excess of equity income are expected to be sufficient to meet
operating cash flow objectives. Accordingly, we expect to have sufficient cash
flow to continue funding dividends to our shareholders. Dividends are determined
by management's long-term assessments of cash flow.
Other Matters
We conduct business in Europe and may recognize transaction gains and losses
from our foreign operations. Foreign currency transaction gains and losses were
not material to our results of operations for the current year; however, such
gains and losses may cause fluctuations in the results of operations. We are
subject to foreign currency exchange rate risk from the effects of changes 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.
OFF-BALANCE SHEET AND AGGREGATE CONTRACTUAL AGREEMENTS
The table below summarizes our contractual obligations as of December 31, 2004
and the effect that such commitments and obligations are expected to have on our
liquidity and cash flow in future periods.
Less than 1 More than 5
Total Year 1-3 Years 3-5 Years years
---------- ----------- --------- --------- -----------
Limited recourse mortgage notes
payable (1) $2,052,410 $105,491 $215,204 $254,008 $1,477,707
Deferred acquisition fees (1) 41,638 7,685 22,323 11,270 360
Build-to-suit obligations 6,528 6,528
Operating leases (2) 9,906 623 1,541 1,669 6,073
---------- -------- -------- -------- ----------
$2,110,482 $120,327 $239,068 $266,947 $1,484,140
========== ======== ======== ======== ==========
(1) Amounts are inclusive of principal and interest.
(2) 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.
WPC and Carey Financial, the wholly-owned broker-dealer subsidiary of WPC, are
currently subject to an SEC investigation 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.
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 properties have been subject to some degree of
contamination, principally in connection with either leakage from
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
- --------------------------------------------------------------------------------
(In thousands except share and per share amounts)
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 to require financial assurances from tenants such as
performance bonds or letters of credit if the costs of remediating environmental
conditions are, in our estimation, in excess of specified amounts. Accordingly,
we believe that the ultimate resolution of any environmental matter should not
have a material adverse effect on our financial condition, liquidity or results
of operations.
SUBSEQUENT EVENTS
On January 3, 2005, we and CPA(R):16-Global, through 60% and 40% interests,
respectively, in a limited liability company, acquired land and buildings in
Helsinki, Finland for $113,287 (based on the exchange rate of the Euro on the
date of acquisition), and entered into a net lease with Pohjola Non-Life
Insurance Company. The lease has an initial term of 10 years and 5 months with a
5-year minimum renewal option and provides for initial annual rent of $8,128.
The lease provides for annual rent increases based on the Finnish CPI. In
connection with the purchase, the limited liability company obtained a limited
recourse mortgage loan of $84,663 with a 10-year term and a fixed annual
interest rate of 4.59% through February 2007 and 4.57% thereafter through the
remainder of the loan term.
On February 28, 2005, we and CPA(R):16-Global, through 75% and 25% interests,
respectively, in a limited liability company, entered into a purchase and sale
agreement with Hellweg Die Profi-Baumarkte GMBH to purchase up to 16 properties
in Germany for up to $166,345 (based on the exchange rate of the Euro as of the
date of the agreement), subject to certain due diligence procedures and
negotiations with the proposed lessees. There is no assurance that this purchase
will be completed, and, if completed, that the actual terms will not differ from
the proposed terms. To the extent that all 16 properties are purchased, initial
annual rent will be $13,597. In the event that the purchase is completed, we
intend to seek to obtain limited recourse mortgage financing of approximately
$115,223.
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
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
- --------------------------------------------------------------------------------
(In thousands except share and per share amounts)
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 flow.
Identification of Tangible and Intangible Assets in Connection with Real Estate
Acquisitions
In connection with the acquisition of properties, purchase costs are allocated
to tangible and intangible assets and liabilities acquired based on their
estimated fair values. The value of tangible assets, consisting of land,
buildings and tenant improvements, is determined as if vacant. Intangible assets
including the above-market value of leases, the value of in-place leases and the
value of tenant relationships are recorded at their relative fair values.
Below-market value of leases are also recorded at their relative fair values and
are included in prepaid and deferred rental income and security deposits in the
accompanying financial statements.
The value attributed to tangible assets is determined in part using a discount
cash flow model which is intended to approximate what a third party would pay to
purchase the property as vacant and rent at current "market" rates. In applying
the model, we assume that the disinterested party would sell the property at the
end of a market lease term. Assumptions used in the model are property-specific
as information is available; however, when certain necessary information is not
available, we will use available regional and property-type information.
Assumptions and estimates include a discount rate or internal rate of return,
marketing period necessary to put a lease in place, carrying costs during the
marketing period, leasing commissions and tenant improvements allowances, market
rents and growth factors of such rents, market lease term and a cap rate to be
applied to an estimate of market rent at the end of the market lease term.
Above-market and below-market lease intangibles are based on the difference
between the market rent and the contractual rents and are discounted to a
present value using an interest rate reflecting our current assessment of the
risk associated with the lease acquired. We acquire properties subject to net
leases and consider the credit of the lessee in negotiating the initial rent.
The total amount of other intangibles is allocated to in-place lease values and
tenant relationship intangible values based on our evaluation of the specific
characteristics of each tenant's lease and our overall relationship with each
tenant. Characteristics we consider in allocating these values include the
nature and extent of the 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 are used to determine these values. Intangibles for above-market
and below-market leases, in-place lease intangibles and tenant relationships are
amortized over their estimated useful lives. In the event that a lease is
terminated, the unamortized portion of each intangible, including market rate
adjustments, in-place lease values and tenant relationship values, is charged to
expense.
Factors considered 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, assets held for sale and
equity investments. Estimates and judgments are used when evaluating whether
these assets are impaired. When events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable, we perform projections
of undiscounted cash flows, and if such cash flows are insufficient, the assets
are adjusted (i.e., written down) to their estimated fair value. An analysis of
whether a real estate asset has been impaired requires us to make our best
estimate of market rents, residual values and holding periods. In our
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
- --------------------------------------------------------------------------------
(In thousands except share and per share amounts)
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, other than
temporary decline in residual value, 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 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.
Impairments of $5,000 recorded in 2004 in discontinued operations are described
in Results of Operations above.
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
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
- --------------------------------------------------------------------------------
(In thousands except share and per share amounts)
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 1.25% 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 1.22% of lease revenues.
Fair Value of Assets and Liabilities
In connection with the Merger, we acquired a subordinated interest in a mortgage
trust that consists of limited recourse loans on 62 properties that we hold with
three of our affiliates. The fair value of the interests in the trust is
determined using a discounted cash flow model with assumptions of market rates
and the credit quality of the underlying lessees. If there are adverse changes
in either market rates or the credit quality of the lessees, the model and,
therefore, the income recognized from the subordinated interests 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 hedges and ineffective portions of
hedges are recognized in earnings in the 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.
Interest to be Capitalized in Connection with Real Estate Under Construction
Operating real estate is stated at cost less accumulated depreciation. Costs
directly related to build-to-suit projects, primarily interest, if applicable,
are capitalized. Interest capitalized in 2004 and 2003 was approximately $3,298
and $3,178, respectively. We consider a build-to-suit project as substantially
completed upon the completion of improvements, but no later than a date that is
negotiated and stated in the lease. If portions of a project are substantially
completed and occupied and other portions have not yet reached that stage, the
substantially completed portions are accounted for separately. We allocate costs
incurred between the portions under construction and the portions substantially
completed and only capitalize those costs associated with the portion under
construction. We do not have a credit facility and determine an interest rate to
be applied for capitalizing interest based on an average rate on our outstanding
limited recourse mortgage debt.
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 five joint ventures that are
consolidated and have minority interests that have finite lives and were
considered mandatorily redeemable non-controlling interests prior to the
issuance of FSP 150-3. As a result of the deferral provisions of FSP 150-3,
these minority interests have not been
-14-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
- --------------------------------------------------------------------------------
(In thousands except share and per share amounts)
reflected as liabilities. We adopted FAS 150 in July 2003 and it did not have a
significant impact on our consolidated financial statements.
