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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
--------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED 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: 000-50249
--------------------------
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-2298116
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
50 ROCKEFELLER PLAZA 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 126,461,525 shares of common stock, $.001 par value outstanding
at May 4, 2005.
CORPORATE PROPERTY ASSOCIATES 15 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 5-9
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations 10-16
Item 3. - Quantitative and Qualitative Disclosures about Market Risk 17
Item 4. - Controls and Procedures 18
PART II - Other Information
Item 1. - Legal Proceedings 19
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 4. - Submission of Matters to a Vote of Security Holders 19
Item 5. - Other Information 19
Item 6. - Exhibits 19
Signatures 20
* 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 15 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 $56,321 and $47,756 at
March 31, 2005 and December 31, 2004 $ 1,762,384 $ 1,695,066
Net investment in direct financing leases 289,160 291,367
Intangible assets, net of accumulated amortization of $12,995 and $8,503 at March
31, 2005 and December 31, 2004 238,665 228,760
Assets held for sale 18,941 19,385
Real estate under construction 28,538 25,115
Equity investments 180,029 180,479
Cash and cash equivalents 132,719 144,522
Marketable securities 11,733 32,150
Other assets, net 103,891 101,552
----------- -----------
Total assets $ 2,766,060 $ 2,718,396
=========== ===========
LIABILITIES, MINORITY INTEREST, AND SHAREHOLDERS' EQUITY:
Liabilities:
Limited recourse mortgage notes payable $ 1,369,558 $ 1,309,126
Accrued interest 7,975 7,694
Due to affiliates 5,071 6,159
Accounts payable and accrued expenses 10,630 10,661
Other liabilities 23,145 23,378
Prepaid rental income and security deposits 62,572 66,122
Deferred acquisition fees payable to affiliate 30,222 34,650
Dividends payable 20,054 19,908
----------- -----------
Total liabilities 1,529,227 1,477,698
----------- -----------
Minority interest 181,261 176,490
Commitments and contingencies (Note 8)
Shareholders' equity:
Common stock, $.001 par value; authorized 240,000,000 shares; issued and
outstanding, 126,802,586 and 126,009,926 at March 31, 2005 and December 31, 2004 127 126
Additional paid-in capital 1,154,848 1,147,138
Dividend in excess of accumulated earnings (97,569) (85,151)
Accumulated other comprehensive income 3,942 6,189
----------- -----------
1,061,348 1,068,302
Less, treasury stock at cost, 597,445 and 416,149 shares at March 31, 2005 and
December 31, 2004 (5,776) (4,094)
----------- -----------
Total shareholders' equity 1,055,572 1,064,208
----------- -----------
Total liabilities, minority interest and shareholders' equity $ 2,766,060 $ 2,718,396
=========== ===========
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 15 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 $ 45,752 $ 22,611
Interest income from direct financing leases 6,442 3,526
Other operating income 1,815 4,215
------------- -------------
54,009 30,352
------------- -------------
Operating expenses:
Depreciation and amortization 12,437 5,585
General and administrative 2,802 1,974
Property expenses 8,290 4,867
------------- -------------
23,529 12,426
------------- -------------
Income from continuing operations before other interest income,
minority interest, equity investments, (losses)
gains and interest expense 30,480 17,926
Other interest income 949 1,005
Minority interest in income (3,659) (1,995)
Income from equity investments 3,975 2,071
(Loss) gain on foreign currency transactions, net (1,521) 1,876
Interest expense (21,688) (8,999)
------------- -------------
Income from continuing operations 8,536 11,884
Discontinued operations:
(Loss) income from operations of discontinued properties (290) (280)
Impairment charge on real estate (610) -
------------- -------------
Loss from discontinued operations (900) (280)
------------- -------------
Net income $ 7,636 $ 11,604
============= =============
Earnings from continuing operations $ .07 $ .11
Loss from discontinued operations (.01) -
------------- -------------
Net income $ .06 $ .11
============= =============
Weighted average shares outstanding - basic 126,207,868 106,094,871
============= =============
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 $ 7,636 $ 11,604
Other comprehensive income (loss):
Change in foreign currency translation adjustment (2,163) (523)
Change in unrealized depreciation of marketable
securities (317) -
Unrealized gain (loss) on derivative instruments 233 (200)
------- --------
(2,247) (723)
------- --------
Comprehensive income $ 5,389 $ 10,881
======= ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
CORPORATE PROPERTY ASSOCIATES 15 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 $ 7,636 $ 11,604
Adjustments to reconcile net income to net cash provided by operating activities:
Loss from discontinued operations, including impairment charge on real estate 900 280
Depreciation and amortization of intangibles and deferred financing costs 12,906 5,726
Equity income in excess of distributions received (315) (221)
Straight-line rent adjustments (71) (1,820)
Settlement proceeds assigned to lender - (2,754)
Loss (gain) on foreign currency transactions, net 1,521 (1,876)
Fees paid to affiliate by issuance of stock 2,669 1,275
Minority interest in income 3,659 1,995
Changes in operating assets and liabilities, net
(2,332) 2,031
--------- ---------
Net cash provided by continuing operations 26,573 16,240
Net cash used in discontinued operations (290) (280)
--------- ---------
Net cash provided by operating activities 26,283 15,960
--------- ---------
Cash flows from investing activities:
Distributions from operations of equity investments in excess of equity income 864 167
Acquisitions of real estate and equity investments and other capitalized costs (125,520) (58,779)
VAT taxes recovered in connection with purchases of real estate, net - 604
Payment of deferred acquisition fees (6,001) (3,253)
Purchase of short-term investments - (23,059)
Redemption of short-term investments - 9,488
Proceeds from sale of securities and real estate 20,000 28,034
--------- ---------
Net cash used in investing activities (110,657) (46,798)
--------- ---------
Cash flows from financing activities:
Proceeds from mortgages 90,727 28,589
Mortgage and note principal payments (5,864) (2,065)
Deferred financing costs and mortgage deposits, net of deposits refunded (75) (8)
Capital contributions from minority partner 11,528 -
Distributions paid to minority partners (5,603) (802)
Proceeds from issuance of stock, net of costs of raising capital 5,042 3,871
Dividends paid (19,908) (16,565)
Purchase of treasury stock (1,682) (679)
--------- ---------
Net cash provided by financing activities 74,165 12,341
--------- ---------
Effect of exchange rate changes on cash (1,594) 524
--------- ---------
Net decrease in cash and cash equivalents (11,803) (17,973)
Cash and cash equivalents, beginning of period 144,522 235,217
--------- ---------
Cash and cash equivalents, end of period $ 132,719 $ 217,244
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per share amounts)
NOTE 1. BASIS OF PRESENTATION:
Corporate Property Associates 15 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
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 $.1589 and $.1569, 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 non-compounded distribution return of 6%. 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. The Advisor has
elected, at its option, to receive the performance fee 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 $2,763 and $1,430 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. The Company incurred personnel reimbursements of $925 and
$552 for the three months ended March 31, 2005 and 2004, 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 annual
installments each January over no less than four years following the first
anniversary of the date a property was purchased. Such deferred fees are only
payable if the preferred return has been met. The unpaid portion of the deferred
fees bears interest at an annual rate of 6% from the date of purchase of a
property until paid. For transactions that were completed during the three
months ended March 31, 2005, current and deferred fees were $1,965 and $1,573,
respectively. For transactions that were completed during the three months ended
March 31, 2004, current and deferred fees were $1,626 and $1,301, respectively.
