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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
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: 033-68728
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CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 13-3726306
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
50 ROCKEFELLER PLAZA 10020
NEW YORK, NEW YORK (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBERS:
INVESTOR RELATIONS (212) 492-8920
(212) 492-1100
----------
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 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
Registrant has 30,703,946 shares of common stock, $.001 par value
outstanding at May 4, 2005.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
INDEX
Page No.
--------
PART I
Item 1. - Financial Statements*
Condensed Consolidated Balance Sheets as of March 31,
2005 and December 31, 2004 2
Condensed Consolidated Statements of Income for the three
months ended March 31, 2005 and 2004 3
Condensed Consolidated Statements of Comprehensive Income
for the three months ended March 31, 2005 and 2004 3
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2005 and 2004 4
Notes to Condensed Consolidated Financial Statements 5-7
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-13
Item 3. - Quantitative and Qualitative Disclosure About Market Risk 14
Item 4. - Controls and Procedures 14
PART II - Other Information
Item 2. - Unregistered Sales of Equity Securities and
Use of Proceeds 15
Item 4. - Submission of Matters to a Vote of Security Holders 15
Item 5. - Other Information 15
Item 6. - Exhibits 15
Signatures 16
* The summarized condensed consolidated financial statements contained herein
are unaudited; however, in the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary for a fair
statement of such financial statements have been included.
1
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
PART I
Item 1. - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands except share and per share amounts)
March 31, 2005 December 31, 2004
(Note)
-------------- -----------------
ASSETS:
Land and buildings, net of accumulated depreciation of $49,890
at March 31, 2005 and $48,209 at December 31, 2004 $302,041 $309,818
Net investment in direct financing leases 12,153 12,153
Assets held for sale 2,765 2,753
Intangible assets, net 1,445 1,462
Equity investments 91,598 93,915
Cash and cash equivalents 10,731 8,044
Marketable securities 8,150 8,465
Other assets, net 16,693 16,432
-------- --------
Total assets $445,576 $453,042
======== ========
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY:
Liabilities:
Limited recourse mortgage notes payable $168,241 $175,646
Limited recourse mortgage note payable on asset held for sale 5,223 --
Accrued interest 959 972
Accounts payable and accrued expenses 2,342 2,224
Due to affiliates 3,386 3,545
Deferred acquisition fees payable to affiliate 3,983 5,403
Dividends payable 6,348 6,322
Other liabilities, net 1,030 1,036
Prepaid rental income and security deposits 3,668 3,662
-------- --------
Total liabilities 195,180 198,810
-------- --------
Minority interest 8,188 8,159
-------- --------
Commitments and contingencies (Note 7)
Shareholders' equity:
Common stock, $.001 par value; authorized, 40,000,000 shares;
issued and outstanding, 31,997,779 shares at March 31, 2005
and 31,818,107 shares at December 31, 2004 32 32
Additional paid-in capital 290,996 288,830
Dividends in excess of accumulated earnings (38,307) (33,102)
Accumulated other comprehensive income 2,313 2,518
-------- --------
255,034 258,278
Less, treasury stock at cost, 1,288,184 shares at March 31, 2005
and 1,233,519 shares at December 31, 2004 (12,826) (12,205)
-------- --------
Total shareholders' equity 242,208 246,073
-------- --------
Total liabilities, minority interest and shareholders' equity $445,576 $453,042
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Note: The balance sheet at December 31, 2004 has been derived from the audited
consolidated financial statements at that date.
