Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED 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: 000-25771
----------------
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 13-3951476
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
50 ROCKEFELLER PLAZA 10020
NEW YORK, NEW YORK (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 68,017,224 shares of common stock, $.001 par value
outstanding at May 4, 2005.
CORPORATE PROPERTY ASSOCIATES 14 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 Disclosures About Market Risk 14
Item 4. - Controls and Procedures 15
PART II - Other Information
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds 16
Item 4. - Submission of Matters to a Vote of Security Holders 16
Item 5. - Other Information 16
Item 6. - Exhibits 16
Signatures 17
* 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 14 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 $91,494 at March 31, 2005 and
$86,212 at December 31, 2004 $ 983,952 $ 999,861
Net investment in direct financing leases 116,175 116,343
Equity investments 134,240 134,905
Asset held for sale - 3,797
Cash and cash equivalents 38,943 36,395
Marketable securities 6,666 13,904
Other assets, net 43,403 41,150
---------------- ----------------
Total assets $ 1,323,379 $ 1,346,355
================ =========-======
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY:
Liabilities:
Mortgage notes payable $ 690,110 $ 701,181
Mortgage notes payable on asset held for sale - 2,190
Accrued interest 4,470 4,612
Due to affiliates 4,314 4,925
Accounts payable and accrued expenses 4,076 5,184
Prepaid rental income and security deposits 18,254 22,233
Deferred acquisition fees payable to affiliate 16,424 20,012
Dividends payable 12,943 12,894
---------------- ----------------
Total liabilities 750,591 773,231
---------------- ---------------
Minority interest 25,935 26,426
Commitments and contingencies (Note 7)
Shareholders' equity:
Common stock, $.001 par value; authorized, 120,000,000 shares; issued and outstanding,
69,309,914 shares at March 31, 2005 and 68,982,023 shares at December 31, 2004 69 69
Additional paid-in capital 624,137 620,366
Dividends in excess of accumulated earnings (76,231) (76,301)
Accumulated other comprehensive income 11,304 13,621
---------------- ----------------
559,279 557,755
Less, treasury stock at cost, 1,330,075 shares at March 31, 2005 and 1,191,490 shares
at December 31, 2004 (12,426) (11,057)
---------------- ----------------
Total shareholders' equity 546,853 546,698
---------------- ----------------
Total liabilities, minority interest and shareholders' equity $ 1,323,379 $ 1,346,355
================ ================
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 14 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 $ 28,929 $ 28,144
Interest income from direct financing leases 3,645 3,388
Other operating income 638 220
---------- -----------
33,212 31,752
---------- -----------
Operating expenses:
Depreciation 5,904 5,843
General and administrative 1,585 1,794
Property expenses 5,631 4,866
---------- -----------
13,120 12,503
---------- -----------
Income from continuing operations before other interest
income, minority interest, equity investments, interest
expense and gain (loss) 20,092 19,249
Other interest income 358 331
Minority interest in income (448) (406)
Income from equity investments 3,811 3,367
Interest expense (13,245) (13,475)
---------- -----------
Income from continuing operations before gain (loss) 10,568 9,066
Gain (loss) on derivative instruments, net 2,406 (55)
Loss on foreign currency transactions, net (303) (60)
---------- -----------
Income from continuing operations 12,671 8,951
Discontinued operations:
Income from operation of discontinued properties 144 38
Gain on sale of real estate 196 -
---------- -----------
Income from discontinued operations 340 38
Net income $ 13,011 $ 8,989
========== ===========
Basic earnings per share:
Earnings from continuing operations $ .18 $ .13
Earnings from discontinued operations .01 -
---------- -----------
Net income $ .19 $ .13
========== ===========
Weighted average shares outstanding - basic 68,025,078 67,129,602
========== ===========
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 $ 13,011 $ 8,989
Other comprehensive income (loss):
Change in foreign currency translation adjustment (2,106) (955)
Change in unrealized appreciation of marketable securities (211) 155
---------- ---------
(2,317) (800)
---------- ---------
Comprehensive income $ 10,694 $ 8,189
========== =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