-15-
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Corporate Property Associates 15 Incorporated:
We have completed an integrated audit of Corporate Property Associates 15
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 15 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 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
-16-
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
-17-
CORPORATE PROPERTY ASSOCIATES 15 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 $ 392,445 $ 145,549
Buildings 1,350,377 737,913
---------- ----------
1,742,822 883,462
Less, accumulated depreciation 47,756 18,725
---------- ----------
1,695,066 864,737
Net investment in direct financing leases 291,367 148,325
Intangible assets, net of accumulated amortization
of $8,503 and $533 at December 31, 2004 and 2003 228,760 32,742
Assets held for sale 19,385 --
Real estate under construction 25,115 61,270
Equity investments 180,479 83,984
Cash and cash equivalents 144,522 235,217
Marketable securities 32,150 111,000
Short-term investments -- 37,833
Other assets, net 101,552 64,044
---------- ----------
Total assets $2,718,396 $1,639,152
========== ==========
LIABILITIES, MINORITY INTEREST, AND
SHAREHOLDERS' EQUITY:
Liabilities:
Limited recourse mortgage notes payable $1,309,126 $ 596,003
Notes payable -- 4,061
Accrued interest 7,694 2,464
Due to affiliates 6,159 2,912
Accounts payable and accrued expenses 10,661 6,907
Other liabilities 23,378 --
Prepaid and deferred rental income and security
deposits, net of accumulated amortization of
$653 and $172 at December 31, 2004 and 2003 66,122 38,504
Deferred acquisition fees payable to affiliate 34,650 24,005
Dividends payable 19,908 16,555
---------- ----------
Total liabilities 1,477,698 691,411
---------- ----------
Minority interest 176,490 52,650
---------- ----------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value; authorized 240,000,000
shares; issued and outstanding, 126,009,926 and
105,681,019 at December 31, 2004 and 2003 126 106
Additional paid-in capital 1,147,138 944,788
Dividend in excess of accumulated earnings (85,151) (52,887)
Accumulated other comprehensive income 6,189 3,255
---------- ----------
1,068,302 895,262
Less, treasury stock at cost, 416,149 and 18,807
shares at December 31, 2004 and 2003 (4,094) (171)
---------- ----------
Total shareholders' equity 1,064,208 895,091
---------- ----------
Total liabilities, minority interest and
shareholders' equity $2,718,396 $1,639,152
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
-18-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
CONSOLIDATED STATEMENTS of INCOME
For the years ended December 31, 2004, 2003 and 2002
(In thousands except share and per share amounts)
2004 2003 2002
------------ ----------- -----------
Revenues:
Rental income $ 131,452 $ 65,912 $ 11,372
Interest income from direct financing leases 18,096 6,845 1,322
Other operating income 9,991 6,363 253
------------ ----------- -----------
159,539 79,120 12,947
------------ ----------- -----------
Operating Expenses:
Depreciation and amortization 34,044 16,457 2,570
General and administrative 8,534 7,322 1,289
Property expense 25,113 16,498 1,810
Impairment charge on real estate -- 24,000 --
------------ ----------- -----------
67,691 64,277 5,669
------------ ----------- -----------
Income before interest income, minority
interest, equity investments, interest
expense and gains and losses 91,848 14,843 7,278
Interest income 3,291 3,410 1,698
Minority interest in income (9,445) (2,703) (88)
Income from equity investments 10,065 8,233 1,067
Interest expense (57,579) (25,961) (4,188)
------------ ----------- -----------
Income (loss) from continuing operations
before gains and losses 38,180 (2,178) 5,767
Gains on foreign currency transactions, net 5,516 3,173 --
(Loss) gain on sale (48) 2,757 --
------------ ----------- -----------
Income from continuing operations 43,648 3,752 5,767
Discontinued operations:
(Loss) income from operations of discontinued
properties (240) 895 --
Gain on sale of real estate 478 -- --
Impairment charge on property held for sale (5,000) -- --
------------ ----------- -----------
(Loss) income from discontinued operations (4,762) 895 --
------------ ----------- -----------
Net income $ 38,886 $ 4,647 $ 5,767
============ =========== ===========
Basic earnings (loss) per share:
Earnings from continuing operations $ .39 $ .05 $ .29
(Loss) earnings from discontinued operations (.05) .01 --
------------ ----------- -----------
Net income $ .34 $ .06 $ .29
============ =========== ===========
Weighted average shares outstanding - basic 112,766,233 78,939,049 19,720,070
============ =========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
-19-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31, 2002, 2003 and 2004
(In thousands except share and per share amounts)
Dividends in Accumulated
Additional Excess of Other
Common paid-in Comprehensive Accumulated Comprehensive Treasury
stock capital income Earnings Income Stock Total
------ ---------- ------------- ------------ ------------- -------- ----------
Balance at
December 31, 2001 $ 200 $ (69) $ 131
39,946,488 shares issued $.001
par, at $10 per share, net
of offering costs $ 40 355,764 355,804
Dividends (11,968) (11,968)
Comprehensive Income:
Net income 5,767 5,767 5,767
Other comprehensive income:
Foreign currency
translation adjustment 1,061 $1,061 1,061
-------
$ 6,828
=======
Balance at ---- ---------- -------- ------ ----------
December 31, 2002 40 355,964 (6,270) 1,061 350,795
---- ---------- -------- ------ ----------
65,695,724 shares issued $.001
par, at $10 per share, net
of offering costs 66 588,824 588,890
Dividends (51,264) (51,264)
Purchase of treasury stock,
18,807 shares $ (171) (171)
Comprehensive Income:
Net income $ 4,647 4,647 4,647
Other comprehensive income:
Foreign currency
translation adjustment 2,194 2,194 2,194
-------
$ 6,841
=======
Balance at ---- ---------- -------- ------ -------- ----------
December 31, 2003 106 944,788 (52,887) 3,255 (171) 895,091
---- ---------- -------- ------ -------- ----------
20,328,907 shares issued $.001
par, at $10 per share, net
of offering costs 20 202,350 202,370
Dividends (71,150) (71,150)
Purchase of treasury stock,
397,342 shares (3,923) (3,923)
Comprehensive Income:
Net income $38,886 38,886 38,886
Other comprehensive income:
Unrealized appreciation on
marketable securities 344 344 344
Unrealized loss on
derivative instruments (528) (528) (528)
Foreign currency translation
adjustment 3,118 3,118 3,118
-------
$41,820
=======
Balance at ---- ---------- -------- ------ -------- ----------
December 31, 2004 $126 $1,147,138 $(85,151) $6,189 $(4,094) $1,064,208
==== ========== ======== ====== ======== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
-20-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
---------------------------------
2004 2003 2002
--------- --------- ---------
Cash flows from operating activities:
Net income $ 38,886 $ 4,647 $ 5,767
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss (income) from discontinued operations, including
impairment charge and gain on sale of real estate 4,762 (895) --
Depreciation and amortization 34,849 16,664 2,582
Equity income in excess of distributions received (632) (1,190) --
Minority interest in income 9,445 2,703 88
Straight-line rent adjustments (5,210) (5,012) (245)
Fees paid by issuance of stock to affiliate 6,487 3,305 317
Impairment charges on real estate -- 24,000 --
Unrealized gain on foreign currency transactions (2,100) (1,638) --
Loss (gain) on sale of real estate 48 (2,757) --
Realized gain on foreign currency transactions (3,416) (1,535) --
Settlement proceeds assigned to lender (2,754) -- --
Changes in operating assets and liabilities, net of operating
assets acquired and liabilities assumed in connection with
acquisition of business operations (a) (b) 10,369 16,349 4,824
--------- --------- ---------
Net cash provided by continuing operations 90,734 54,641 13,333
Net cash (used in) provided by discontinued operations (13) 895 --
--------- --------- ---------
Net cash provided by operating activities 90,721 55,536 13,333
--------- --------- ---------
Cash flows from investing activities:
Distributions from equity investments in excess of equity income 1,570 327 1,114
Distributions of mortgage financing from equity investees -- 24,162 --
Purchase of short-term investments (17,782) (37,833) --
Redemption of short-term investments 55,615 -- --
Purchases of securities (39,125) (146,995) (71,350)
Sales of securities 130,125 50,995 56,350
Acquisitions of real estate and equity investments and other
capitalized costs (c) (688,335) (536,361) (662,856)
Value added taxes recoverable on purchases of real estate 5,134 (2,652) (4,036)
Payment of deferred acquisition fees (3,253) -- --
Proceeds from sale of real estate 16,828 3,662 11,615
Cash acquired in acquisition of business operations (f) 86,626 -- --
Cash payments to shareholders of acquired company (231,826) -- --
--------- --------- ---------
Net cash used in investing activities (684,423) (644,695) (669,163)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from stock issuance, net of costs 21,954 585,585 355,486
Dividends paid (67,797) (40,498) (6,179)
Proceeds from mortgages (d) (e) 495,954 194,680 359,189
Proceeds from note payable -- 3,862 3,622
Prepayment of note payable (3,862) (3,622) --
Mortgage principal payments (13,206) (7,864) (385)
Distributions to minority partners (6,900) (3,737) (235)
Contributions from minority partners, net of distributions 76,720 17,659 28,340
Deferred financing costs and mortgage deposits (163) (2,424) (4,512)
Purchase of treasury stock (3,923) (171) --
--------- --------- ---------
Net cash provided by financing activities 498,777 743,470 735,326
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents 4,230 1,144 78
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (90,695) 155,455 79,574
Cash and cash equivalents, beginning of year 235,217 79,762 188
--------- --------- ---------
Cash and cash equivalents, end of year $ 144,522 $ 235,217 $ 79,762
========= ========= =========
-21-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(In thousands)
Non-cash investing and financing activities:
(a) Increase in due to affiliates excludes amounts which relate to the raising
of capital (financing activities) pursuant to the Company's public
offering. At December 31, 2002, the amount due to the Company's Advisor, W.