2
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands except share and per share amounts)
Three Months Ended March 31,
----------------------------
2005 2004
----------- -----------
Revenues:
Rental income $ 10,301 $ 9,769
Interest income from direct financing leases 416 646
Other operating income 127 7
----------- -----------
10,844 10,422
----------- -----------
Operating expenses:
Depreciation and amortization of intangibles 1,932 1,820
General and administrative 776 1,009
Property expenses 2,290 2,250
Impairment charge on marketable securities 575 --
----------- -----------
5,573 5,079
----------- -----------
Income from continuing operations before other interest
income, minority interest, equity investments, gains
(losses) and interest expense 5,271 5,343
Other interest income 262 252
Minority interest in income (436) (406)
Income from equity investments 3,001 3,168
Gain on sale of real estate 316 --
Unrealized loss on foreign currency transactions and warrants (780) (122)
Interest expense (3,376) (3,445)
----------- -----------
Income from continuing operations 4,258 4,790
Discontinued operations:
Loss from operations of discontinued properties (263) (864)
(Loss) gain on sale of real estate (8) 382
Impairment charge on real estate (2,845) --
----------- -----------
Loss from discontinued operations (3,116) (482)
----------- -----------
Net income $ 1,142 $ 4,308
=========== ===========
Basic earnings per share:
Earnings from continuing operations $ .14 $ .16
Loss from discontinued operations (.10) (.02)
----------- -----------
Net income $ .04 $ .14
=========== ===========
Weighted average shares outstanding - basic 30,702,417 30,396,414
=========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
CONDENSED CONSOLIDATED STATEMENTS of COMPREHENSIVE INCOME (Unaudited)
(In thousands except share and per share amounts)
Three Months Ended March 31,
----------------------------
2005 2004
------ ------
Net income $1,142 $4,308
Other comprehensive income (loss):
Recognition of impairment charge on marketable
securities 564 --
Change in unrealized depreciation on marketable
securities (273) (137)
Change in foreign currency translation adjustment (495) (310)
------ ------
(204) (447)
------ ------
Comprehensive income $ 938 $3,861
====== ======
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands except share and per share amounts)
Three Months Ended March 31,
----------------------------
2005 2004
------- -------
Cash flows from operating activities:
Net income $ 1,142 $ 4,308
Adjustments to reconcile net income to net cash provided
by operating activities:
Loss from discontinued operations, including impairment
charges and gain on sale of real estate 3,116 482
Depreciation and amortization of intangible assets
and financing costs 2,043 2,017
Straight-line rent adjustments (188) (228)
Income from equity investments in excess of distributions received (239) (1,252)
Fees paid by issuance of stock 1,564 861
Minority interest in income 436 406
Gain on sale of real estate (316) --
Unrealized loss on foreign currency transactions and derivative
instruments, net 780 122
Impairment charge on marketable securities 575 --
Change in operating assets and liabilities,
net (460) (265)
------- -------
Net cash provided by continuing operations 8,453 6,451
Net cash used in discontinued operations (244) (907)
------- -------
Net cash provided by operating activities 8,209 5,544
------- -------
Cash flows from investing activities:
Distributions from equity investments in excess of equity income 1,439 352
Receipt of amount due from sale of equity investment -- 1,430
Proceeds from sale of assets 2,835 6,693
Payment of deferred acquisition fees to an affiliate (1,420) (1,467)
------- -------
Net cash provided by investing activities 2,854 7,008
------- -------
Cash flows from financing activities:
Payments on mortgage principal (1,629) (1,454)
Distributions to minority interest partner (407) (379)
Proceeds from issuance of shares, net of costs 602 471
Dividends paid (6,321) (6,272)
Purchase of treasury stock (621) (494)
------- -------
Net cash used in financing activities (8,376) (8,128)
------- -------
Net increase (decrease) in cash and cash equivalents 2,687 4,424
Cash and cash equivalents, beginning of period 8,044 13,305
------- -------
Cash and cash equivalents, end of period $10,731 $17,729
======= =======
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(in thousands except share and per share amounts)
NOTE 1. BASIS OF PRESENTATION:
Corporate Property Associates 12 Incorporated ("the Company") is a Real Estate
Investment Trust ("REIT") that invests in commercial properties leased to
companies domestically and internationally. As a REIT, the Company is not
subject to federal income taxation as long as it satisfies certain requirements
relating to the nature of its income, the level of its distributions and other
factors. The accompanying unaudited condensed consolidated financial statements
of the Company have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and with the instructions to Article 10 of Regulation S-X of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. All
significant intercompany balances and transactions have been eliminated. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair statement of the results of the
interim periods presented have been included. The results of operations for the
interim periods are not necessarily indicative of results for the full year.
These condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2004.
Reclassification
The financial statements included in this Form 10-Q have been adjusted to
reflect the disposition (or planned disposition) of certain properties as
discontinued operations for all periods presented (see Note 6). As a result,
certain prior period amounts have been reclassified to conform to current period
financial statement presentation.
Dividend
Dividends declared per share for the three-month periods ended March 31, 2005
and 2004 were $.2067.
NOTE 2. TRANSACTIONS WITH RELATED PARTIES:
In connection with performing services on behalf of the Company, the advisory
agreement between the Company and its advisor, W. P. Carey & Co. LLC (the
"Advisor"), provides that the Advisor receive asset management and performance
fees, each of which are 1/2 of 1% of average invested assets as defined in the
advisory agreement. The performance fee is subordinated to the preferred return,
a cumulative non-compounded distribution return of 7%. Effective in 2005, the
advisory agreement was amended to allow the Advisor to elect to receive
restricted common stock for any fee due from the Company. Subsequent to this
amendment, the Advisor elected to receive asset management and performance fees
due from the Company in 2005 in common stock rather than cash. The Advisor is
also reimbursed for the actual cost of personnel needed to provide
administrative services necessary to the operation of the Company. The Company
incurred asset management fees of $952 and $916 for the three months ended March
31, 2005 and 2004, respectively, with performance fees in like amounts, both of
which are included in property expenses in the accompanying condensed
consolidated financial statements. For the three months ended March 31, 2005 and
2004, the Company incurred personnel cost reimbursements of $261 and $309,
respectively, which are included in general and administrative expenses in the
accompanying condensed consolidated financial statements.