An annual installment of deferred fees was paid to the Advisor in January 2005.
NOTE 3. ACQUISITIONS OF REAL ESTATE AND REAL ESTATE INTERESTS:
A summary of the investments completed during the quarter ended March 31, 2005
is as follows:
INITIAL ANNUAL
ANNUAL MORTGAGE DEBT
LEASE OBLIGOR: COST LOCATION RENT FINANCING SERVICE DATE ACQUIRED
- -------------------------------------- --------- ---------------------- -------- --------- --------- -------------
Pohjola Non-Life Insurance Company (1) (2) $ 113,287 Helsinki, Finland $ 8,128 $ 84,663 $ 4,280 1/3/2005
(1) Based on the applicable exchange rate on the date of acquisition.
(2) The Company owns a 60% interest in this investment with the
remaining interest owned by an affiliate. Amounts in the table above
represent 100% of the investment.
5
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per share amounts)
NOTE 4. EQUITY INVESTMENTS:
The Company owns interests in single-tenant net leased properties leased to
corporations through noncontrolling interests in (i) partnerships and limited
liability companies in which its ownership interests are 50% or less and the
Company exercises significant influence, and (ii) as tenants-in-common subject
to common control. The ownership interests range from 30% to 64%. All of the
underlying investments are owned with affiliates that have similar investment
objectives as the Company. The lessees are Petsmart, Inc.; Builders FirstSource,
Inc.; True Value Company; Hologic, Inc., Starmark Camhood LLC., Actuant
Corporation, Marriott International, Inc. ("Marriott"), Advanced Micro Devices,
Inc. ("AMD"), Compucom Systems, Inc. ("Compucom"), The Upper Deck Company
("Upper Deck") and Del Monte Corporation ("Del Monte"). The interests in the
Marriott, AMD, Compucom, Upper Deck and Del Monte properties were acquired in
connection with the merger of Carey Institutional Properties Incorporated into
the Company in September 2004.
Summarized combined financial information of the equity investees is as follows:
MARCH 31, 2005 DECEMBER 31, 2004
-------------- -----------------
Assets (primarily real estate) $ 760,510 $ 763,997
Liabilities (primarily mortgage notes payable) (448,215) (451,998)
--------- ---------
Partners' and members' equity $ 312,295 $ 311,999
========= =========
Company's share of equity investees' net assets $ 180,029 $ 180,479
========= =========
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
-------- --------
Revenues (primarily rental income and interest income from direct financing leases) $ 22,090 $ 11,416
Expenses (primarily interest on mortgages and depreciation) (11,122) (6,782)
-------- --------
Net income $ 10,968 $ 4,634
======== ========
Company's share of net income from equity investments $ 3,975 $ 2,071
======== ========
NOTE 5. 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 $11,733, reflecting an aggregate unrealized loss of $33
and cumulative net amortization of $233 ($100 for the three months ended March
31, 2005). The fair value of the Company's interests 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 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 $ 11,733 $ 11,205 $ 10,710
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 6. DERIVATIVE INSTRUMENT:
During 2004 the Company obtained a $23,171 variable rate mortgage loan and
concurrently entered into an interest rate swap contract with the lender which
effectively converted the variable rate debt service obligations of the loan to
a fixed rate. The interest rate swap, which has a notional amount of $22,975 as
of March 31, 2005 and a term ending February 2014, is a derivative instrument
designated as a cash flow hedge. The Company's objective in using derivatives is
to limit its exposure to interest rate movements. To accomplish this objective,
the Company has used interest rate swaps as part of its cash flow hedging
strategy. At March 31, 2005, the interest rate swap had a fair value liability
of $295 and was included in other liabilities. The change in net unrealized gain
(loss)of $233 and ($200) for the three-month periods ended March 31, 2005 and
2004, respectively, for this cash flow hedge is included in accumulated other
6
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in thousands except share and per share amounts)
comprehensive income in shareholders' equity.
NOTE 7. INTANGIBLES:
In connection with its acquisition of properties, the Company has recorded net
lease intangibles of $232,452, which are being amortized over periods ranging
from 6 years and 5 months to 40 years. Amortization of below-market and
above-market rent intangibles is recorded as an adjustment to revenue.