P. Carey & Co. LLC, was $6,815.
(b) The Company assigned a security deposit of $10,462 to a lender which is
included in other assets and prepaid rental income and security deposits,
respectively, in 2002.
(c) 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
$13,899, $12,024 and $13,012, respectively.
(d) Net of $1,941 and $8,172 held back by lenders to fund escrow accounts in
2004 and 2003, respectively.
(e) In connection with acquiring properties in 2002, the Company assumed
mortgage notes payable of $8,630.
(f) The merger with Carey Institutional Properties Incorporated ("CIP(R)") as
described in Note 3 to the consolidated financial statements, consisted of
the acquisition and assumption of certain assets and liabilities,
respectively, at fair value in exchange for the issuance of shares, a cash
payment to CIP(R) shareholders who elected to redeem their shares and
certain costs, as follows:
Real estate accounted for under the operating method $ 228,465
Net investment in direct financing leases 136,638
Intangible assets 106,641
Equity investments 94,251
Investment in mortgage loan securitization 11,999
Other assets 3,255
Mortgage notes payable net (cost $205,572) (202,186)
Amounts due to CIP(R)shareholders (1) (231,826)
Other liabilities (2) (24,161)
Minority interest (35,497)
Issuance of common stock (174,205)
---------
Cash acquired in acquisition of CIP(R)'s business operations $ 86,626
=========
As part of the merger, the Company issued 17,420,571 shares of common stock
of the Company to shareholders of CIP(R) in exchange for 15,982,176 shares
of common stock of CIP(R).
(1) Consists of dividend payable of $90,913 and $140,913 for redemption of
shares, both of which were paid in 2004.
(2) Includes current and deferred fees of $6,385 and $5,108 payable to the
Advisor (see Note 3 to the consolidated financial statements).
Supplemental cash flow information:
Interest paid, excluding capitalized interest, was $53,639 in 2004, $25,689 in
2003 and $3,319 in 2002, respectively. Capitalized interest was $3,298, $3,178
and $321 in 2004 , 2003 and 2002, respectively.
A dividend of $0.1585 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.
-22-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
1. Organization:
Corporate Property Associates 15 Incorporated (the "Company") is a Real Estate
Investment Trust ("REIT") that invests in commercial and industrial real estate
leased to companies domestically and internationally. As of December 31, 2004,
our portfolio consisted of 306 properties leased to 83 tenants and totaled more
than 29 million square feet.
The Company was formed as a Maryland corporation on February 26, 2001. Between
November 7, 2001 and November 8, 2002, we sold a total of 39,930,312 shares of
common stock for gross proceeds of $399,303 in gross offering proceeds. Between
March 20, 2003 and August 7, 2003, we completed an offering for an additional
64,687,294 shares of our common stock to the public, for gross proceeds of
$646,873. We have used and will continue to use the proceeds of our two public
offerings, combined with limited recourse mortgage debt, to acquire and own
commercial and industrial 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.
2. Summary of Significant Accounting Policies:
BASIS OF CONSOLIDATION
The consolidated financial statements include the Company, its wholly owned
subsidiaries and controlling majority-owned partnership interests. 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 the entity
to determine if the entity is deemed a VIE, and if the Company is deemed to be
the primary beneficiary, in accordance with FASB Interpretation No. 46(R),
"Consolidation of Variable Interest Entities" ("FIN 46(R)"). Entities that meet
one or more of the criteria listed below are considered VIEs.
- The Company's equity investment is not sufficient to allow the entity
to finance its activities without additional third party financing;
- The Company does not have the direct or indirect ability to make
decisions about the entity's business;
- The Company is not obligated to absorb the expected losses of the
entity;
- The Company does not have the right to receive the expected residual
returns of the entity; and
- The Company's voting rights are not proportionate to its economic
interests, and substantially all of the entity's activities either
involve or are conducted on behalf of an investor that has
disproportionately few voting rights.
The Company consolidates the entities that are VIEs and the Company is deemed to
be the primary beneficiary of the VIE. For entities where the Company is not
deemed to be the primary beneficiary or the entity is not deemed a VIE and the
Company's ownership is 50% or less and has the ability to exercise significant
influence as well as jointly-controlled tenancy-in-common interests are
accounted for under the equity method, i.e. at cost, increased or decreased by
the Company's share of earnings or losses, less distributions. The Company will
reconsider its determination of whether an entity is a VIE and who the primary
beneficiary is if certain events occur that are likely to cause a change in the
original determinations.
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 marketable securities.
-23-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
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 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 are
allocated to the tangible and intangible assets and liabilities acquired based
on their estimated fair values. The value of the tangible assets, consisting of
land, buildings and tenant improvements, is determined as if vacant. Intangible
assets including the above-market value of leases, the value of in-place leases
and the value of tenant relationships are recorded at their relative fair
values. Below-market value of leases are also recorded at their relative fair
values and are included in prepaid and deferred rental income and security
deposits in the accompanying financial statements.
Above-market and below-market in-place lease values for owned properties are
recorded based on the present value (using an interest rate reflecting the risks
associated with the leases acquired) of the difference between (i) the
contractual amounts to be paid pursuant to the leases negotiated and in-place at
the time of acquisition of the properties and (ii) management's estimate of fair
market lease rates for the property or equivalent property, measured over a
period equal to the remaining non-cancelable term of the lease. The capitalized
above-market lease value is amortized as a reduction of rental income over the
remaining non-cancelable term of each lease. The capitalized below-market lease
value is amortized as an increase to rental income over the initial term and any
fixed rate renewal periods in the respective leases.
The total amount of other intangibles are allocated to in-place lease values and
tenant relationship intangible values based on management's evaluation of the
specific characteristics of each tenant's lease and the Company's overall
relationship with each tenant. Characteristics that are considered in allocating
these values include the nature and extent of the existing relationship with the
tenant, prospects for developing new business with the tenant, the tenant's
credit quality and the expectation of lease renewals among other factors. Third
party appraisals or management's estimates are used to determine these values.