Fees are payable to the Advisor for services provided to the Company relating to
the identification, evaluation, negotiation, financing and purchase of
properties. A portion of such fees is deferred and is payable in equal
installments each January over no less than eight years following the first
anniversary of the date a property was purchased. Such deferred fees are only
payable if the preferred return, as defined in the advisory agreement, is met.
The unpaid portion of the deferred fees bears interest at an annual rate of 7%
from the date of purchase until paid. No such fees were incurred for the three
months ended March 31, 2005 and 2004. An annual installment of deferred fees
was paid to the Advisor in January 2005.
5
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
(in thousands except share and per share amounts)
NOTE 3. EQUITY INVESTMENTS:
The Company owns interests in properties leased to corporations through
noncontrolling interests in (i) various partnerships and limited liability
companies in which its ownership interests are 50% or less and the Company
exercises significant influence, and (ii) tenancies-in-common subject to common
control. The ownership interests range from 15% to 50%. All of the underlying
investments are owned with affiliates that have similar investment objectives as
the Company. The lessees are Best Buy Co., Inc., Sicor, Inc., The Upper Deck
Company, Advanced Micro Devices, Inc., Compucom Systems, Inc., Textron, Inc.,
McLane Company, Inc., The Retail Distribution Group, Inc., Del Monte
Corporation, Special Devices, Inc., ShopRite Supermarkets, Inc., True Value
Company, Starmark Camhood LLC, Medica-France, SA and affiliates of Carrefour
France, SAS.
Summarized financial information of the Company's equity investees is as
follows:
As of March As of December
31, 2005 31, 2004
----------- --------------
Assets (primarily real estate) $ 897,297 $ 916,775
Liabilities (primarily mortgage notes payable) (613,533) (630,037)
--------- ---------
Partners' and members' equity $ 283,764 $ 286,738
========= =========
Company's share of equity investees' net assets $ 91,598 $ 93,915
========= =========
Three Months Ended March 31,
----------------------------
2005 2004
-------- --------
Revenues (primarily rental income and interest
income from direct financing leases) $ 24,258 $ 22,702
Expenses (primarily interest on mortgages
and depreciation) (14,361) (14,575)
-------- --------
Net income $ 9,897 $ 8,127
======== ========
Company's share of net income from equity investments $ 3,001 $ 3,168
======== ========
NOTE 4. MORTGAGE FINANCING THROUGH LOAN SECURITIZATION:
The Company is accounting for its subordinated interest in the Carey Commercial
Mortgage Trust ("CCMT") mortgage securitization as an available-for-sale
security and it is measured at fair value with all gains and losses from changes
in fair value reported as a component of other comprehensive income as part of
shareholders' equity. As of March 31, 2005, the fair value of the Company's
subordinated interest was $8,000, reflecting an aggregate unrealized gain of
$1,085 and cumulative net amortization of $324 ($31 for the three months ended
March 31, 2005). The fair value of the Company's subordinated interest in CCMT
is determined using a discounted cash flow model with assumptions of market
rates and the credit quality of the underlying lessees.
One of the key variables in determining fair value of the subordinated interest
in CCMT is current interest rates. As required by Statement of Financial
Accounting Standards ("FAS") No. 140, "Accounting for Transfer and Servicing of
Financial Assets and Extinguishments of Liabilities," a sensitivity analysis of
the current value of the subordinated interest based on adverse changes in
market interest rates of 1% and 2% is as follows:
Fair Value as of 1% Adverse 2% Adverse
March 31, 2005 Change Change
---------------- ---------- ----------
Fair value of the interest of CCMT $8,000 $7,640 $7,302
The above sensitivity analysis is hypothetical and changes in fair value, based
on a 1% or 2% variation, should not be extrapolated because the relationship of
the change in assumption to the change in fair value may not always be linear.
NOTE 5. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company evaluates the fair value of its financial instruments, including
available-for-sale securities, to determine whether any investment has
experienced an other-than-temporary decline. If it is determined that an
investment has experienced an other-than-temporary decline in its value, the
investment is written down to its fair value by a charge to earnings. In March
2005, the Company incurred a non-cash charge of $575 to reflect an
other-than-temporary decline in the market value of one of its publicly traded
investments based on a decline in the trading activity of this investment.
6
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands except share and per share amounts)
NOTE 6. ASSETS HELD FOR SALE AND 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 held for sale or sold are reflected in the condensed
consolidated financial statements as Discontinued Operations for all periods
presented.
Assets Held for Sale
The Company entered into a contract in March 2005 to sell property in
Piscataway, New Jersey to a third party for $3,115. The Company expects this
transaction to close during its third quarter ending September 30, 2005. This
property has a carrying value of $5,625. The net proceeds from the sale after
expected brokerage commission and closing costs of approximately $320 are
expected to be approximately $2,795. Because the expected sale proceeds net of
closing costs are less than the property's carrying value, the property has been
deemed impaired. In connection with the reclassification of this property to an
asset held for sale, the Company recorded an impairment charge of $2,845 in the
quarter ended March 31, 2005.