Intangibles are summarized as follows:
MARCH 31, 2005 DECEMBER 31, 2004
-------------- -----------------
Lease intangibles
In-place lease $ 151,953 $ 139,514
Tenant relationship 30,034 27,927
Above-market rent 69,673 69,822
Less: accumulated amortization (12,995) (8,503)
--------- ---------
$ 238,665 $ 228,760
========= =========
Below-market rent $ (19,208) $ (19,056)
Less: accumulated amortization 900 653
--------- ---------
$ (18,308) $ (18,403)
========= =========
Net amortization of intangibles was $4,348 and $317 for the quarters ended March
31, 2005 and 2004, respectively. Based on the intangibles recorded through March
31, 2005, annual net amortization of intangibles for each of the next five years
is expected to be as follows: 2005 - $17,247, 2006 - $17,219, 2007 - $17,219,
2008 - $17,219, 2009 - $17,219 and 2010 - $17,219.
NOTE 8. COMMITMENTS AND CONTINGENCIES:
As of March 31, 2005, the Company was not involved in any material litigation.
In March 2004, following a broker-dealer examination of Carey Financial
Corporation ("Carey Financial"), the wholly-owned broker-dealer subsidiary of
the Advisor, by the staff of the Securities and Exchange Commission ("SEC"),
Carey Financial received a letter from the staff of the SEC alleging certain
infractions by Carey Financial of the Securities Act of 1933, the Securities
Exchange Act of 1934, the rules and regulations thereunder and those of the
National Association of Securities Dealers, Inc. ("NASD").
The staff alleged that in connection with a public offering of shares of the
Company, Carey Financial and its retail distributors sold certain securities
without an effective registration statement. Specifically, the staff alleged
that the delivery of investor funds into escrow after completion of the first
phase of the offering (the "Phase I Offering"), completed in the fourth quarter
of 2002 but before a registration statement with respect to the second phase of
the offering (the "Phase II Offering") became effective in the first quarter of
2003, constituted sales of securities in violation of Section 5 of the
Securities Act of 1933. In addition, in the March 2004 letter the staff raised
issues about whether actions taken in connection with the Phase II offering were
adequately disclosed to investors in the Phase I Offering. In the event the SEC
pursues these allegations, or if affected investors of the Company bring a
similar private action, the Company might be required to offer the affected
investors the opportunity to receive a return of their investment. It cannot be
determined at this time if, as a consequence of investor funds being returned by
the Company, Carey Financial would be required to return to the Company the
commissions paid by the Company on purchases actually rescinded. Further, as
part of any action against the Advisor, the SEC could seek disgorgement of any
such commissions or different or additional penalties or relief, including
without limitation, injunctive relief and/or civil monetary penalties,
irrespective of the outcome of any rescission offer. The potential effect such a
rescission offer or SEC action may ultimately have on the operations of the
Advisor, Carey Financial or the REITs managed by WPC, including the Company
cannot be predicted at this time. There can be no assurance that the effect, if
any, would not be material.
7
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in thousands except share and per share amounts)
The staff also alleged in the March 2004 letter that the prospectus delivered
with respect to the Phase I Offering contained material misrepresentations and
omissions in violation of Section 17 of the Securities Act of 1933 and Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder in that
the prospectus failed to disclose that (i) the proceeds of the Phase I Offering
would be used to advance commissions and expenses payable with respect to the
Phase II Offering, and (ii) the payment of dividends to Phase II shareholders
whose funds had been held in escrow pending effectiveness of the registration
statement resulted in significantly higher annualized rates of return than were
being earned by Phase I shareholders. Carey Financial has reimbursed the Company
for the interest cost of advancing the commissions that were later recovered by
the Company from the Phase II Offering proceeds.
In June 2004, the Division of Enforcement of the SEC ("Enforcement Staff")
commenced an investigation into compliance with the registration requirements of
the Securities Act of 1933 in connection with the public offerings of shares of
the Company during 2002 and 2003. In December 2004, the scope of the Enforcement
Staff's inquiries broadened to include broker-dealer compensation arrangements
in connection with the Company and other REITs managed by the Advisor, as well
as the disclosure of such arrangements. At that time the Advisor and Carey
Financial received a subpoena from the Enforcement Staff seeking documents
relating to payments by the Advisor, Carey Financial, and REITs managed by the
Advisor to (or requests for payment received from) any broker-dealer, excluding
selling commissions and selected dealer fees. The Advisor and Carey Financial
subsequently received additional subpoenas and requests for information from the
Enforcement Staff seeking, among other things, information relating to any
revenue sharing agreements or payments (defined to include any payment to a
broker-dealer, excluding selling commissions and selected dealer fees) made by
the Advisor, Carey Financial or any REIT managed by the Advisor in connection
with the distribution of REITs managed by the Advisor or the retention or
maintenance of REIT assets. Other information sought by the SEC includes
information concerning the accounting treatment and disclosure of any such
payments, communications with third parties (including other REIT issuers)
concerning revenue sharing, and documents concerning the calculation of
underwriting compensation in connection with the REIT offerings under applicable
NASD rules.
In response to the Enforcement Staff's subpoenas and requests, the Advisor and
Carey Financial have produced documents relating to payments made to certain
broker-dealers both during and after the offering process, for certain of the
REITs managed by the Advisor (including Corporate Property Associates 10
Incorporated, Carey Institutional Properties Incorporated, Corporate Property
Associates 12 Incorporated, Corporate Property Associates 14 Incorporated, and
the Company), in addition to selling commissions and selected dealer fees. The
expenses associated with these payments, which were made during the period from
early 2000 through the end of 2003, were borne by the REITs, including the
Company. The Advisor is continuing to gather information relating to these types
of payments made to broker-dealers and supply it to the SEC.
The Advisor, Carey Financial and the REITs, including the Company, are
cooperating fully with this investigation and are in the process of providing
information to the Enforcement Staff in response to the subpoenas and requests.