Intangibles for above-market and below-market leases, in-place lease intangibles
and tenant relationships are amortized over their estimated useful lives. In the
event that a lease is terminated, the unamortized portion of each intangible,
including market rate adjustments, in-place lease values and tenant relationship
values, is charged to expense.
Factors considered in the analysis include the estimated carrying costs of the
property during a hypothetical expected lease-up period, current market
conditions and costs to execute similar leases. The Company also considers
information 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 are also considered.
The value of in-place leases are amortized to expense over the remaining initial
term of each lease. The value of tenant relationship intangibles are amortized
to expense over the initial and expected renewal terms of the leases but no
amortization period for intangibles will exceed the remaining depreciable life
of the building.
The purchase price allocation in connection with the merger with CIP(R) is
described in Note 3.
-24-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
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 AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
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. All of the Company's cash and
cash equivalents at December 31, 2004 and 2003 were held in the custody of three
financial institutions and which balances, at times, exceed federally insurable
limits. The Company mitigates this risk by depositing funds with major financial
institutions. Similar investments that have a maturity of three months or more
at the time of purchase are classified as short-term investments in the
accompanying consolidated financial statements.
MARKETABLE SECURITIES
Marketable securities, which consist of an interest in collateralized mortgage
obligations (see Note 9) 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.
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 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
..50% of the purchase price of the properties, over no less than four years
following the first anniversary of the date a property was purchased. Payment of
such fees is subject to the Preferred Return (see Note 4).
ACCUMULATED OTHER COMPREHENSIVE INCOME
As of December 31, 2004 and 2003, accumulated other comprehensive income
reflected in the shareholders' equity is comprised of the following:
As of December 31,
------------------
2004 2003
------ ------
Unrealized appreciation on marketable securities $ 344 $ --
Unrealized loss on derivative instruments (528) --
Foreign currency translation adjustment 6,373 3,255
------ ------
Accumulated other comprehensive income $6,189 $3,255
====== ======
TREASURY STOCK
Treasury stock is recorded at cost.
-25-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
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 $14,555.
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 5 and 6, respectively):
Direct financing method - Leases accounted for under the direct financing method
are recorded at their net investment (see Note 6). 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 (see Note 5).
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 have 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 1.25% of lease revenues (rental income and interest
income 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. For the years ended December 31,
2004 and 2003, the allowance for uncollected rents was $2,002 and $182,
respectively.
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 the 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.
-26-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
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 the Company's proportionate share of earnings and cash
contributions and distributions. On a periodic basis, the Company assesses
whether there are any indicators that the value of equity investments may be
impaired and whether or not that impairment is other than temporary. To the
extent impairment has occurred, the charge shall be measured as the excess of
the carrying amount of the investment over the fair value of the investment.
When the Company identifies assets as held for sale, it discontinues
depreciating the assets and estimates the sales price, net of selling costs, of
such assets. If in the Company's opinion, the net sales price of the assets
which have been identified for sale is less than the net book value of the
assets, an impairment charge is recognized and a valuation allowance is
established. To the extent that a purchase and sale agreement has been entered
into, the allowance is based on the negotiated sales price. To the extent that
the Company has adopted a plan to sell an asset but has not entered into a sales
agreement, it will make judgments of the net sales price based on current market
information. Accordingly, the initial assessment may be greater or less than the
purchase price subsequently 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 France, Ireland,
Belgium, Finland and the United Kingdom and owns an interest in property in
Germany. The functional currencies for these investments are the Euro and the
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 $6,373 and $3,255,
respectively.
Foreign currency transactions may produce receivables or payables that are fixed
in terms of the amount of foreign currency that will be received or paid. A
change in the exchange rates between the functional currency and the currency in
which a transaction is denominated increases or decreases the expected amount of
functional currency cash flows upon settlement of that transaction. That
increase or decrease in the expected functional currency cash flows is a foreign
currency transaction gain or loss that generally will be included in determining
net income for the period in which the exchange rate changes. Likewise, a
transaction gain or loss (measured from the transaction date or the most recent
intervening balance sheet date) whichever is later, realized upon settlement of
a foreign currency transaction generally will be included in net income for the
period in which the transaction is settled. Foreign currency transactions that
are (i) designated as, and are effective as, economic hedges of a net investment
and (ii) 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.
Foreign currency intercompany transactions with subsidiaries 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 $2,100 and $1,638 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 $3,416 and
$1,535, 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.
-27-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
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"). The Company has an interest rate swap instrument on a variable rate
loan which has a notional amount of $23,646 as of December 31, 2004. The
interest rate swap is a derivative instrument designated as a cash flow hedge
which allows the Company to limit its exposure to interest rate movements.
Changes in the fair value of the interest swap agreement are included in other
comprehensive income (loss). The interest rate swap was entered into in 2004 and
at December 31, 2004 reflected an unrealized loss of $528.
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 18).
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.
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 in
the accompanying 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. The Company has an interest in one limited partnership
that is consolidated and
-28-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
that is considered a mandatorily redeemable controlling interest with a finite
life As a result of the deferral provisions of FSP 150-3, this minority interest
has not been reflected as a liability. The Company adopted FAS 150 in July 2003
and it did not have a significant impact on our consolidated financial
statements.
3. Business Combination with Carey Institutional Properties Incorporated:
On September 1, 2004, a subsidiary of the Company and Carey Institutional
Properties Incorporated ("CIP(R)"), an affiliated real estate investment trust
managed by W. P. Carey & Co. LLC, the Company's advisor ("Advisor"), completed a
merger ("Merger") pursuant to a Merger agreement dated June 4, 2004 between the
companies. The Merger provided a liquidation option for CIP(R) shareholders and
provided for the continued growth and enhancement of the Company's investment
portfolio. Under the terms of the Merger, which was approved by the shareholders
of both companies at special meetings of the shareholders of each company held
on August 24, 2004, the Company's subsidiary is the surviving company. The total
purchase price for CIP(R) was $519,477, which is comprised of 17,420,571
($174,206 based on $10 per share) shares of the Company's common stock, $140,913
in consideration for CIP(R) shareholders who redeemed their interests, fair
value of debt assumed of $202,186 and transaction costs of $2,172. Prior to the
completion of the Merger, CIP(R)'s interests in certain real estate assets that
did not meet the investment objectives of the Company were sold to the Advisor.
Under the terms of the Merger agreement, each CIP(R) shareholder had the option
of receiving either 1.09 shares of newly issued Company common stock or $10.90
in cash for each CIP(R) common share that he or she owned as of August 31, 2004.
The exchange ratio for issuing shares was based on a third party valuation of
CIP(R) and pursuant to fairness opinions that each company received from
separate investment banking firms. Shareholders holding 15,982,176 shares of
CIP(R) common stock received 17,420,571 shares of Company common stock and
shareholders holding 12,927,812 shares of CIP(R) common stock elected to receive
cash of $140,913 in consideration for redeeming their CIP(R) interests.
The Company has accounted for the Merger under the purchase method of
accounting. The purchase price has been allocated to the assets acquired and
liabilities assumed based upon their fair values. The assets acquired primarily
consist of commercial real estate assets net leased to single tenants, cash, a
subordinated interest in a mortgage loan securitization, receivables and
deposits. The liabilities assumed primarily consist of mortgage notes payable,
accrued interest, accounts payable, security deposits and amounts due to former
CIP(R) shareholders. The amounts due to former CIP(R) shareholders were paid
prior to September 30, 2004. The results of operations for the year ended
December 31, 2004 include CIP(R) for the period from September 1, 2004 to
December 31, 2004.
In connection with evaluating the fair value of real estate interests acquired,
the Company assigned a portion of the value to both tangible assets and
intangible assets. Intangible assets consist of values attributable to
above-market and below-market leases, in-place lease intangibles and tenant
relationships. As more fully described in Note 2, the allocation of value to
tangible and intangible assets is based on certain critical accounting
estimates. The value attributed to tangible assets is determined in part using a
discounted cash flow model which is intended to approximate what a third party
would pay to purchase the property as vacant and rent at "market" rates.