2005 Dispositions
In March 2005, the Company sold a property in Newark, Delaware formerly leased
to Lanxide Corporation to a third party and received $2,835, net of selling
costs. In connection with this sale, the Company recognized a loss of $8
excluding impairment charges of $5,431 previously recorded against this
property.
2004 Dispositions
In March 2004, the Company sold a property in Ashburn, Virginia and received
$6,693, net of selling costs. In connection with the sale, the Company
recognized a gain of $382.
In April 2004, the Company sold a property in Hauppauge, New York and received
$5,924, net of selling costs and recognized a gain of $1,372. In connection with
the sale, CCMT, the lender of the mortgage loan on the property which had been
classified as an asset held for sale, consented to the transfer of the loan
obligation to the Company's property in Austin, Texas leased to Q Clubs, Inc.
The results of operations for the New Jersey property, which was classified as
held for sale as of March 31, 2005, and the results of operations of properties
in Delaware, Virginia and New York which were sold are included in Discontinued
Operations and are summarized as follows:
Three Months Ended March 31,
----------------------------
2005 2004
------- -------
Revenues (primarily rental revenues and other
operating income) $ 20 $ 244
Expenses (primarily interest on mortgages, depreciation
and property expenses) (283) (1,108)
(Loss) gain on sale of real estate (8) 382
Impairment charge on real estate (2,845) --
------- -------
Loss from discontinued operations $(3,116) $ (482)
======= =======
NOTE 7. COMMITMENTS AND CONTINGENCIES:
The Company has provided indemnification in connection with divestitures. These
indemnities address a variety of matters including environmental liabilities.
The Company's maximum obligations under such indemnification cannot be
reasonably estimated. The Company is not aware of any claims or other
information that would give rise to material payments under such
indemnifications.
As previously reported, the Advisor and Carey Financial Corporation ("Carey
Financial"), the wholly-owned broker-dealer subsidiary of the Advisor, are
currently subject to an investigation by the United States Securities and
Exchange Commission ("SEC") into payments made to third party broker dealers in
connection with the distribution of REITs managed by the Advisor and other
matters. Although no regulatory action has been initiated against the Advisor or
Carey Financial in connection with the matters being investigated, it is
possible that the SEC may pursue an action in the future. The potential timing
of any such action and the nature of the relief or remedies the SEC may seek
cannot be predicted at this time. If such an action is brought, it could
materially affect the Advisor and the REITs managed by the Advisor, including
the Company.
In response to the Division of Enforcement of the SEC'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 the Advisor (including 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.
NOTE 8. SUBSEQUENT EVENT:
In April 2005, management approved a plan to sell the former Scott property in
San Leandro, California. The Company expects to enter into a contract with a
third party to sell this property for approximately $18,400. The contract is
expected to provide for a due diligence period that will expire on July 31, 2005
and is expected to close in the Company's third quarter. As such, there is no
assurance that the proposed sale will be completed.
The property has a carrying value of $15,416. The net proceeds from the sale
after expected brokerage commission, closing and other costs of approximately
$1,840 are expected to be approximately $16,560. The Company expects to record a
gain of approximately $1,800 in connection with this sale.
7
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 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 12 Incorporated contain
forward-looking statements and should be read in conjunction with the condensed
consolidated financial statements and notes thereto as of March 31, 2005. As
used in this quarterly report on Form 10-Q, the terms "the Company," "we," "us"
and "our" include Corporate Property Associates 12 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," "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, the risk factors described
in Item 1 of our Annual Report on Form 10-K for the year ended December 31,
2004. 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. Additionally, a description of our
critical accounting estimates is included in the management's discussion and
analysis section in our Annual Report on Form 10-K for the year ended December
31, 2004. There has been no significant change in such critical accounting
estimates.
EXECUTIVE OVERVIEW
Business Overview
We are a real estate investment trust ("REIT") that invests in commercial and
industrial properties leased to companies domestically and internationally. We
were formed in 1993 and are managed by our advisor, W. P. Carey & Co. LLC (the
"Advisor"). 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.