Although no regulatory action has been initiated against the Advisor or Carey
Financial in connection with the matters being investigated, it is possible that
the SEC may pursue an action against either the Advisor or Carey Financial in
the future. The potential timing of any such action and the nature of the relief
or remedies the SEC may seek cannot be predicted at this time. If such an action
is brought, it could have a material adverse effect on the Advisor and the REITs
managed by the Advisor, including the Company.
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.
NOTE 9. 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 an agreement in December 2004 to sell its vacant
property in Miami, Florida formerly leased to Transworld Center, Inc. In
connection with the proposed sale, the Company reclassified this property as an
asset held for sale and recognized a non-cash impairment charge of $5,000 in
December 2004 to reduce the property's carrying value to an amount which
approximated the sales price less estimated costs to sell. As a result of a
quarterly review of this property's carrying value, the Company recognized an
additional non-cash charge of $610 for the quarter ended March 31, 2005 to
further reduce this property's carrying value to an amount which approximated
the sales price less estimated costs to sell. The sale of this property was
completed in April 2005 (see Note 10).
The results of operations of the Transworld property are included in
discontinued operations and summarized as follows:
Three Months Ended March 31,
----------------------------
2005 2004
---- ----
Revenues (primarily rental revenues and other operating
income) $ 4 $ -
Expenses (primarily interest on mortgages, depreciation and
property expenses) (294) (280)
Impairment charge on real estate (610) -
----- -----
Loss from discontinued operations $(900) $(280)
===== =====
8
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in thousands except share and per share amounts)
NOTE 10. SUBSEQUENT EVENTS:
In April 2005, the Company completed the sale of its Miami, Florida property
(see Note 9) to a third party for net proceeds of $19,419. In addition, the
Company received cash of $150 and a promissory note with a term of approximately
5 years from Transworld in settlement of its remaining lease obligations.
Transworld also agreed to forfeit its $1,694 security deposit.
In May 2005, the Company and Corporate Property Associates16-Global
Incorporated, through 30% and 70% interests, respectively, purchased properties
located in Stuart, Florida, Portsmouth, Rhode Island, Southwest Harbor and
Trenton, Maine, for $58,115 and entered into a net lease with The Talaria
Company, LLC. The lease has an initial term of 25 years with three ten-year
renewal options and provides for initial annual rent of $5,162. Limited recourse
mortgage financing of $35,000 was obtained in connection with this purchase.
9
CORPORATE PROPERTY ASSOCIATES 15 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 15 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 15 Incorporated, its
consolidated subsidiaries and predecessors, unless otherwise indicated.
Forward-looking statements discuss matters that are not historical facts.
Because they discuss future events or conditions, forward-looking statements may
include words such as "anticipate," "believe," "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 2001 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 $ 45,752 $ 22,611
Interest income from direct financing leases 6,442 3,526
----------- -----------
$ 52,194 $ 26,137
=========== ===========
10
CORPORATE PROPERTY ASSOCIATES 15 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
---- ----
Mercury Partners and U-Haul Moving Partners (a) (e) $ 7,135 $ -
Carrefour France, SA. (c) (e) 4,207 3,809
Clear Channel Communications, Inc. (e) 3,538 3,538
Thales S.A. (a) (c) (e) 2,917 -
Pohjola Non-Life Insurance Company (c) (d) (e) 1,938 -
TietoEnator plc. (a) (c) (e) 1,839 -
Medica - France, SA (c) (e) 1,348 1,238
Foster Wheeler, Inc. 1,318 1,318
Life Time Fitness, Inc. 1,232 1,232
Information Resources, Inc. (b) (e) 1,079 -
Qualceram Shires plc. (c) 1,037 993
Lillian Vernon Corporation 962 962
Universal Technical Institute, Inc. (a) 950 -
Best Buy Co., Inc. (b) (e) 948 -
Berry Plastics Corporation. 810 713
Other (c) (e) 20,936 12,334
-------- --------
$ 52,194 $ 26,137
======== ========
(a) We placed into service or acquired our interest in this investment during
2004.
(b) Includes the Carey Institutional Properties Incorporated ("CIP(R)") real
estate interests acquired in the September 2004 merger.
(c) Revenue amounts are subject to fluctuations in foreign currency exchange
rates.
(d) We acquired our interest in this investment during 2005.
(e) Lease revenues applicable to minority interests in the consolidated
amounts above total $10,893 and $3,738 for the three-month periods ended
March 31, 2005 and 2004, respectively.
We recognize income from equity investments of which lease revenues are a
significant component. Our ownership interests range from 30% to 64%. 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
---- ----
Marriott International, Inc. (b) $ 2,612 $ -
Starmark Holdings L.L.C. 2,010 2,010
True Value Company 1,809 1,806
Advanced Micro Devices, Inc. (b) 871 -
Petsmart, Inc. 623 623
Hologic, Inc 505 505
Del Monte Corporation (b) 368 -
The Upper Deck Company (b) 363 -
Compucom Systems, Inc (b) 352 -
Actuant Corporation (a) (c) 194 -
Builders FirstSource, Inc 144 142
-------- --------
$ 9,851 $ 5,086
======== ========
(a) Revenue amounts are subject to fluctuations in foreign currency
exchange rates.
(b) Includes the CIP(R) real estate interests acquired in the September
2004 merger.
(c) We sold a 49.99% interest in this investment in May 2004 to an
affiliate.
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;
- Rising interest rates would likely enable us to achieve higher rates
of return on new investments, which would be partially offset by
increased debt costs associated with increased interest rates; and
- Rising interest rates may have an impact on the credit quality of
certain tenants.