Above-market and below-market lease intangibles are based on the difference
between the market rent and the contractual rents and are discounted to a
present value using an interest rate reflecting the Company's assessment of the
risk associated with the lease acquired. In-place lease and tenant relationship
values are based on the specific characteristics of each lease and estimated
carrying costs of the property during a hypothetical expected lease-up period,
current market conditions and costs to execute similar leases. The fair values
of the interest in the mortgage loan securitization and mortgage notes payable
were determined using cash flow models and assumptions about market interest
rates at or near the date of the Merger. Substantially all of the other assets
acquired and liabilities assumed approximated their stated values and are
short-term in nature.
4. Agreements and Transactions with Related Parties:
In connection with performing management 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
-29-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands, except share and per share amounts
subordinated to the Preferred Return, a cumulative non-compounded dividend
return of 6%. 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. For the years
ended December 31, 2004, 2003 and 2002, the Company incurred asset management
fees of $7,881, $4,161 and $737, respectively, with performance fees in like
amounts. For the years ended December 31, 2004, 2003 and 2002, the Company
incurred personnel reimbursements of $2,869, $1,163 and $193, respectively.
Asset management fees and personnel reimbursement costs are included in property
expense and general and administrative expenses, respectively, in the
accompanying 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. A portion of such fees is deferred and is payable in equal annual
installments over no less than four 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 that were completed in 2004, 2003 and 2002, current
fees were $17,373, $15,030 and $16,265, respectively and deferred fees were
$13,899, $12,024 and $13,012, respectively. An annual installment of deferred
fees was paid to the Advisor in January 2004.
The Advisor is obligated to reimburse the Company for the amount by which
operating expenses of the Company exceeds 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 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 cost of significant litigation that is 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 Company owns interests in limited partnerships and limited liability
companies which range from 30% to 65% and a 64% interest in a jointly controlled
tenancy-in-common which owns two properties subject to a master net lease. The
remaining interests in the limited partnerships and tenancy-in-common are owned
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 sharing the associated costs. Pursuant to the terms of the
agreement, which has a term through 2016, the Company's share of rental
occupancy and leasehold improvement costs is based on gross revenues. Expenses
of $471 and $136 were incurred in 2004 and 2003, respectively. The Company's
share of aggregate future minimum lease payments as of December 31, 2004 is
$9,906.
5. 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 are as follows:
Year ended December 31,
- -----------------------
2005 $ 164,957
2006 165,755
-30-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands except share and per share amounts
2007 166,023
2008 166,552
2009 167,191
Thereafter through 2028 1,541,448
Contingent rents (including CPI-based increases) were approximately $798 and $77
in 2004 and 2003, respectively. No contingent rents were realized in 2002.
6. Net Investment in Direct Financing Leases:
Net investment in direct financing leases is summarized as follows:
December 31,
-------------------
2004 2003
-------- --------
Minimum lease payments
receivable $515,594 $342,603
Unguaranteed residual value 229,585 128,003
-------- --------
745,179 470,606
Less: unearned income 453,812 322,281
-------- --------
$291,367 $148,325
======== ========
Scheduled future minimum rents, exclusive of renewals and expenses paid by
tenants, under non-cancelable direct financing lease are as follows:
Year ended December 31,
- -----------------------
2005 $ 26,941
2006 27,058
2007 27,178
2008 26,963
2009 27,199
Thereafter through 2033 380,255
Contingent rents (including CPI-based increases) were approximately $358 and $10
in 2004 and 2003, respectively. No contingent rents were realized in 2002.
7. Equity Investments:
The Company owns interests in single-tenant net leased properties leased to
corporations through noncontrolling interests in (i) 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 common control. The ownership interests range from 30% to 64%. All of the
underlying investments are owned with affiliates that have similar investment
objectives as the Company. The lessees are Petsmart, Inc.; Builders FirstSource,
Inc.; True Value Company; Hologic, Inc., Starmark Camhood LLC., Actuant
Corporation, Marriott International, Inc. ("Marriott"), Advanced Micro Devices,
Inc. ("AMD"), CompuCom Systems, Inc. ("CompuCom"), The Upper Deck Co. ("Upper
Deck") and Del Monte Corporation ("Del Monte"). The interests in the Marriott,
AMD, CompuCom, Upper Deck and Del Monte properties were acquired in connection
with the Merger.
Summarized combined financial information of the equity investees is as follows:
December 31,
-------------------
2004 2003
-------- --------
Assets (primarily real estate) $763,997 $450,586
Liabilities (primarily mortgage notes payable) 451,998 265,972
-------- --------
Partners' and members' capital $311,999 $184,614
======== ========
Company's share of equity investees' net assets $180,479 $ 83,984
======== ========
-31-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands except share and per share amounts
Year Ended December 31,
-----------------------------
2004 2003 2002
-------- -------- -------
Revenues (primarily rental income and
interest income from direct financing
leases) $ 84,612 $ 43,749 $10,795
Expenses (primarily interest on mortgages
and depreciation) (45,799) (25,619) (6,064)
-------- -------- -------
Net income $ 38,813 $ 18,130 $ 4,731
======== ======== =======
Company's share of net income from equity
investments $ 10,065 $ 8,233 $ 1,067
======== ======== =======
8. Acquisitions of Real Estate and Real Estate Interests:
A summary of the properties and investments acquired during 2004 is as follows:
ORIGINAL ANNUAL
INITIAL MORTGAGE DEBT
ANNUAL FINANCING SERVICE DATE
LEASE OBLIGOR: COST LOCATION RENT (1) (1) (1) ACQUIRED
-------------- -------- -------- -------- --------- ------- ---------
TietoEnator plc. (2)(3) $ 97,370 Espoo, Finland $ 6,985 $ 70,739 $ 4,327 7/8/2004
Thales S.A.(2)(4) 103,200 Guyancourt, Conflans, 9,715 76,835 5,774 7/26/2004
Laval, Ymare and and
Aubagne, France 8/3/2004
Grande Communications Networks, Inc. 1,361 San Marcos, TX 140 -- -- 6/24/2004
Shaklee Corporation 32,461 Pleasanton, CA 2,679 18,800 1,557 5/26/2004
Oriental Trading Company, Inc.(5) 31,000 La Vista, NE 2,728 16,400 -- 5/7/2004
Mercury Partners, LP and U-Haul Moving 78 locations in the United
Partners, Inc.(6) 312,445 States 28,541 183,000 14,758 4/29/2004
Worthington Precision Metals, Inc. 7,168 Mentor, OH and Franklin, TN 788 4,600 381 4/14/2004
World Airways, Inc. 8,699 Peachtree City, GA 853 5,500 502 3/26/2004
UTI Holdings, Inc. 22,815 Rancho Cucamonga, CA 1,936 14,000 1,110 2/6/2004
Affina Corporation 12,565 Peoria, IL 1,254 -- -- 1/8/2004
Regie des Batiments(2) 12,120 Mons, Belgium 1,269 11,231 799 1/2/2004
Plumbmaster, Inc. 9,843 Concord Township, PA and 855 6,300 522 1/2/2004
Oceanside, CA
(1) Amounts are shown at 100% for properties and investments where the Company
has a controlling interest and less than 100% ownership interest.
(2) Based on the applicable exchange rates on the dates of acquisition.
(3) The Company owns a controlling 60% interest.
(4) The Company owns a controlling 65% interest.
(5) Build-to-suit commitment. The Company has obtained a loan facility of
$16,400 which may be drawn upon to fund construction of the property. The
initial annual rent is based on estimated construction costs of $31,000 and
will commence when construction is completed. Initial annual rent may be
adjusted if actual construction costs are different from the estimate.
(6) The Company owns a controlling 57.69% interest, and received from the
tenant a security deposit of $22,849, which is included in Other
Liabilities.