CORPORATE PROPERTY ASSOCIATES 14 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 $ 13,011 $ 8,989
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations, including gain on sale of real estate (340) (38)
Depreciation and amortization 6,187 6,140
Straight-line rent adjustments (892) (1,138)
Income from equity investments in excess of distributions received (54) (258)
Issuance of shares in satisfaction of current and accrued performance fees 2,156 1,906
Minority interest in income 448 406
Unrealized (gain) loss on derivatives, net (2,406) 55
Unrealized loss on foreign currency transactions, net 303 118
Gain on foreign currency transactions, net - (58)
(Decrease) increase in prepaid rents and security deposits (3,781) 83
Change in other operating assets and liabilities, net (1,384) (458)
--------- ------------
Net cash provided by continuing operations 13,248 15,747
Net cash provided by discontinued operations 144 56
--------- ------------
Net cash provided by operating activities 13,392 15,803
--------- ------------
Cash flows from investing activities:
Distributions from operations of equity investments in excess of equity income 719 419
Additional capitalized costs (50) (368)
Payment of value added taxes from purchase of real estate - (1,617)
Purchase of securities - (10,825)
Proceeds from sale of real estate and securities 9,000 15,950
Payment of deferred acquisition fees (3,420) (3,266)
--------- ------------
Net cash provided by investing activities 6,249 293
--------- ------------
Cash flows from financing activities:
Funds released by mortgage lenders - 96
Payments of mortgage principal (3,060) (2,716)
Distributions to minority interest partner (939) (582)
Proceeds from issuance of shares, net of costs 1,615 1,209
Dividends paid (12,892) (12,662)
Purchase of treasury stock (1,369) (675)
--------- ------------
Net cash used in financing activities (16,645) (15,330)
--------- ------------
Effect of exchange rate changes on cash (448) (319)
--------- ------------
Net increase in cash and cash equivalents 2,548 447
Cash and cash equivalents, beginning of period 36,395 38,725
--------- ------------
Cash and cash equivalents, end of period $ 38,943 $ 39,172
========= ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per share amounts)
NOTE 1. BASIS OF PRESENTATION:
Corporate Property Associates 14 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
Certain prior period amounts have been reclassified to conform to current period
financial statement presentation. For the periods ended March 31, 2005 and 2004,
the Company purchased and sold auction-rate securities. As a result, certain
amounts were reclassified in the accompanying condensed consolidated statements
of cash flows for the period ended March 31, 2004 to conform to the current
period presentation.
Dividend
Dividends declared per share for the three-month periods ended March 31, 2005
and 2004 were $.1904 and $.1894, respectively.
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 rate of cash flow from operations 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 has elected at its option to receive the performance fees
for 2005 in restricted shares of common stock of the Company 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 $2,267 and $2,103 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 reimbursements of $668 and
$775, 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 is met. The unpaid portion of the deferred fees
bears interest at an annual rate of 6% from the date of purchase until paid. No
such fees were incurred during 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 14 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in thousands except share and per share amounts)
NOTE 3. EQUITY INVESTMENTS:
The Company owns interests in single-tenant net leased properties leased to
corporations through noncontrolling interests (i) in various partnerships and
limited liability companies in which its ownership interests are 50% or less and
the Company exercises significant influence, and (ii) as tenants-in-common
subject to joint control. The ownership interests range from 11.54% to 50%. All
of the underlying investments are owned with affiliates that have similar
investment objectives as the Company. The lessees are Advanced Micro Devices,
Inc., Compucom Systems, Inc., Textron, Inc., CheckFree Holdings, Inc., Special
Devices, Inc., Applied Materials, Inc., True Value Company, Clear Channel
Communications, Inc., Starmark Camhood, LLC, U-Haul Moving Partners, Inc.
and Mercury Partners, LP.