How We Earn Revenue
The primary source of our revenue is earned from leasing real estate. We invest
in 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, tenant defaults 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 its 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 lease revenues
for the three-month periods ended March 31, 2005 and 2004 is as follows:
2005 2004
---- ----
Rental income from operating leases $10,301 $ 9,769
Interest income from direct financing leases 416 646
------- -------
$10,717 $10,415
======= =======
8
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands except share and per share amounts)
For the three-month periods ended March 31, 2005 and 2004, we earned net lease
revenues (i.e., rental income and interest income from direct financing leases)
from our direct ownership of real estate from the following lease obligations:
2005 2004
---- ----
Applied Materials, Inc. (a) $ 2,483 $ 2,391
Dick's Sporting Goods, Inc. 683 683
Perry Graphic Communications, Inc. and Judd's
Incorporated 548 548
Spectrian Corporation 538 538
Westell Technologies, Inc. 496 496
Career Education Corporation 423 434
Telos Corporation 416 416
PPD Development, Inc. 404 376
24 Hour Fitness 396 392
Silgan Containers Corporation 388 355
The Bon-Ton Stores, Inc. 361 361
Jen-Coat, Inc. 323 303
Learning Care Group, Inc. 320 320
Orbseal LLC 270 253
Pacific Logistics, L.P. 266 260
Garden Ridge Corporation 249 249
Sunland Distribution, Inc. (b) 239 --
Celadon Group, Inc. 237 230
Randall International, Inc. 234 234
Nutramax Products, Inc. 228 221
Rave Reviews Cinemas, L.L.C 223 203
Milford Manufacturing Services, L.L.C 182 182
Vermont Teddy Bear Co., Inc. 176 176
Other 634 794
------- -------
$10,717 $10,415
======= =======
- ----------
(a) Lease revenues applicable to minority interests in the consolidated
amounts above total $819 and $789 for the three-month periods ended March
31, 2005 and 2004, respectively.
(b) We acquired this investment in September 2004.
We recognize income from equity investments of which lease revenues are a
significant component. Our ownership interests range from 15% to 50%. For the
three-month periods ended March 31, 2005 and 2004, our share of net lease
revenues in the following lease obligations was as follows:
2005 2004
---- ----
Carrefour France, SAS (a) $1,141 $1,033
Advanced Micro Devices, Inc. 871 815
Starmark Camhood, LLC 685 685
True Value Company 542 542
Special Devices, Inc. 510 510
Medica-France, SA (a) 472 433
Best Buy Co., Inc. 428 432
Sicor, Inc. 418 368
Del Monte Corporation 369 369
The Upper Deck Company 363 363
McLane Company Foodservice, Inc. 358 354
Compucom Systems, Inc. 352 352
Textron, Inc. 319 310
ShopRite Supermarkets, Inc. 278 276
Other 78 87
------ ------
$7,184 $6,929
====== ======
- ----------
(a) Revenue amounts are subject to fluctuations in foreign currency exchange
rates.
Current Developments and Trends
Inflation and interest rates, at least for the short term, are expected to rise.
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 inflation and a
corresponding increase in the Consumer Price Index ("CPI"), which over time
will result in increased revenue and partially offset the impact of
declining property values;
9
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands except share and per share amounts)
- - The impact of rising interest rates would be mitigated through our use of
fixed interest rates on our debt; and
- - Rising interest rates may have an impact on the credit quality of certain
tenants.
As of March 31, 2005, we have cash and cash equivalent balances of $10,731. For
the three months ended March 31, 2005, cash flow generated from continuing
operations and equity investments were sufficient to fully fund dividends paid,
distributions to minority partners, and scheduled mortgage principal payments.
We are addressing challenges at several underperforming properties (see Lease
Revenues below). During 2005 we completed the sale of an underperforming
property and also expect to complete sales of two additional underperforming
properties. In addition, during 2004, we sold two underperforming properties and
have reinvested a portion of the proceeds from these sales into new cash
generating investments. Management is focused on improving cash flow at vacant
and/or underperforming properties by aggressively working to lease or sell such
property and/or work with existing tenants to meet their rental obligations. Our
ability to maintain the current dividend rate depends on a successful resolution
of these challenges.
Current developments include:
PROPOSED SALE OF UNDERPERFORMING PROPERTY. We entered into a contract in March
2005 to sell property in Piscataway, New Jersey to a third party for $3,115. We
expect this transaction to close during our third quarter ending September 30,
2005. This property has a carrying value of $5,625 and has been vacant since
February 2004. The net proceeds from the sale after expected brokerage
commission and closing costs of approximately $320 are expected to be
approximately $2,795. Because the expected sale proceeds net of closing costs
are less than the property's carrying value, the property has been deemed
impaired. In connection with the reclassification of this property to an asset
held for sale, we recorded a non-cash impairment charge of $2,845 in the quarter
ended March 31, 2005.
SENIOR MANAGEMENT. In March 2005, Gordon F. DuGan, vice chairman, was elected
chief executive officer. Mr. DuGan was previously our co-chief executive officer
with William Polk Carey, who will remain chairman of the board. Mr. DuGan will
also serve as chief executive officer of our Advisor. Also in March 2005, Thomas
E. Zacharias was appointed chief operating officer. Mr. Zacharias will continue
to serve as managing director and head of our Advisor's asset management
department and will also serve as our Advisor's Chief operating officer. In
connection with the ongoing investigation by the United States Securities and
Exchange Commission, the Board of Directors has accepted the resignation of John
J. Park as chief financial officer and elected Claude Fernandez, who has been
our principal accounting officer, as acting chief financial officer. A search is
underway for a new chief financial officer.