A summary of the properties and investments acquired during 2003 is as follows:
Original
Initial Annual Mortgage Annual Debt Date(s)
Lease Obligor: Cost Location Rent Financing Service Acquired
-------------- ------- -------- -------------- --------- ----------- ----------
Insulated Structures $22,021 Birmingham, UK $1,698 $15,283 $ 798 1/28/2003
Investments Limited (1)
WNA American Plastic 6,545 Chattanooga, TN 637 -- -- 2/12/2003
-32-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands except share and per share amounts
Industries, Inc.
WinCup Holdings, Inc. 15,602 Mooresville, NC 1,460 9,500 838 2/25/2003
Pemstar, Inc. 12,565 Rochester, MN 1,278 7,500 664 3/28/2003
Gestamp Alabama, Inc. 15,707 McCalla, AL 1,575 8,500 712 3/28/2003
MediMedia USA, Inc. 23,979 Yardley, PA 2,111 14,000 1,072 4/1/2003
Qualceram Shires plc (1) 35,213 England, Northern 2,759 23,171 1,988 4/29/2003
Ireland and Ireland
Lillian Vernon Corporation 38,743 Virginia Beach, VA 3,848 24,000 2,108 7/2/2003
Qualserv Corporation 6,492 Fort Smith, AR 667 -- -- 7/31/2003
Grande Communications 13,822 Corpus Christi, 1,379 7,550 687 8/7/2003
Networks, Inc. Odessa, San Marcos
and Waco, TX
Dick's Sporting Goods, Inc. 22,089 Cheektowaga, NY, 2,257 8,200 760 8/8/2003
Greenwood, IN and
Freehold, NJ
Kerr Group, Inc. 14,764 Jackson, TN and 1,331 8,460 739 8/13/2003
Bowling Green, KY
American Pad & Paper LLC 16,126 Holyoke and 1,579 9,400 764 8/26/2003
Westfield, MA,
Mattoon, IL and
Morristown, TN
Life Time Fitness, Inc. 44,921 Rochester Hills and 4,247 27,000 2,174 9/30/2003
Canton, MI
Precise Technology, Inc. 29,319 Excelsior Springs, MO; 2,640 17,200 1,524 10/30/2003
St. Petersburg, FL;
West Lafayette, IN;
North Versailles
Township, PA and
Buffalo Grove, IL
Insulated Structures 10,715 West Midlands, United 713 6,223 452 11/4/2003
Investments Limited (1) Kingdom
Starmark Camhood II LLC 28,272 Atlanta, GA and Bel 2,633 15,500 1,226 11/7/2003
Air, MD
Berry Plastics Corporation 36,649 Alsip, IL, Geddes, NY 2,960 21,200 1,756 11/20/2003
and Tolleson, AZ
Sportsrack LLC 11,518 Shelby and Port Huron, 1,045 7,400 617 11/24/2003
MI
Carrefour France, SAS (1) 20,634 Nimes, France 1,921 16,750 251 11/27/2003
Actuant Corporation (1)(2) 16,690 Kahl am Main, 1,602 11,233 939 12/11/2003
Germany
24 Hour Fitness USA, Inc. 9,766 Englewood, CO 914 6,300 584 12/22/2003
Equity Investments Acquired:
Initial Annual
Contractual Mortgage Annual Debt Date(s)
Lease Obligor: Cost Location Rent Financing Service Acquired
-------------- ------- -------- -------------- --------- ----------- --------
Starmark Camhood LLC(3) $78,324 15 health club $8,040 $47,652 $4,441 2/7/2003
facilities
-33-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands except share and per share amounts
(1) Based on the applicable exchange rates on the dates of acquisition.
(2) In May 2004, the Company sold a 49.99% interest in this property to
CPA(R):16-Global and reclassified its remaining 50% interest in the
limited partnership which owns the property to the equity method of
accounting. Amounts represent 100%.
(3) Amounts shown represent the Company's 44% interest.
9. Interest in Mortgage Loan Securitization:
The Company is accounting for its subordinated interest in the Carey Commercial
Mortgage Trust mortgage securitization, acquired in September 2004 in connection
with the Merger, as an available-for-sale security, which is measured at fair
value with all gains and losses from changes in fair value reported as a
component of accumulated other comprehensive income as part of shareholders'
equity. As of December 31, 2004, the fair value of the Company's interest was
$12,150, reflecting an unrealized gain of $284 and net amortization of $133. The
fair value of the Company's interests in the trust is determined using a
discounted cash flow model with assumptions of market rates and the credit
quality of the underlying lessees.
One of the key variables in determining the fair value of the subordinated
interest is current interest rates. As required by Statement of Financial
Accounting Standards ("SFAS") No. 140, "Accounting for Transfer and Servicing of
Financial Assets and Extinguishments of Liabilities," a sensitivity analysis of
the current value of the interest based on adverse changes in the market
interest rates of 1% and 2% is as follows:
Fair Value as of December 31, 2004 1% Adverse Change 2% Adverse Change
---------------------------------- ----------------- -----------------
Fair value of the interests $12,150 $11,588 $11,061
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.
10. Intangibles:
In connection with its acquisition of properties, including properties acquired
from CIP(R), the Company has recorded net lease intangibles of $218,207 which
are being amortized over periods ranging from 6 years and 5 months to 40 years.
Amortization of below-market and above-market rent intangibles is recorded as an
adjustment to revenue.
Intangibles are summarized as follows:
DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- -----------------
Lease intangibles
In-place lease $139,514 $19,958
Tenant relationship 27,927 10,236
Above-market rent 69,822 3,081
Less: accumulated amortization (8,503) (533)
-------- -------
$228,760 $32,742
-------- -------
Below-market rent $(19,056) $(7,338)
Less: accumulated amortization 653 172
-------- -------
$(18,403) $(7,166)
======== =======
Net amortization of intangibles was $7,370 and $361 for the years ended December
31, 2004 and 2003, respectively. Scheduled net amortization of intangibles for
each of the next five years is $15,844 annually.
11. Disclosure About Fair Value of Financial Instruments:
-34-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands except share and per share amounts
The Company's mortgage notes payable had a carrying value of $1,309,126 and
$596,003 and a fair value of $1,313,144 and $578,096 at December 31, 2004 and
2003, respectively. The Company's marketable securities, including the interest
in the Carey Commercial Mortgage Trust acquired in September 2004, had a
carrying value of $31,999 and $111,000 and a fair value of $32,150 and $111,000
at December 31, 2004 and 2003, respectively. The Company's minority interests
had a carrying value of $62,908 and $28,500 and a fair value of $57,798 and
$27,003 at December 31, 2004 and 2003, respectively. The carrying values of
other assets and liabilities approximated their fair values at December 31, 2004
and 2003. The fair value of debt instruments was evaluated using a discounted
cash flow model with rates which take into account the credit of the tenants and
interest rates risks.
12. Mortgage Notes Payable:
Mortgage notes payable, all of which are limited recourse obligations, are
collateralized by the assignment of various leases and by real property with a
carrying value of approximately $1,924,010. As of December 31, 2004, mortgage
notes payable had fixed annual interest rates ranging from 5.09% to 10.00% and a
variable interest rate of 3.624%.
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 $ 23,864 $ 23,630 $ 234
2006 26,245 25,978 267
2007 28,891 28,557 334
2008 31,388 31,054 334
2009 70,070 69,736 334
Thereafter through 2032 1,128,668 1,119,335 9,333
---------- ---------- -------
Total $1,309,126 $1,298,290 $10,836
========== ========== =======
13. Dividends:
Dividends paid to shareholders consist of ordinary income, return of capital,
capital gains or a combination thereof for income tax purposes. The Company paid
its first dividend in April 2002. For the three years ended December 31, 2004,
2003 and 2002, dividends per share reported for tax purposes were as follows:
2004 2003 2002
---- ---- ----
Ordinary income $.40 $.42 $.45
Return of capital .19 .20 --
Capital gains .04 -- --
---- ---- ----
$.63 $.62 $.45
==== ==== ====
14. Derivative Instrument:
In 2004, the Company obtained a $23,171 variable rate mortgage loan and
concurrently entered into an interest rate swap contract with the lender which
effectively converted the variable rate debt service obligations of the loan to
a fixed rate. The interest rate swap, which has a notional amount of $23,646 as
of December 31, 2004 and a term ending February 2014, is a derivative instrument
designated as a cash flow hedge. The Company's objective in using derivatives is
to limit its exposure to interest rate movements. To accomplish this objective,
the Company has used interest rate swaps as part of its cash flow hedging
strategy. At December 31, 2004, the interest rate swap had a fair value
liability of $528 and was included in other liabilities. The change in net
unrealized losses of $528 for the year ended December 31, 2004 for this cash
flow hedge is included in accumulated other comprehensive income in
shareholders' equity.