Summarized financial information of the Company's equity investees is as
follows:
March 31, 2005 December 31, 2004
-------------- -----------------
Assets (primarily real estate) $1,116,972 $ 1,122,692
Liabilities (primarily mortgage notes payable) (679,232) (682,377)
---------- -------------
Partners' and members' equity $ 437,740 $ 440,315
========== =============
Company's share of equity investees' net assets $ 134,240 $ 134,905
========== =============
Three Months Ended March 31,
----------------------------
2005 2004
--------- ----------
Revenues (primarily rental income and interest income from direct financing leases) $ 29,100 $ 20,569
Expenses (primarily interest on mortgages and depreciation) (17,359) (11,770)
-------- ----------
Net income $ 11,741 $ 8,799
======== ==========
Company's share of net income from equity investments $ 3,811 $ 3,367
======== ==========
NOTE 4. INTEREST IN MORTGAGE LOAN SECURITIZATION:
The Company is accounting for its subordinated interest in the Carey Commercial
Mortgage Trust ("CCMT") mortgage securitization as an available-for-sale
marketable security, which is measured at fair value with all gains and losses
from changes in fair value reported as a component of other comprehensive income
as part of shareholders' equity. As of March 31, 2005, the fair value of the
Company's interest was $6,666, reflecting an aggregate unrealized gain of $904
and cumulative net amortization of $270 ($27 for the three months ended March
31, 2005). The fair value of the Company's 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 the fair value of the subordinated
interest 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 interest based on adverse changes in market interest
rates of 1% and 2% is as follows:
Fair Value as of March 31, 2005 1% Adverse Change 2% Adverse Change
------------------------------- ------------------ ------------------
Fair value of the interest in CCMT $ 6,666 $ 6,367 $ 6,085
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. UNREALIZED GAINS AND LOSSES:
Included in the determination of net income for the three months ended March 31,
2005 and 2004 are unrealized gains of $2,103 and unrealized losses of $173,
respectively, which reflect changes in the fair value of derivative instruments
and losses on foreign currency transactions. Derivative instruments include an
interest rate swap agreement on a variable rate limited recourse mortgage
obligation, common stock warrants in certain tenant companies, which provide for
net settlement, and a provision in a lease contract which provides the Company
with an option to receive a portion of rent in U.S. dollars or the local
currency. For the period ended March 31, 2005,
6
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in thousands except share and per share amounts)
unrealized gains and losses on derivatives consist of an unrealized gain of $196
on the interest rate swap agreement, unrealized gains of $2,210 on common stock
warrants and an unrealized loss of $6 on the foreign currency option. Included
in unrealized gains on common stock warrants is a mark-to-market adjustment of
$2,199 as a result of the approval of a redemption transaction by American Tire
Distributors, Inc. of its outstanding warrants in March 2005. The redemption
transaction was completed in April 2005. The interest rate swap agreement has a
notional amount of $8,834 and matures in September 2007.
NOTE 6. 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.
In February 2005, the Company sold a property in Valencia, California formerly
leased to Stellex Technologies, Inc. to a third party and received $1,932, net
of selling costs. In connection with this sale, the Company recognized a gain of
$196. The results of operations for the Valencia, California property 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) $ 217 $ 105
Expenses (primarily interest on mortgages, depreciation and
property expenses) (73) (67)
Gain on sale of real estate 196 -
------ ------
Earnings from discontinued operations $ 340 $ 38
====== ======
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.
7
CORPORATE PROPERTY ASSOCIATES 14 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 14 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 14 Incorporated, its
consolidated subsidiaries and predecessors, unless otherwise indicated.
Forward-looking statements discuss matters that are not historical facts.
Because they discuss future events or conditions, forward-looking statements may
include words such as "anticipate," "believe," "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 1997 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 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 lease revenues
for the three-month periods ended March 31, 2005 and 2004 is as follows:
2005 2004
------------ --------
Rental income from operating leases $28,929 $28,144
Interest from direct financing leases 3,645 3,388
------- -------
$32,574 $31,532
======= =======
8
CORPORATE PROPERTY ASSOCIATES 14 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
------- --------
Carrefour France, SAS (a) $ 3,661 $ 3,372
Petsmart, Inc. (b) 2,076 2,076
Federal Express Corporation (b) 1,679 1,661
Nortel Networks Limited. 1,500 1,500
Atrium Companies, Inc. 1,194 1,139
Advance PCS, Inc. 1,075 1,075
Tower Automotive, Inc. (c) 974 974
Katun Corporation (a) 965 955
Dick's Sporting Goods, Inc. 953 953
McLane Company Foodservice, Inc. (c) 895 886
Perkin Elmer, Inc. (a) 887 891
Metaldyne Company LLC 874 813
Collins & Aikman Corporation 861 837
APW North America Inc. 749 731
Consolidated Theatres (d) 648 437
Gibson Guitar Corp. 634 632
Builders FirstSource, Inc. 628 619
Amerix Corporation 624 624
Mayo Foundation 605 605
Gerber Scientific, Inc. 584 564
Buffets, Inc. 584 568
Waddington North America, Inc. 580 548
Institutional Jobbers Company 568 568
Other (a) 8,776 8,504
-------- --------
$ 32,574 $ 31,532
======== ========
(a) Revenue amounts are subject to fluctuations in foreign currency exchange
rates.
(b) Lease revenues applicable to minority interests in the consolidated
amounts above total $2,001 and $1,995 for the three-month periods ended
March 31, 2005 and 2004, respectively.
(c) Tower Automotive filed for Chapter 11 bankruptcy protection in February
2005.