DIVIDEND. In March 2005, our board of directors approved the first quarter
dividend of $.2067 per share payable in April 2005 to shareholders of record as
of March 31, 2005.
RESULTS OF OPERATIONS
Lease Revenues
For the comparable quarters ended March 31, 2005 and 2004, lease revenues
(rental income and interest income from direct financing leases) increased by
$302 primarily as the result of the Sunland Distribution, Inc. acquisition in
September 2004 and Silgan Containers Manufacturing Corp. expansion in June 2004
which together contributed $272 of additional lease revenues and scheduled rent
increases at several properties which contributed $213. These increases were
partially offset by lower rent at our Chattanooga, Tennessee property as a
result of a new lease entered into in October 2004 with a tenant that replaced a
former tenant who had filed for bankruptcy protection, and the expiration of a
short-term lease at the former Scott Companies, Inc. property in San Leandro,
California.
Our net leases generally have rent increases based on formulas indexed to
increases in the CPI or other indices for the jurisdiction in which the property
is located, sales overrides or other periodic increases, which are designed to
increase lease revenues in the future. There are no scheduled lease expirations
in the next 12 months.
The following update is provided for underperforming properties previously
disclosed:
Piscataway, New Jersey - During the quarter ended March 31, 2005, we entered
into a contract to sell this property to a third party for $3,115. As a result,
the results of operations for this property have been reclassified to an asset
held for sale (see Current Developments and Trends above).
10
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands except share and per share amounts)
San Leandro, California - In April 2005, our operating committee approved a plan
to sell the former Scott property for approximately $18,400 (see Subsequent
Event below). This property is currently occupied by several tenants under
short-term leases. The results of operations of this property will be presented
as discontinued operations in future periods.
Tulsa, Oklahoma - The Garden Ridge Corporation lease modification was approved
by the bankruptcy court in April 2005 and is expected to become effective in May
2005. Under the terms of the lease modification, annual rent will decrease from
$940 to $742 and the initial lease will be extended from April 2016 to August
2024. Garden Ridge retains the option under bankruptcy laws to seek to terminate
the lease.
Depreciation and Amortization of Intangibles
For the comparable quarters ended March 31, 2005 and 2004, depreciation and
amortization of intangibles increased $112 primarily due to the Sunland
acquisition, Silgan expansion and a new lease at our Chattanooga, Tennessee
property (see Lease Revenues above).
General and Administrative Expenses
For the comparable quarters ended March 31, 2005 and 2004, general and
administrative expenses decreased $233 primarily due to a decline in our share
of expenses allocated by the Advisor due to an increase in the asset base of
affiliated REITs. As investment activity of affiliated REITs continues to
increase, expenses allocated to us by our Advisor are expected to moderate or
decline.
Property Expenses
For the comparable quarters ended March 31, 2005 and 2004, property expenses
were stable.
Impairment Charge on Marketable Securities
During the quarter ended March 31, 2005, we incurred a non-cash charge of $575
to reflect an other-than-temporary decline in the market value of one of our
publicly traded investments.
Gain on Sale of Real Estate
During the quarter ended March 31, 2005, we recognized a gain of $316 on the
sale of excess land at a property.
Unrealized Loss on Foreign Currency Transactions and Warrants
For the comparable quarters ended March 31, 2005 and 2004, unrealized loss on
foreign currency transactions and warrants increased $658 primarily due to the
negative impact of foreign currency fluctuations and a reduction in the
value of certain warrants.
Loss From Discontinued Operations
For the quarter ended March 31, 2005, we incurred a loss from discontinued
operations of $3,116 primarily as a result of a non-cash impairment charge of
$2,845 recorded in connection with entering into a contract to sell the
Piscataway property to a third party (see Current Developments and Trends
above).
Net Income
For the comparable quarters ended March 31, 2005 and 2004, net income decreased
$3,166 primarily due to a non-cash impairment charge of $2,845 in connection
with the proposed sale of our Piscataway property and a non-cash charge of $575
to reflect an other-than-temporary decline in market value of one of our
investments, both of which are described above.
FINANCIAL CONDITION
Uses of Cash During the Period
There has been no material change in our financial condition since December 31,
2004. Management believes that we have sufficient cash balances to meet our
existing working capital needs. Our ability to maintain our current dividend
rate depends on successfully resolving cash flow challenges at several
underperforming properties (see Current Developments and Trends and Lease
Revenues above). 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 our equity investments) to meet operating expenses, service
debt and fund dividends to shareholders. Cash flows from continuing operations
and equity investments of $9,892 were sufficient to pay dividends to
shareholders of $6,321, meet scheduled mortgage principal installments of $1,629
and
11
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands except share and per share amounts)
distribute $407 to minority interest partners. There is no assurance that cash
flow from operating activities will be sufficient to meet our operating and
dividend objectives for an extended period, and, therefore, management will
continue to assess whether the current dividend rate can be maintained.