We will continue to pursue our objectives through long-term transactions and
diversifying our portfolio. We expect to continue investing in the international
commercial real estate market, as we believe the international market provides
for favorable
11
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands except share and per share amounts)
opportunities relative to risk/return as compared to U.S. opportunities. In
addition, financing terms are generally more favorable for international
transactions. Financing terms for international transactions generally provide
for lower interest rates and greater flexibility to finance the underlying
property. These benefits are partially offset by shorter loan maturities.
Investing in additional international properties is also expected to increase
our exposure to fluctuations in foreign currency exchange rates (the Euro and
the British Pound).
For the three months ended March 31, 2005, cash flows generated from operations
and equity investments of $27,147 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 $31,375. As a
result, we experienced an operating cash shortfall for the three months ended
March 31, 2005 of $4,228 (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 $132,719 as of March 31, 2005 which can be used for
working capital needs and other commitments and may be used for future real
estate purchases.
Management believes that as the portfolio matures there is a potential for an
increase in the value of the 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:
ACQUISITION. In January 2005, we and an affiliate, Corporate Property Associates
16 - Global Incorporated ("CPA(R):16-Global"), through 60% and 40% interests,
respectively, in a limited liability company, acquired land and buildings in
Helsinki, Finland for $113,287 (based on the exchange rate of the Euro on the
date of acquisition), and entered into a net lease with Pohjola Non-Life
Insurance Company. The lease has an initial term of 10 years and 5 months with a
5-year minimum renewal option and provides for initial annual rent of $8,128.
The lease provides for annual rent increases based on the Finnish CPI. In
connection with the purchase, the limited liability company obtained a limited
recourse mortgage loan of $84,663 with a 10-year term and a fixed annual
interest rate of 4.59% through February 2007 and 4.57% thereafter through the
remainder of the loan term.
PROPOSED ACQUISITION. In February 2005, we and CPA(R):16-Global, through 75% and
25% interests, respectively, in a limited liability company, entered into a
purchase and sale agreement with Hellweg Die Profi-Baumarkte GMBH to purchase up
to 16 properties in Germany for up to $166,345 (based on the exchange rate of
the Euro as of the date of the agreement), subject to certain due diligence
procedures and negotiations with the proposed lessees. There is no assurance
that this purchase will be completed, and, if completed, that the actual terms
will not differ from the proposed terms. To the extent that all 16 properties
are purchased, initial annual rent will be $13,597. In the event that the
purchase is completed, we intend to seek to obtain limited recourse mortgage
financing of approximately $115,223. We expect this transaction to be completed
during our second quarter ending June 30, 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 and increased the first
quarter dividend to $.1589 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
$26,057, primarily due to $15,105 from new leases entered into during 2004 and
2005, $8,457 from the properties acquired from CIP(R) in September 2004 (the
"Merger") and $2,420 from the completion of several build-to-suit projects
primarily in 2004. Rent increases and fluctuations in foreign currency exchange
rates did not have a significant impact on lease revenues during
12
CORPORATE PROPERTY ASSOCIATES 15 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 first quarter of 2005. 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.
NEW LEASES - The following new lease was entered into during the quarter ended
March 31, 2005:
- In January, we entered into a new lease with Pohjola Non-Life
Insurance Company which provides for initial annual rent of $8,128
(based on the exchange rate of the Euro at the date of acquisition
and subject to future fluctuations in the exchange rate of the
Euro).
RECENT LEASE ACTIVITY - The following lease activity occurred during the quarter
ended March 31, 2005:
- Tower Automotive, Inc., the lessee of three properties that generate
annual lease revenues of $2,537, filed a voluntary petition of
bankruptcy in February. Tower, which is current on all its lease
obligations, has not yet notified us whether it intends to affirm
its lease.
- In March, Trends Clothing Corp. terminated its lease at a property
in Miami, Florida. The Trends lease generated annual lease revenues
of $1,319 in 2004. We are actively seeking to re-lease this
property.
UPCOMING LEASE ACTIVITY - There are no lease expirations scheduled during the
next 12 months. The following events are scheduled during the next 12 months:
- Humco Holdings Group, a lessee for properties in Texarkana, Texas
and Orem, Utah, has a purchase option which is exercisable in August
2005. Annual rent for these properties is $910. Humco has not yet
indicated whether it intends to exercise the purchase option.
- Three build-to-suit projects, which are all expected to be completed
by September 2005, are expected to contribute additional annual rent
of approximately $3,765 upon their completion.
Other Operating Income
Other operating income generally consists of costs reimbursable by tenants,
lease termination payments and other non-rent related revenues including, but
not limited to, settlements of claims against former lessees. We receive
settlements in the ordinary course of business; however, the timing and amount
of such settlements cannot always be estimated. Reimbursable costs are recorded
as both income and property expense and, therefore, have no impact on net
income. For the comparable quarters ended March 31, 2005 and 2004, other
operating income decreased $2,400, primarily due to the forfeiture of Fleming
Companies, Inc.'s $2,754 security deposit to us in the first quarter of 2004.
The decrease was partially offset by an increase in costs which are reimbursable
by tenants.
Depreciation and Amortization
For the comparable quarters ended March 31, 2005 and 2004, depreciation and
amortization increased $6,852. The increase is primarily due to acquisition
activity in 2004 and 2005, including the Merger.
General and Administrative Expenses
For the comparable quarters ended March 31, 2005 and 2004, general and
administrative expenses increased $828 primarily due to a $374 increase in our
share of expenses allocated by the Advisor due to an increase in our asset base,
a $256 increase in auditing fees and a $104 increase in our share of rental
expenses under an office-sharing agreement.
Property Expenses
For the comparable quarters ended March 31, 2005 and 2004, property expenses
increased $3,423 primarily due to an increase in asset management and
performance fees of $2,665 and an increase in reimbursable tenant costs, as well
as increases in other property related expenses such as insurance and real
estate taxes. These increases, including the increase in asset management and
performance fees, are primarily due to the growth of our asset base as a result
of several acquisitions in 2004 and 2005 including the Merger. As a result of
Trends' lease termination, annual carrying costs on this property are
expected to be $539.