(d) Increase is the result of percentage of sales rent increases in 2005.
We recognize income from equity investments of which lease revenues are a
significant component. Our ownership interests range from 11.54% 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
------- -------
Starmark Camhood, LLC $ 1,873 $ 1,873
Clear Channel Communications, Inc. 1,415 1,415
True Value Company 1,266 1,264
Advanced Micro Devices, Inc. 871 815
Mercury Partners and U-Haul Moving Partners (a) 824 -
Applied Materials, Inc. 819 789
CheckFree Holdings, Inc. 562 545
Special Devices, Inc. 510 510
Compucom Systems, Inc. 352 352
Textron, Inc. 319 310
------- -------
$ 8,811 $ 7,873
======= =======
(a) Interest in this investment was acquired in April 2004.
Current Developments and Trends
Competition for investments continues to remain strong. 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;
- - The impact of rising interest rates would be mitigated through our use of
fixed interest rates on the majority of our debt; and
- - Rising interest rates may have an impact on the credit quality of certain
tenants.
9
CORPORATE PROPERTY ASSOCIATES 14 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 months ended March 31, 2005, cash flows generated from operations
and equity investments of $14,111 were not sufficient to fund dividends paid and
meet other obligations including paying scheduled mortgage principal payments
and making distributions to minority interests, which totaled $16,891. As a
result, we experienced an operating cash shortfall for the three months ended
March 31, 2005 of $2,780 (see Financial Condition - Operating Activities below).
Management believes that the operating cash shortfall, which was primarily the
result of a decline in prepaid rents due to the receipt of certain quarterly
rent payments in December 2004 which were due during the quarter ended March 31,
2005, is temporary and not indicative of future results. We have cash and cash
equivalent balances of $38,943 as of March 31, 2005 that can be utilized for
working capital needs and other commitments and may be used for future real
estate purchases.
Management believes that as the portfolio matures there is a potential for an
increase in the value of the portfolio and that any increase may not be
reflected in the financial statements; however, rising interest rates and other
market conditions may have an adverse affect on the future value of the
portfolio.
CURRENT DEVELOPMENTS INCLUDE:
DISPOSITION. In February 2005, we sold a property in Valencia, California for
$4,116. We recognized a gain of $196 on this transaction. The operations of this
property are included in Discontinued Operations for all periods presented.
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 and increased the first
quarter dividend to $.1904 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
$1,042 primarily as a result of $672 from rent increases at several properties,
$256 from the impact of favorable changes in foreign exchange rates (Euro and
the British Pound) on rents from foreign properties and $249 from new leases
entered into in 2004, the completion of a build-to-suit project in 2004 and a
lease renewal in January 2005. These increases were partially offset by a
decrease in lease revenue due to lease terminations. 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.
A lease with Best Buy, Inc. that contributed $1,900 in annual rent was extended
in January 2005 for an additional 5 years and will now contribute $2,152 in
annual rent and expire in January 2010. There are no other lease expirations in
the next 12 months. Tower Automotive, Inc., the lessee of four properties that
generated annual lease revenues of $3,895 in 2004, filed a voluntary petition of
bankruptcy in February 2005. Tower, which is current on all its lease
obligations, has not yet notified us whether it intends to affirm its lease.
Meridian Automotive Systems, Inc., the lessee of a property that generated
annual lease revenues of $1,207 in 2004, filed a voluntary petition of
bankruptcy in April 2005. Meridian, which is current on its lease obligations,
has not yet notified us whether it intends to affirm its lease.
General and Administrative Expenses
For the comparable quarters ended March 31, 2005 and 2004, general and
administrative expenses decreased $209 primarily due to a decline in our share
of expenses allocated to us by the Advisor due to an increase in the asset base
of affiliated REITs. As investment activity of affiliated REITs continues to
increase, fees allocated to us by our Advisor are expected to decline.
10
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Continued)
(in thousands except share and per share amounts)
Property Expenses
For the comparable quarters ended March 31, 2005 and 2004, property expenses
increased by $765 primarily due to an increase in asset management and
performance fees of $328, which was the result of increases in property values
pursuant to the annual third party valuation of our portfolio as of December 31,
2004, and an increase in reimbursable tenant costs of $295. Reimbursable tenant
costs are recorded as other operating income and property expense and have no
impact on net income.
Income From Equity Investments
For the comparable quarters ended March 31, 2005 and 2004, income from equity
investments increased by $444 primarily as a result of our April 2004 purchase
of an 11.54% interest in a newly-formed limited partnership which purchased 78
U-Haul properties. This acquisition contributed $293 of the total increase.