Annual operating cash flow may benefit as management continues to focus on
increasing performance at underperforming properties through leases with new
tenants and property sales. New leases in 2004 with Silgan and Sunland
Distribution are expected to contribute additional annual cash flow of $1,724.
The sale of our Delaware property in March 2005 eliminated annual carrying costs
of $300. The expected sales of properties in New Jersey and California, which
both are expected to be completed in 2005, will eliminate annual carrying costs
on these properties of approximately $1,107. In addition, operating cash flow
will also benefit from scheduled balloon payments due in August and October 2005
which will reduce annual debt service costs by approximately $613. Scheduled
rent increases on several properties during 2005 should also result in
additional cash from operations.
INVESTING ACTIVITIES - Our investing activities are generally comprised of real
estate purchases, payment of our annual installment of deferred acquisition fees
and receipt of proceeds from the sale of property. Proceeds from the sale of
property were $2,835, which was related to the Newark, Delaware sale in March
2005. The annual installment of deferred acquisition fees was paid in January
2005 and totaled $1,420.
FINANCING ACTIVITIES - In addition to making scheduled mortgage principal
payments, paying dividends to shareholders and making distributions to minority
partners, we obtained $602 as a result of issuing shares through our
Distribution Reinvestment and Share Purchase Plan, and used $621 to purchase
treasury shares through a redemption plan which allows shareholders to sell
shares back to us, subject to certain limitations.
All of our mortgages are limited recourse and bear interest at fixed rates.
Accordingly, our cash flow should not be adversely affected by increases in
interest rates, which are near historical lows. We may seek to refinance, during
the term of our existing debt agreements, maturing or recently paid-off mortgage
debt with new property-level financing. There is no assurance that existing debt
will be refinanced at lower rates of interest as such debt matures. Many of the
loans restrict our ability to prepay a loan or provide for payment of premiums
if paid prior to its scheduled maturity, but allow defeasance of the loan, that
is, a deposit is made to service the loan commitment even if the underlying
property is sold.
A lender on limited recourse mortgage debt has recourse only to the property
collateralizing such debt and not to any of our other assets, while unsecured
financing would give a lender recourse to all of our assets. The use of limited
recourse debt, therefore, will allow us to limit our exposure of all of our
assets with respect 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 has helped to diversify
our portfolio and, therefore, reduce concentration of risk in any particular
lessee.
Cash Resources
As of March 31, 2005, we had $10,731 in cash and cash equivalents that can be
used for working capital needs and other commitments, and may be used for future
real estate purchases. In addition, debt may be incurred on unleveraged
properties with a carrying value of $31,930 as of March 31, 2005 and any
proceeds may be used to finance future real estate purchases. We also expect to
receive cash of approximately $21,900 upon the completion of sales of our
Piscataway and San Leandro properties, both of which are expected to be
completed in 2005. In connection with the Piscataway sale, escrow funds of
$2,550 will be released by the lender.
Cash Requirements
During the next twelve months, cash requirements will include scheduled mortgage
principal payment installments, balloon payments of $2,460 and $1,688, due in
August 2005 and October 2005, respectively, paying dividends to shareholders,
making distributions to minority partners as well as other normal recurring
operating expenses. We may also seek to use our cash to purchase new properties
to further diversify our portfolio. The balloon payment of $2,460, which was due
in August 2005, was paid in April 2005 using existing cash reserves.
Our ability to sustain our dividend on a long-term basis will be affected by our
ability to sell or generate cash from underperforming properties, including
properties in Piscataway and San Leandro, both of which are expected to be sold
in 2005, and the ability of Garden Ridge to successfully reorganize and emerge
from bankruptcy. See Current Developments and Trends and Lease Revenues above.
12
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands except share and per share amounts)
OFF-BALANCE SHEET AND AGGREGATE CONTRACTUAL AGREEMENTS
The table below summarizes our contractual obligations as of March 31, 2005 and
the effect that such 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) $235,144 $28,361 $52,572 $66,171 $88,040
Deferred acquisition fees (1) 4,772 1,528 1,780 1,001 463
Subordinated disposition fees (2) 1,874 1,874
Operating leases (3) 2,160 147 350 369 1,294
-------- ------- ------- ------- -------
$243,950 $30,036 $54,702 $67,541 $91,671
======== ======= ======= ======= =======
(1) Amounts are inclusive of principal and interest.
(2) Payable, subject to meeting contingencies, in connection with any liquidity
event.
(3) Operating lease obligations consist primarily of our share of minimum rents
payable under an office cost-sharing agreement with certain affiliates for
the purpose of leasing office space used for the administration of real
estate entities.
SUBSEQUENT EVENT
In April 2005, management approved a plan to sell the former Scott property in
San Leandro, California. We expect to enter into a contract with a third party
to sell this property for approximately $18,400. The contract is expected to
provide for a due diligence period that will expire on July 31, 2005 and is
expected to close in our third quarter. As such, there is no assurance that the
proposed sale will be completed.