Minority Interest in Income
For the comparable quarters ended March 31, 2005 and 2004, minority interest in
income increased $1,664, primarily due to acquisition activity in 2004, which
contributed $1,400 of the increase. The Merger in 2004 and an acquisition in
2005 also contributed
13
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands except share and per share amounts)
to this increase. The acquisition in January 2005 of a 60% controlling interest
in the Pohjola investment is expected to contribute approximately $1,540 in
income to minority partners annually, subject to fluctuations in foreign
exchange rate of the Euro.
Income From Equity Investments
For the comparable quarters ended March 31, 2005 and 2004, income from equity
investments increased by $1,904, primarily due to $1,757 of income from equity
investments acquired in connection with the Merger.
(Loss) Gain on Foreign Currency Transactions, Net
For the quarter ended March 31, 2005, we incurred a net loss on foreign currency
transactions of $1,521 as compared to a net gain of $1,876 in the comparable
prior year quarter. The majority of this loss represents unrealized losses of
$1,278 on the translation of intercompany subordinated debt with scheduled
principal repayments primarily due to the strengthening of the US dollar since
December 31, 2004. During the quarter ended March 31, 2004, we recognized net
foreign currency transaction gains of $1,876, primarily from the transfer of
cash from a foreign subsidiary.
Interest Expense
For the comparable quarters ended March 31, 2005 and 2004, interest expense
increased by $12,689, primarily due to interest expense on new mortgages
obtained or assumed on properties acquired in 2004 and 2005, including the
Merger in September 2004.
Loss From Discontinued Operations
Loss from discontinued operations of $900 for the quarter ended March 31, 2005
represents the results of operations and the recognition of a $610 non-cash
impairment charge on our Miami, Florida property. This property was sold in
April 2005 for net proceeds of $19,419 (see Subsequent Event below).
Net Income
For the comparable quarters ended March 31, 2005 and 2004, net income decreased
$3,968. This decrease is primarily due to net losses incurred on foreign
currency transactions and the recognition of $2,754 in other income in 2004 from
the forfeiture of a tenant's security deposit. These decreases were partially
offset by additional income generated as a result of the increase in our asset
base. These variances are described above.
FINANCIAL CONDITION
Uses of Cash During the Period
Cash and cash equivalents totaled $132,719 as of March 31, 2005, a decrease of
$11,803 from the December 31, 2004 balance. Management believes we have
sufficient cash balances to meet our working capital needs including our
distribution rate. Our use of cash during the period is described below.
OPERATING ACTIVITIES - Cash flows from operating activities and distributions
from the operations of equity investments in excess of equity income of $27,147
were not sufficient to fund dividend payments of $19,908, scheduled mortgage
principal payments of $5,864 and distributions to minority interests of $5,603.
The 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. Management believes that this
shortfall is temporary and not indicative of future results.
Annual cash flow is expected to increase as a result of recent acquisition
activity, including the Merger in September 2004, acquisitions and the
completion of several build-to-suit projects in 2004 and the 2005 acquisition of
an interest in property leased to Pohjola. The Pohjola transaction is expected
to provide annual cash flow of $2,309, net of amounts distributable to
CPA(R):16, which owns a 40% interest in the property and subject to fluctuations
in foreign currency exchange rates. Scheduled rent increases at existing
properties, most of which are based on increases in the CPI, should also
contribute to increased operating cash flow.
INVESTING ACTIVITIES - Our investing activities are generally comprised of real
estate transactions (purchases and sales), payment of our annual installment of
deferred acquisition fees to our Advisor and the purchase of and sale of
short-term investments and marketable securities which we intend to convert to
cash. We used $111,928 for our interest in Pohjola and capitalized costs of
$12,606 related to several build-to-suit projects that are expected to be
completed during 2005. The annual installment of deferred acquisition
14
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands except share and per share amounts)
fees was paid in January 2005 and totaled $6,001. We also sold our holdings of
auction-rate securities during the quarter and received proceeds of $20,000
which are now invested in short-term money market instruments.
FINANCING ACTIVITIES - In addition to making scheduled mortgage principal
payments, paying dividends to shareholders and making distributions to minority
partners, we used $1,682 to purchase treasury shares through a redemption plan
which allows shareholders to sell shares back to us, subject to certain
limitations. In connection with the Pohjola transaction, we received mortgage
proceeds of $84,663 and received a contribution of $11,450 from the minority
partner. Annual debt service on the Pohjola mortgage is $2,568, net of
CPA(R):16-Global's minority interest (subject to fluctuations in the exchange
rate of the Euro). We also obtained $5,042 as a result of issuing shares through
our Distribution Reinvestment and Share Purchase Plan.
Currently, the majority of our mortgages are limited recourse and bear interest
at fixed rates, including a loan which effectively has a fixed rate as the
result of our simultaneously entering into an interest rate swap agreement.
Accordingly, our cash flow should not be adversely affected by increases in
interest rates which are near historical lows. However, financings on future
acquisitions will likely bear higher rates of interest. A lender on limited
recourse mortgage debt has recourse only to the property collateralizing such
debt and not to any of our other assets, while 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 $132,719 in cash and cash equivalents which can be
used for working capital needs, future real estate purchases, distributions and
other commitments. In addition, debt may be incurred on unleveraged properties
with a carrying value of $81,710 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 October 2008), paying dividends to shareholders, making distributions to
minority partners, funding build-to-suit commitments on three projects that we
currently project will total $13,906 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 as
described above, 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. We are subject to foreign currency exchange
rate risk from the effects of changes in foreign currency exchange rates. We
have obtained limited recourse mortgage financing at fixed rates of interest in
the local currency. To the extent that currency fluctuations increase or
decrease rental revenues as translated to dollars, the change in debt service,
as translated to dollars, will partially offset the effect of fluctuations in
revenue, and, to some extent mitigate the risk from changes in foreign currency
rates.