Income from equity investments also increased as a result of rent increases at
several properties.
Interest Expense
For the comparable quarters ended March 31, 2005 and 2004, interest expense
decreased by $230 primarily due to a $13,261 reduction in mortgage notes payable
balances, all of which provide for scheduled mortgage principal payments.
Gain (Loss) on Derivative Instruments, Net
Gain on derivative instruments, net, of $2,406 for the quarter ended March 31,
2005 primarily represents a mark-to-market adjustment on common stock warrants
of $2,199 as a result of the approval of a redemption transaction by American
Tire Distributors, Inc. of its outstanding warrants in March 2005. The
redemption transaction was completed in April 2005.
Income From Discontinued Operations
Income from discontinued operations of $340 for the quarter ended March 31, 2005
represents the results of operations and a gain of $196 on the sale of our
Valencia, California property in February 2005.
Net Income
For the comparable quarters ended March 31, 2005 and 2004, net income increased
by $4,022 primarily due to increases in total revenues of $1,460 and income from
equity investments of $444. Net income benefited from a mark-to-market
adjustment related to the approval of a warrant redemption transaction that
resulted in an unrealized gain of $2,199. Net income also benefited from
reductions in general and administrative expenses of $209, interest expense of
$230 and a gain on the sale of property of $196. These increases were partially
offset by an increase in property expense of $765. These variances 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. Cash and cash equivalents totaled $38,943 as of March 31, 2005, an
increase of $2,548 from the December 31, 2004 balance. Management believes that
we have sufficient cash balances to meet our working capital needs. Our use of
cash during the period is described below.
OPERATING ACTIVITIES - For the three-month period ended March 31, 2005, cash
flows from operating activities and equity investments of $14,111 were not
sufficient to pay dividends to shareholders of $12,892, meet scheduled principal
payment installments on mortgage debt of $3,060 and distribute $939 to minority
partners. This cash shortfall was primarily the result of a decline in prepaid
rents due to the receipt of certain quarterly rent payments in December 2004
which were due during the quarter ended March 31, 2005. Variances in amount of
rent collected in any given period can occur due to differences in the timing of
tenant payments. Management believes that this shortfall is temporary and not
indicative of future results.
Annual operating cash flow is expected to increase as a result of recent lease
activity, including three new leases signed in 2004, the completion of a
build-to-suit project in late 2004 and the lease renewal in 2005 with Best Buy
(see Results of Operations - Lease Revenue above). These leases will contribute
additional annual cash flow of approximately $1,242. Scheduled rent increases in
2005 at several existing properties will also contribute to increased cash flow.
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 $9,000, which consists primarily of $7,000 from the sale of
marketable securities and the proceeds from the sale of our Valencia, California
property. The annual installment of deferred acquisition fees is paid each
January and was $3,420 in 2005.
11
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Continued)
(in thousands except share and per share amounts)
FINANCING ACTIVITIES - In addition to making scheduled mortgage principal
payments, paying dividends to shareholders and making distributions to minority
partners, we used $1,369 to purchase treasury shares through a redemption plan
which allows shareholders to sell shares back to us, subject to certain
limitations. We also obtained $1,615 as a result of issuing shares through our
Distribution Reinvestment and Share Purchase Plan.
Substantially 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. 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 $38,943 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 $55,718 as of March 31, 2005 and any
proceeds may be used to finance future real estate purchases.
Cash Requirements
During the next twelve months, cash requirements will include scheduled mortgage
principal payment installments (we have no mortgage balloon payments scheduled
until February 2008), paying dividends to shareholders and 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 and maintain cash balances sufficient to meet working capital
needs. Based on the projected increase in operating cash flows from new leases,
the completed build-to-suit projects and recent property acquisitions, cash flow
from operations and distributions from operations of equity investments in
excess of equity income is expected to be sufficient to meet operating cash flow
objectives during the next twelve months.
Other Matters
We have foreign operations 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 quarter.
We are subject to material foreign currency exchange rate risk from the effects
of changes in exchange rates. To date, we have not entered into any foreign
currency forward exchange contracts to hedge the effects of adverse fluctuations
in foreign currency exchange rates. We have obtained limited recourse mortgage
financing at fixed rates of interest in the local currency. To the extent that
currency fluctuations increase or decrease rental revenues as translated to
dollars, the change in debt service, as translated to dollars, will partially
offset the effect of fluctuations in revenue, and, to some extent mitigate the
risk from changes in foreign currency rates. As of March 31, 2005, Carrefour,
which leases properties in France, contributed 9% of lease revenues. The
leverage on the limited recourse financing of the Carrefour investment is higher
than the average leverage on our domestic real estate investments.