The property has a carrying value of $15,416. The net proceeds from the sale
after expected brokerage commission, closing and other costs of approximately
$1,840 are expected to be approximately $16,560. We expect to record a gain of
approximately $1,800 in connection with this sale.
13
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(in thousands except share and per share amounts)
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"). The value of the marketable securities is subject to
fluctuations based on changes in interest rates, economic conditions and the
creditworthiness of lessees at the mortgaged properties. As of March 31, 2005
our interests in CCMT had a fair value of $8,000. We also own marketable equity
securities of Proterion Corporation and Sentry Technology Corporation, which
based on their quoted per share prices had a fair value of $150 as of March 31,
2005 (see Results of Operations above for description of write down of the
Proterion securities to fair value).
All of our $173,464 long-term debt bears interest at fixed rates, and 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 our debt obligations and the related weighted-average interest rates by
expected maturity dates. The interest rates on our fixed rate debt as of March
31, 2005 ranged from 5.15% to 8.75% per annum.
2005 2006 2007 2008 2009 Thereafter Total Fair Value
------ ------- ------- ------- ------- ---------- -------- ----------
Fixed rate debt $8,852 $11,517 $23,762 $22,478 $20,290 $86,565 $173,464 $175,178,
Weighted average interest rate 7.76% 7.72% 7.56% 6.67% 8.36% 7.38%
A change in interest rates of 1% would not have an effect on annual interest
expense as we have no variable rate debt. A change in interest rates of 1% would
increase or decrease the fair value of our fixed rate debt at March 31, 2005 by
approximately $6,465.
Foreign Currency Exchange Rate Risk
We have foreign operations in France 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. We are a net receiver of the Euro (we receive more cash
then we pay out) and therefore our foreign investments benefit from a weaker
U.S. dollar and are adversely affected by a stronger U.S. dollar relative to the
foreign currency. The foreign operations were not significant to our
consolidated financial position, results of operations or cash flows during the
quarter ended March 31, 2005.
To date, we have not entered into any foreign currency exchange contracts or
other derivative financial instruments to hedge the effects of adverse
fluctuations in foreign currency exchange rates.
ITEM 4. - CONTROLS AND PROCEDURES
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 Officer 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.
Our Chief Executive Officer and Chief Financial Officer have conducted a review
of our disclosure controls and procedures as of March 31, 2005.
Based upon this review, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls (as defined in Rule 13a-15(e)
promulgated 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 with adequate
timeliness.
There have been no changes during the most recent fiscal quarter in our internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
14
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
PART II
ITEM 2. - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) For the quarter ended March 31, 2005, 126,129 shares were issued to
the Advisor as consideration for asset management and performance
fees. Shares were issued at $12.40 per share.
(c) Issuer Purchases of Equity Securities
Total Number of
Total Number Average Shares Purchased as
of Price Part of Publicly
Shares Paid Per Announced
Period Purchased Share Plans or Programs (1)
------ ------------ -------- ---------------------
January 1, 2005 - January 31, 2005 54,055 $11.12 N/A
February 1, 2005 - February 28, 2005 610 11.12 N/A
March 1, 2005 - March 31, 2005 -- -- N/A
------
Total 54,665
======
(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.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended March 31, 2005, no matters were submitted to a vote of
security holders.
Item 5. - OTHER INFORMATION
On May 5, 2005, the Advisor announced the resignation of John Park as its Chief
Financial Officer in connection with an ongoing investigation by the Securities
and Exchange Commission of payments to broker-dealers that is described in the
Company's Annual Report on Form 10-K for the year ended December 31, 2004. Mr.
Park has also resigned as Chief Financial Officer of the Company.
Claude Fernandez, the Company's Principal Accounting Officer, will assume the
position of acting Chief Financial Officer and Michael D. Roberts, an Executive
Director of the Company, will assume the position of acting Principal Accounting
Officer, effective immediately. The Company has commenced a search for a new
Chief Financial Officer.
Claude Fernandez, age 52, joined the Company as Assistant Controller in March
1983, was elected Controller in July 1983, Vice President in April 1986, and was
until now a Managing Director and the Principal Accounting Officer of the
Company.
Michael D. Roberts, age 53, joined the Company as Second Vice President and
Assistant Controller in April 1989, was named Vice President and Controller in
October in 1989, First Vice President in 1997, and was until now an Executive
Director of the Company.
ITEM 6. - EXHIBITS
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
15
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORPORATE PROPERTY ASSOCIATES 12 INCORPORATED
5/10/2005 By: /s/ Claude Fernandez
Date -----------------------------------------
Claude Fernandez
Managing Director and
acting Chief Financial Officer
(acting Principal Financial Officer)
5/10/2005 By: /s/ Michael D. Roberts
Date -----------------------------------------
Michael D. Roberts
Executive Director and Controller
(acting Principal Accounting Officer)
16