15
CORPORATE PROPERTY ASSOCIATES 15 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 commitments and obligations are expected to have on our
liquidity and cash flow in future periods.
Less than 1 More than 5
Total Year 1-3 Years 3-5 Years years
---------- ----------- --------- ---------- ------------
Limited recourse mortgage notes payable (1) $2,097,548 $106,247 $220,587 $ 258,186 $1,512,528
Deferred acquisition fees (1) 34,208 11,285 18,382 4,541 -
Subordinated disposition fees (2) 342 - - - 342
Build-to-suit obligations (4) 13,906 13,906 - - -
Operating leases (3) 7,827 531 1,267 1,338 4,691
---------- -------- -------- ---------- ----------
$2,153,831 $131,969 $240,236 $ 264,065 $1,517,561
========== ======== ======== ========== ==========
(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.
(4) Represents remaining build-to-suit obligations for three projects
that are all expected to be completed by the end of our third
quarter ending September 30, 2005. Commitments include funding of up
to $9,634 for an expansion at an existing property leased to UTI
Holdings, Inc., $4,140 for a build-to-suit project for property
leased to Oriental Trading Company, Inc. and $132 for tenant
improvements at a property leased to Integracolor., Ltd.
SUBSEQUENT EVENTS
In April 2005, we completed the sale of our Miami, Florida property to a third
party for net proceeds of $19,419. In addition, we received cash of $150 and a
promissory note with a term of approximately 5 years from Transworld in
settlement of its remaining lease obligations. Transworld also agreed to forfeit
its $1,694 security deposit.
In May 2005, we and CPA(R):16-Global, through 30% and 70% interests,
respectively, purchased properties located in Stuart, Florida, Portsmouth, Rhode
Island, Southwest Harbor and Trenton, Maine, for $58,115 and entered into a net
lease with The Talaria Company, LLC. The lease has an initial term of 25 years
with three ten-year renewal options and provides for initial annual rent of
$5,162. Limited recourse mortgage financing of $35,000 was obtained in
connection with this purchase.
16
CORPORATE PROPERTY ASSOCIATES 15 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.
Our marketable securities consist of our ownership interest in Carey Commercial
Mortgage Trust ("CCMT"). The value of the marketable securities is subject to
fluctuation based on changes in interest rates, economic conditions and the
creditworthiness of lessees at the mortgaged properties. As of March 31, 2005,
our interest in CCMT had a fair value of $11,733.
Substantially all of our long-term debt of $1,369,558 either bears interest at
fixed rates or is hedged through the use of interest rate swap instruments that
convert variable rate debt service obligations to a fixed rate. The fair value
of these instruments is affected by changes in market interest rates. The
following table presents principal cash flows based upon expected maturity dates
of our debt obligations and the related weighted-average interest rates by
expected maturity dates for our fixed rate debt. The interest rate on our fixed
rate debt as of March 31, 2005 ranged from 4.59% to 10.00%. The interest rate on
our variable rate debt as of March 31, 2005 was 3.624%.
2005 2006 2007 2008 2009 Thereafter Total Fair Value
------- ------- ------- ------- ------- ---------- ----------- ----------
Fixed rate debt $17,614 $25,992 $28,613 $31,188 $69,896 $1,186,087 $ 1,359,390 $1,366,686
Weighted average interest rate 8.24% 6.16% 6.14% 6.12% 6.74% 6.13%
Variable rate debt $ 166 $ 253 $ 316 $ 316 $ 316 $ 8,801 $ 10,168 $ 10,168
Annual interest expense from variable rate debt would increase or decrease by
approximately $102 for each change of 1% in annual interest rates.
We have an interest rate swap contract with a notional amount of $22,975 at
March 31, 2005 (based on the exchange rate at March 31, 2005) on a variable rate
obligation with a balance at March 31, 2005 of $22,975 which is therefore not
affected by changes in interest rates and which is included in the fixed rate
debt amount in the above table. A change in interest rates of 1% would increase
or decrease the fair value of our fixed rate debt at March 31, 2005 by
approximately $48,752.
Foreign Currency Exchange Rate Risk
We have foreign operations in France, Germany, Ireland, Belgium, Finland and the
United Kingdom and as such are subject to risk from the effects of exchange rate
movements of foreign currencies, which may affect future costs and cash flows.
Our foreign operations are currently conducted in the Euro and the British
Pound. For both the Euro and the British Pound we are a net receiver of the
foreign currency (we receive more cash then we pay out) and therefore our
foreign operations benefit from a weaker U.S. dollar and are adversely affected
by a stronger U.S. dollar relative to the Euro and the British Pound. Realized
and unrealized losses from foreign currency transactions totaled $1,521 during
the quarter ended March 31, 2005.
To date, we have not entered into any foreign currency forward exchange
contracts to hedge the effects of adverse fluctuations in foreign currency
exchange rates. We have either obtained limited recourse mortgage financing at a
fixed rate of interest in the local currency or entered into interest rate swap
contracts which effectively convert variable rate debt obligations to a fixed
interest rate. To the extent that currency fluctuations affect rental revenues
as translated to dollars, the change in debt service, as translated to dollars,
will partially offset the fluctuations in revenue, and, to some extent mitigate
the risk from changes in foreign currency rates.
17
CORPORATE PROPERTY ASSOCIATES 15 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.
18
CORPORATE PROPERTY ASSOCIATES 15 INCORPORATED
PART II
Item 1. -- LEGAL PROCEEDINGS
In March 2004, following a broker-dealer examination of Carey Financial
Corporation ("Carey Financial"), the wholly-owned broker-dealer subsidiary of
the Advisor, by the staff of the Securities and Exchange Commission ("SEC"),
Carey Financial received a letter from the staff of the SEC alleging certain
infractions by Carey Financial of the Securities Act of 1933, the Securities
Exchange Act of 1934, the rules and regulations thereunder and those of the
National Association of Securities Dealers, Inc. ("NASD").