15. Commitment and Contingencies:
-35-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands except share and per share amounts
As of December 31, 2004, the Company was not involved in any material
litigation.
In March 2004, following a broker-dealer examination of Carey Financial
Corporation ("Carey Financial"), the wholly-owned broker-dealer subsidiary of
the Advisor, by the staff of the Securities and Exchange Commission ("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 the
Company, Carey Financial and its retail distributors sold certain securities
without an effective registration statement. Specifically, the staff alleged
that the delivery of investor funds into escrow after completion of the first
phase of the offering (the "Phase I Offering"), completed in the fourth quarter
of 2002 but before a registration statement with respect to the second phase of
the offering (the "Phase II Offering") became effective in the first quarter of
2003, constituted sales of securities in violation of Section 5 of the
Securities Act of 1933. In addition, in the March 2004 letter the staff raised
issues about whether actions taken in connection with the Phase II offering were
adequately disclosed to investors in the Phase I Offering. In the event the SEC
pursues these allegations, or if affected investors of the Company bring a
similar private action, the Company 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
the Company, Carey Financial would be required to return to the Company the
commissions paid by the Company on purchases actually rescinded. Further, as
part of any action against the Advisor, 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 the
Advisor, Carey Financial or the REITs managed by WPC, including the Company
cannot be predicted at this time. There can be no assurance that the effect, if
any, would not be material.
The staff also alleged in the March 2004 letter that the prospectus delivered
with respect to the Phase I Offering contained material misrepresentations and
omissions in violation of Section 17 of the Securities Act of 1933 and Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder in that
the prospectus failed to disclose that (i) the proceeds of the Phase I Offering
would be used to advance commissions and expenses payable with respect to the
Phase II Offering, and (ii) the payment of dividends to Phase II shareholders
whose funds had been held in escrow pending effectiveness of the registration
statement resulted in significantly higher annualized rates of return than were
being earned by Phase I shareholders. Carey Financial has reimbursed the Company
for the interest cost of advancing the commissions that were later recovered by
the Company from the Phase II Offering proceeds.
In June 2004, the Division of Enforcement of the SEC ("Enforcement Staff")
commenced an investigation into compliance with the registration requirements of
the Securities Act of 1933 in connection with the public offerings of shares of
the Company 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 the Company and other REITs managed by the Advisor, as well
as the disclosure of such arrangements. At that time the Advisor and Carey
Financial received a subpoena from the Enforcement Staff seeking documents
relating to payments by the Advisor, Carey Financial, and REITs managed by the
Advisor to (or requests for payment received from) any broker-dealer, excluding
selling commissions and selected dealer fees. The Advisor and Carey Financial
subsequently received additional subpoenas and requests for information from the
Enforcement Staff seeking, among other things, information relating to any
revenue sharing agreements or payments (defined to include any payment to a
broker-dealer, excluding selling commissions and selected dealer fees) made by
the Advisor, Carey Financial or any REIT managed by the Advisor in connection
with the distribution of REITs managed by the Advisor 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, the Advisor 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, CPA(R): 14, and the Company), 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 the Company. The Advisor is continuing
to gather information relating to these types of payments made to broker-dealers
and supply it to the SEC.
The Advisor, Carey Financial and the REITs, including the Company, 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 the Advisor or Carey
Financial in connection with the matters being investigated, it is possible that
the SEC may pursue an action against either the Advisor 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 the Advisor and the REITs
managed by the Advisor, including the Company.
16. Impairment Charge on Real Estate:
In June 2002, the Company purchased land and building in Tulsa, Oklahoma and
entered into a net lease with Fleming Companies, Inc. ("Fleming"). Fleming
declared bankruptcy on April 1, 2003, and on August 31, 2003, Fleming's
termination of its lease with the Company was approved by the bankruptcy court
at which time Fleming vacated the property. In connection with the termination
of the lease, the Company wrote down the property to its estimated fair value
and recognized an impairment charge of $24,000 in 2003. This property has been
vacant for an extended period due to difficulties encountered in remarketing
the property as a result of its special purpose nature.
In December 2004, the Company entered into an agreement to sell a vacant
property in Miami, Florida formerly leased to Transworld Center, Inc. In
connection with the proposed sale, the property has been reclassified to assets
held for sale of $19,385 and an impairment charge of $5,000 has been recognized
in 2004. See Note 18 for additional information on discontinued operations.
17. Sale of Interest in French Properties:
In December 2002, the Company purchased, in two separate transactions, 13
properties, seven leased to affiliates of Carrefour France, S.A. ("Carrefour")
and six leased to S.A. Medica France ("Medica"). The total cost for the
properties was $147,294 (based on the exchange rates as of the purchase dates)
and was financed with limited recourse mortgage loans of $120,842. On March 12,
2003, the Company sold a 35% interest in the limited liability company that owns
the Medica and Carrefour properties to CPA(R):12. The purchase price was based
on the appraised value of the properties adjusted for capitalized costs incurred
since the acquisitions including fees paid to the Advisor, net of mortgage debt.
Based on the formula, CPA(R):12 paid the Company $11,916 and assumed $1,031 of
the Company's deferred acquisition fee payable to an affiliate.
In connection with the sale of the 35% interests, the Company recognized a gain
on sale of $961 of which $672 is attributable to foreign currency gains as a
result of changes in rates from the dates of the initial purchases of the
properties and $305 is attributable to depreciation for the period from the
dates of the initial purchases of the properties through March 12, 2003, the
date of the sale of the 35% interest, less $16 attributable to costs incurred in
connection with completing the sale.
In connection with the purchase of another Carrefour property on November 27,
2003, the Company and CPA(R):12 reduced their overall interests in subsidiaries
that own the Carrefour properties to 50.375% and 27.125%, respectively, by
selling a 22.5% interest to the Advisor for $8,689. After the sale of the
interests in the Carrefour properties, the Company retained a 50.375% interest
in the properties. The Advisor's purchase price was based on a third party
appraisal of the Carrefour properties.
In connection with the sale, the Company recognized a gain of $2,933 (net of a
portion of the gain allocable to CPA(R):12), of which $2,106 is attributable to
the appreciation in the properties, $465 is attributable to foreign currency
gains as a result of changes in foreign exchange rates and $362 is attributable
to depreciation recorded at the properties.
18. 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 to be reflected in the
consolidated statements of operations as "Discontinued Operations" for all
periods presented.
-36-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands except share and per share amounts
In December 2004, a property in Rantoul, Illinois leased to Bell Sports Inc.
("Bell Sports") was sold for approximately $11,041, net of selling costs, and
the Company recognized a gain on sale of $478. The Bell Sports property was
acquired on September 1, 2004 in connection with the Merger.
The Company entered into an agreement in December 2004 to sell its vacant
property in Miami, Florida formerly leased to Transworld Center, Inc. The
property has been vacant since November 2003 when Transworld notified the
Company of its decision not to occupy the property. In connection with the
anticipated sale which is subject to the proposed seller's completion of its due
diligence procedures, the property has been reclassified as an asset held for
sale and an impairment charge of $5,000 has been recognized to reduce the
property's carrying value to an amount which approximates the sales price less
estimated costs to sell.