12
CORPORATE PROPERTY ASSOCIATES 14 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 MORE THAN 5
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS YEARS
Limited recourse mortgage notes payable (1) $ 1,052,465 $ 63,579 $ 130,769 $ 193,305 $ 664,812
Deferred acquisition fees (1) 19,437 4,500 8,098 5,238 1,601
Subordinated disposition fees (2) 363 - - - 363
Operating leases (3) 5,996 407 971 1,025 3,593
----------- --------- --------- ---------- ----------
$ 1,078,261 $ 68,486 $ 139,838 $ 199,568 $ 670,369
=========== ========= ========= ========== ===========
(1) Amounts are inclusive of principal and interest.
(2) Payable, subject to meeting contingencies, in connection with any liquidity
event.
(3) Operating lease obligations consist primarily of our share of minimum rents
payable under an office cost-sharing agreement with certain affiliates for
the purpose of leasing office space used for the administration of real
estate entities.
As of March 31, 2005, we have no material capital lease obligations, either
individually or in the aggregate.
13
CORPORATE PROPERTY ASSOCIATES 14 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 and foreign currency exchange rate risks.
Interest Rate Risk
The value of our real estate is subject to fluctuations based on changes in
interest rates, local and regional economic conditions and changes in the
creditworthiness of lessees, and which may affect our ability to refinance our
debt when balloon payments are scheduled.
Our marketable securities consist of our ownership interests in Carey Commercial
Mortgage Trust. 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 March 31, 2005, our marketable
securities had a fair value of $6,666.
Approximately $671,247 of our long-term debt bears interest at fixed rates, and
therefore the fair value of these instruments is affected by changes in the
market interest rates. The following table presents principal cash flows based
upon expected maturity dates of our debt obligations and the related
weighted-average interest rates by expected maturity dates for our fixed rate
debt. The interest rates on our fixed rate debt as of March 31, 2005 ranged from
5.15% to 8.85%. The interest rate on our variable rate debt as of March 31, 2005
ranged from 3.55% to 4.69%.
2005 2006 2007 2008 2009 THEREAFTER TOTAL FAIR VALUE
------- --------- -------- -------- --------- ---------- --------- ----------
Fixed rate debt $ 8,836 $ 12,746 $ 13,700 $ 19,871 $ 62,580 $ 553,514 $ 671,247 $ 687,775
Weighted average interest rate 7.11% 7.12% 7.13% 7.29% 7.99% 7.36%
Variable rate debt $ 294 $ 400 $ 407 $ 415 $ 425 $ 16,922 $ 18,863 $ 18,863
Annual interest expense from variable rate debt would increase or decrease by
approximately $189 for each change of 1% in annual interest rates. We have an
interest rate swap agreement on a variable rate obligation with a balance at
March 31, 2005 of $8,836, for which the related cash flow is therefore not
affected by changes in interest rates. 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 $34,903.
Foreign Currency Exchange Rate Risk
We have foreign operations in the United Kingdom, Finland, France and The
Netherlands and as such are subject to risk from the effects of exchange rate
movements of foreign currencies, which may affect future costs and cash flows.
Our foreign operations for the preceding year were conducted in the Euro and the
British Pound. For these currencies we are a net receiver of the foreign
currency (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 three-month periods ended March 31, 2005 and
2004. Foreign currency translation losses of $303 and $60 for the
three-month periods ended March 31, 2005 and 2004, respectively, are included in
the accompanying condensed consolidated financial statements and are primarily
due to changes in foreign currency on accrued interest receivable on notes
receivable from wholly-owned subsidiaries.
To date, we have not entered into any foreign currency forward exchange
contracts to hedge the effects of adverse fluctuations in foreign currency
exchange rates.
14
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
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.
15
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
PART II
Item 2. - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) For the quarter ended March 31, 2005, 178,242 shares were issued to
the Advisor as consideration for performance fees. Shares were
issued at per share amounts which ranged from $11.30 to $12.10.
(c) 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)
- ------------------------------------ ---------------- ------------------------------------
January 1, 2005 - January 31, 2005 138,585 $ 10.16 N/A
February 1, 2005 - February 28, 2005 - - N/A
March 1, 2005 - March 31, 2005 - - N/A
-------
138,585
=======
(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
16
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
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)
17