The staff alleged that in connection with a public offering of shares of the
Company, Carey Financial and its retail distributors sold certain securities
without an effective registration statement. Specifically, the staff alleged
that the delivery of investor funds into escrow after completion of the first
phase of the offering (the "Phase I Offering"), completed in the fourth quarter
of 2002 but before a registration statement with respect to the second phase of
the offering (the "Phase II Offering") became effective in the first quarter of
2003, constituted sales of securities in violation of Section 5 of the
Securities Act of 1933. In addition, in the March 2004 letter the staff raised
issues about whether actions taken in connection with the Phase II offering were
adequately disclosed to investors in the Phase I Offering. In the event the SEC
pursues these allegations, or if affected investors of the Company bring a
similar private action, the Company might be required to offer the affected
investors the opportunity to receive a return of their investment. It cannot be
determined at this time if, as a consequence of investor funds being returned by
the Company, Carey Financial would be required to return to the Company the
commissions paid by the Company on purchases actually rescinded. Further, as
part of any action against the Advisor, the SEC could seek disgorgement of any
such commissions or different or additional penalties or relief, including
without limitation, injunctive relief and/or civil monetary penalties,
irrespective of the outcome of any rescission offer. The potential effect such a
rescission offer or SEC action may ultimately have on the operations of the
Advisor, Carey Financial or the REITs managed by WPC, including the Company
cannot be predicted at this time. There can be no assurance that the effect, if
any, would not be material.
The staff also alleged in the March 2004 letter that the prospectus delivered
with respect to the Phase I Offering contained material misrepresentations and
omissions in violation of Section 17 of the Securities Act of 1933 and Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder in that
the prospectus failed to disclose that (i) the proceeds of the Phase I Offering
would be used to advance commissions and expenses payable with respect to the
Phase II Offering, and (ii) the payment of dividends to Phase II shareholders
whose funds had been held in escrow pending effectiveness of the registration
statement resulted in significantly higher annualized rates of return than were
being earned by Phase I shareholders. Carey Financial has reimbursed the Company
for the interest cost of advancing the commissions that were later recovered by
the Company from the Phase II Offering proceeds.
In June 2004, the Division of Enforcement of the SEC ("Enforcement Staff")
commenced an investigation into compliance with the registration requirements of
the Securities Act of 1933 in connection with the public offerings of shares of
the Company during 2002 and 2003. In December 2004, the scope of the Enforcement
Staff's inquiries broadened to include broker-dealer compensation arrangements
in connection with the Company and other REITs managed by the Advisor, as well
as the disclosure of such arrangements. At that time the Advisor and Carey
Financial received a subpoena from the Enforcement Staff seeking documents
relating to payments by the Advisor, Carey Financial, and REITs managed by the
Advisor to (or requests for payment received from) any broker-dealer, excluding
selling commissions and selected dealer fees. The Advisor and Carey Financial
subsequently received additional subpoenas and requests for information from the
Enforcement Staff seeking, among other things, information relating to any
revenue sharing agreements or payments (defined to include any payment to a
broker-dealer, excluding selling commissions and selected dealer fees) made by
the Advisor, Carey Financial or any REIT managed by the Advisor in connection
with the distribution of REITs managed by the Advisor or the retention or
maintenance of REIT assets. Other information sought by the SEC includes
information concerning the accounting treatment and disclosure of any such
payments, communications with third parties (including other REIT issuers)
concerning revenue sharing, and documents concerning the calculation of
underwriting compensation in connection with the REIT offerings under applicable
NASD rules.
In response to the Enforcement Staff's subpoenas and requests, the Advisor and
Carey Financial have produced documents relating to payments made to certain
broker-dealers both during and after the offering process, for certain of the
REITs managed by the Advisor (including Corporate Property Associates 10
Incorporated, Carey Institutional Properties Incorporated, Corporate Property
Associates 12 Incorporated, Corporate Property Associates 14 Incorporated, and
the Company), in addition to selling commissions and selected dealer fees. The
expenses associated with these payments, which were made during the period from
early 2000 through the end of 2003, were borne by the REITs, including the
Company. The Advisor is continuing to gather information relating to these types
of payments made to broker-dealers and supply it to the SEC.
The Advisor, Carey Financial and the REITs, including the Company, are
cooperating fully with this investigation and are in the process of providing
information to the Enforcement Staff in response to the subpoenas and requests.
Although no regulatory action has been initiated against the Advisor or Carey
Financial in connection with the matters being investigated, it is possible that
the SEC may pursue an action against either the Advisor or Carey Financial in
the future. The potential timing of any such action and the nature of the relief
or remedies the SEC may seek cannot be predicted at this time. If such an action
is brought, it could have a material adverse effect on the Advisor and the REITs
managed by the Advisor, including the Company.
Item 2.-- UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS
(a) For the three-month period ended March 31, 2005, 266,944 shares were
issued to the Advisor as consideration for performance fees. Shares
were issued at $10.00 per share.
(c) Issuer Purchases of Equity Securities
TOTAL NUMBER OF SHARES PURCHASED
TOTAL NUMBER OF AVERAGE PRICE AS PART OF PUBLICLY ANNOUNCED
PERIOD SHARES PURCHASED PAID PER SHARE PLANS OR PROGRAMS (1)
- ------------------------------------- ---------------- -------------- ----------------------------------
January 1, 2005 -- January 31, 2005 180,863 $ 9.03 N/A
February 1, 2005 -- February 28, 2005 433 9.33 N/A
March 1, 2005 -- March 31, 2005 - - N/A
-------
Total 181,296
=======
(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
19
CORPORATE PROPERTY ASSOCIATES 15 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 15 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)
20