The results of operations of the Bell Sports and Transworld properties are
included in discontinued operations and summarized as follows:
Year Ended December 31,
-----------------------
2004 2003
------- ----
Revenues (primarily rental revenues and
miscellaneous income) $ 1,109 $895
Expenses (primarily interest on mortgages,
depreciation and property expenses) (1,349) --
Impairment charge on real estate (5,000) --
Gain on sale of real estate 478 --
------- ----
(Loss) income from discontinued operations $(4,762) $895
======= ====
As a result of classifying properties as held for sale, no depreciation has been
incurred from the date of reclassification. The effect of suspending
depreciation expense was $51 in 2004. There was no effect in 2003 and 2002.
19. Segment Information:
The Company has determined that it operates in one business segment with
domestic and foreign investments. The Company acquired its first foreign real
estate investments in December 2002.
For 2004, geographic information for the real estate operations segment is as
follows:
Domestic Foreign (1) Total
---------- ----------- ----------
Revenues $ 120,016 $ 39,523 $ 159,539
Operating expenses (55,019) (12,672) (67,691)
Income from equity investments 9,889 176 10,065
Interest expense, net (38,060) (16,228) (54,288)
Other, net (2) (3,965) (12) (3,977)
---------- -------- ----------
Income from continuing operations $ 32,861 $ 10,787 $ 43,648
========== ======== ==========
Total assets $2,120,272 $598,124 $2,718,396
Total long-lived assets 1,850,051 570,736 2,420,787
For 2003, geographic information for the real estate operations segment is as
follows:
Domestic Foreign (3) Total
-------- ----------- --------
Revenues (4) $ 58,904 $ 20,216 $ 79,120
Operating expenses (4) (57,485) (6,792) (64,277)
Income from equity investments 8,233 -- 8,233
Interest expense, net (14,801) (7,750) (22,551)
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CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands except share and per share amounts
Other, net (2) 3,227 -- 3,227
---------- -------- ----------
(Loss) income from continuing $ (1,922) $ 5,674 $ 3,752
========== ======== ==========
operations
Total assets $1,333,860 $305,292 $1,639,152
Total long-lived assets 910,405 280,653 1,191,058
For 2002, geographic information for the real estate operations segment is as
follows:
Domestic Foreign (5) Total
-------- ----------- --------
Revenues (4) $ 12,499 $ 448 $ 12,947
Operating expenses (4) (5,489) (180) (5,669)
Income from equity investments 1,067 -- 1,067
Interest expense, net (2,276) (214) (2,490)
Other, net (2) (88) -- (88)
-------- -------- --------
Income from continuing operations $ 5,713 $ 54 $ 5,767
======== ======== ========
Total assets $633,824 $172,474 $806,298
Total long-lived assets 514,307 159,651 673,958
(1) Consists of operations in France, Finland, the United Kingdom, Belgium,
Ireland and Germany.
(2) Consists of minority interest in income, gains on foreign currency
transactions and (loss) gain on sales.
(3) Consists of operations in France, the United Kingdom, Ireland and Germany.
(4) Amounts have been reclassified to conform to the current year presentation
of excluding interest income and interest expense from the revenues and
operating expenses line items above, respectively.
(5) Consists of operations in France.
20. Selected Quarterly Financial Data (unaudited):
Three Months Ended
-----------------------------------------------------------------------
March 31, 2004 June 30, 2004 September 30, 2004 December 31, 2004
-------------- ------------- ------------------ -----------------
Revenues $30,352 $33,126 $44,906 $51,155
Operating expenses 12,426 13,796 19,077 22,392
Net income 11,604 8,502 11,418 7,362
Earnings per share - basic .11 .08 .10 .05
Dividends declared per share .1569 .1572 .1580 .1585
Three Months Ended
-----------------------------------------------------------------------
March 31, 2003 June 30, 2003 September 30, 2003 December 31, 2003
-------------- ------------- ------------------ -----------------
Revenues (1) $15,619 $18,646 $ 21,499 $23,356
Operating expenses (1) 7,232 9,240 36,612 11,193
Net income (loss) 5,492 5,631 (19,035) 12,559
Earnings (loss) per share - basic .14 .08 (.20) .04
Dividends declared per share .1550 .1562 .1565 .1567
(1) 2003 amounts have been reclassified to conform to the current year
presentation of excluding interest income and interest expense from the
revenues and expenses line items above, respectively.
21. Pro Forma Financial Information (unaudited):
The following consolidated pro forma financial information for the years ended
December 31, 2004 and 2003 has been presented as if significant acquisitions of
properties in 2003 and 2004 including properties acquired in connection with the
Merger, and any related mortgage financing (including mortgage obligations
assumed in the Merger) had occurred on January 1, 2003.
-38-
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Amounts in thousands except share and per share amounts
The pro forma adjustments do not include pro forma adjustments for the Bell
Sports property, acquired in the Merger and subsequently classified to
discontinued operations, which was sold in 2004. The pro forma financial
information is not necessarily indicative of what the actual results would have
been, nor does it purport to represent the results of operations for future
periods.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2004 2003
-------- --------
Pro forma total revenues $201,296 $186,640
Pro forma net income 40,689 18,370
Pro forma earnings per share:
Basic $ .33 $ .14
The pro forma net income and earnings per share figures for the year ended
December 31, 2003 presented above include a non-recurring, non-cash impairment
loss on real estate of $24,000, realized and unrealized gains on foreign
currency transactions of $3,173 and a gain on sale of real estate of $2,757. The
pro forma net income and earnings per share figures for the year ended December
31, 2004 presented above include realized and unrealized gains on foreign
currency transactions of $5,516, a loss on sale of real estate of $48 and an
impairment charge on property held for sale from discontinued operations. For
pro forma purposes, the Company's interest income, other than interest earned
from a mortgage security acquired in the Merger, has been eliminated based on an
assumption that substantially all cash proceeds from its public offering, which
concluded in 2003, have been or will be invested in real estate. The Company
will likely earn interest on cash generated from operations; however, it is not
practicable to make assumptions as to how much interest income would have been
earned on such funds during the pro forma periods presented.
22. Subsequent Events:
On January 3, 2005, the Company and CPA(R):16 - Global, through 60% and 40%
interests, respectively, in a limited liability company, acquired land and
buildings in Helsinki, Finland for $113,287 (based on the exchange rate of the
Euro on the date of acquisition), and entered into a net lease with Pohjola
Non-Life Insurance Company. The lease has an initial term of 10 years and 5
months with a 5-year minimum renewal option and provides for initial annual rent
of $8,128. The lease provides for annual rent increases based on the Finnish
CPI. In connection with the purchase, the limited liability company obtained a
limited recourse mortgage loan of $84,663 with a 10-year term and a fixed annual
interest rate of 4.59% through February 2007 and 4.57% thereafter through the
remainder of the loan term.
On February 28, 2005, the Company and CPA(R):16-Global, through 75% and 25%
interests, respectively, in a limited liability company, entered into a purchase
and sale agreement with Hellweg Die Profi-Baumarkte GMBH to purchase up to 16
properties in Germany for up to $166,345 (based on the exchange rate of the Euro
as of the date of the agreement), subject to certain due diligence procedures
and negotiations with the proposed lessees. There is no assurance that this
purchase will be completed, and, if completed, that the actual terms will not
differ from the proposed terms. To the extent that all 16 properties are
purchased, initial annual rent will be $13,597. In the event that the purchase
is completed, the Company intends to seek to obtain limited recourse mortgage
financing of approximately $115,223.
-39-
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 42,359 holders of record of the Shares of the
Company.
DIVIDENDS
The Company is required to distribute annually 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 $.1569 $.1550
Second quarter .1572 .1562
Third quarter .1580 .1565
Fourth quarter .1585 .1567
------ ------
$.6306 $.6244
====== ======
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
For the three month period ended December 31, 2004, 213,343 shares were issued
to the Advisor as consideration for performance fees. Shares were issued at
$10.00 per share. 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 32,256 $9.03 N/A
November 1, 2004 - November 30, 2004 22,149 9.95 N/A
December 1, 2004 - December 31, 2004 25,385 9.82 N/A
------
Total 79,790
======
(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 SEC. The 10-K may also be obtained through
the SEC's EDGAR database at www.sec.gov.
-40-