1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1996
-------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 0-15778
CORPORATE PROPERTY ASSOCIATES 7, A CALIFORNIA LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
CALIFORNIA 13-3327950
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020
(Address of principal executive offices) (Zip Code)
(212) 492-1100
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
X Yes No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
--- ---
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CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
INDEX
Page No.
PART I
Item 1. - Financial Information*
Consolidated Balance Sheets, December 31, 1995
and September 30, 1996 2
Consolidated Statements of Income for the three and
nine months ended September 30, 1995 and 1996 3
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1995 and 1996 4
Notes to Consolidated Financial Statements 5-6
Item 2. - Management's Discussion of Operations 7-8
PART II
Item 6. - Exhibits and Reports on Form 8-K 9
Signatures 10
*The summarized financial information contained herein is unaudited; however in
the opinion of management, all adjustments necessary for a fair presentation of
such financial information have been included.
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CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
PART I
Item 1. - FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
1995 1996
------------ -------------
(Note) (Unaudited)
ASSETS:
Land, buildings and personal property,
net of accumulated depreciation of
$9,947,765 at December 31, 1995 and
$10,809,548 at September 30, 1996 $34,006,723 $33,500,978
Net investment in direct financing leases 15,542,368 15,542,368
Real estate held for sale 543,138
Cash and cash equivalents 4,968,410 5,196,893
Accrued interest and rents receivable 24,838 169,810
Other assets 1,143,067 896,301
----------- -----------
Total assets $56,228,544 $55,306,350
=========== ===========
LIABILITIES:
Mortgage notes payable $11,928,751 $10,398,585
Note payable 9,606,837 9,606,837
Accrued interest payable 345,418 326,116
Accounts payable and accrued expenses 708,394 597,848
Accounts payable to affiliates 102,020 74,876
Prepaid and deferred rental income 428,827 398,501
----------- -----------
Total liabilities 23,120,247 21,402,763
----------- -----------
PARTNERS' CAPITAL:
General Partners 110,512 154,495
Limited Partners (45,209 Limited
Partnership Units issued and outstanding) 32,997,785 33,749,092
----------- -----------
Total partners' capital 33,108,297 33,903,587
----------- -----------
Total liabilities and
partners' capital $56,228,544 $55,306,350
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
Note: The balance sheet at December 31, 1995 has been derived from the
audited consolidated financial statements at that date.
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CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, 1995 September 30, 1996 September 30, 1995 September 30, 1996
------------------ ------------------ ------------------ ------------------
Revenues:
Rental income from
operating leases $ 1,077,871 $1,107,939 $3,239,261 $3,236,705
Interest from direct
financing leases 560,902 594,629 1,681,789 1,706,245
Other interest income 42,963 72,102 157,102 203,242
Other income 143,866 143,866
Revenue of hotel operations 1,356,089 1,425,136 4,005,659 4,217,754
----------- ---------- ---------- ----------
3,037,825 3,343,672 9,083,811 9,507,812
----------- ---------- ---------- ----------
Expenses:
Interest 620,773 488,360 1,918,708 1,473,906
Depreciation 350,085 287,866 1,021,523 861,783
General and administrative 105,483 94,058 448,734 314,147
Property expenses 81,314 88,018 229,074 307,822
Amortization 17,518 20,516 52,551 52,512
Operating expenses of
hotel operations 972,213 1,033,585 2,932,730 3,073,909
----------- ---------- ---------- ----------
2,147,386 2,012,403 6,603,320 6,084,079
----------- ---------- ---------- ----------
Income before loss
from equity investments,
gain on sales of real estate
and (loss) earnings
from discontinued operations 890,439 1,331,269 2,480,491 3,423,733
Loss from equity investments 34,730 31,141 102,502 96,924
----------- ---------- ---------- ----------
Income before gain on sales
of real estate and (loss) earnings
from discontinued operations 855,709 1,300,128 2,377,989 3,326,809
Gain on sales of real estate 74,729
---------- ---------- --------- ----------
Income from continuing
operations 855,709 1,300,128 2,377,989 3,401,538
(Loss) earnings from discontinued
operations (49,046) 390,822
---------- ---------- --------- ----------
Net income $ 806,663 $1,300,128 $2,768,811 $3,401,538
========== ========== ========== ==========
Net income allocated
to General Partners $ 48,400 $ 78,008 $ 166,129 $ 200,356
========== ========== ========== ==========
Net income allocated
to Limited Partners $ 758,263 $1,222,120 $2,602,682 $3,201,182
========== ========== ========== ==========
Net income per weighted average Unit:
Income from continuing
operations $ 17.79 $ 27.03 $ 49.41 $ 70.81
Discontinued operations (1.02) 8.12
---------- ---------- ---------- ----------
$ 16.77 $ 27.03 $ 57.53 $ 70.81
========== ========== ========== ==========
Weighted Average Limited
Partner Units 45,209 45,209 45,242 45,209
========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
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CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
CONSOLIDATED STATEMENTS of CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30,
--------------------------------------
1995 1996
---- ----
Cash flows from operating activities:
Net income $ 2,768,811 $ 3,401,538
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,074,074 914,295
Other noncash items 111,850 111,850
Loss from equity investment 102,502 96,924
Gain on sales of real estate (74,729)
Net change in operating assets and liabilities (211,957) (368,796)
------------ -----------
Net cash provided by operating activities 3,845,280 4,081,082
------------ -----------
Cash flows from investing activities:
Additional capitalized costs (166,336) (356,038)
Distributions from equity investment 23,041 21,986
Net proceeds from sales of real estate 617,867
----------- -----------
Net cash (used in) provided by investing activities (143,295) 283,815
------------ -----------
Cash flows from financing activities:
Distributions to partners (9,575,174) (2,606,248)
Payments on mortgage principal (1,115,295) (530,166)
Prepayment of mortgage note payable (1,000,000)
Retirement of Limited Partnership Units (41,974)
------------ -----------
Net cash used in financing activities (10,732,443) (4,136,414)
------------ -----------
Net (decrease) increase in cash and cash equivalents (7,030,458) 228,483
Cash and cash equivalents, beginning of period 10,525,885 4,968,410
------------ -----------
Cash and cash equivalents, end of period $ 3,495,427 $ 5,196,893
============ ===========
Supplemental disclosure of cash flows information:
Interest paid $ 1,858,022 $ 1,493,208
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
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CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Basis of Presentation:
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. For
further information, refer to the financial statements and footnotes thereto
included in the Partnership's Annual Report on Form 10-K for the year ended
December 31, 1995.
Note 2. Distributions to Partners:
Distributions declared and paid to partners during the nine months ended
September 30, 1996 are summarized as follows:
Quarter Ended General Partners Limited Partners Per Limited Partner Unit
------------- ---------------- ---------------- ------------------------
December 31, 1995 $51,827 $811,953 $17.96
======= ======== ======
March 31, 1996 $52,113 $816,474 $18.06
======= ======== ======
June 30, 1996 $52,433 $821,448 $18.17
======= ======== ======
A distribution of $18.23 per Limited Partner Unit for the quarter ended
September 30, 1996 was declared and paid in October 1996.
Note 3. Transactions with Related Parties:
For the three-month and nine-month periods ended September 30, 1995, the
Partnership incurred management fees of $24,704 and $78,443, respectively, and
general and administrative expense reimbursements of $22,428 and $79,900,
respectively, payable to an affiliate. For the three-month and nine-month
periods ended September 30, 1996, the Partnership incurred management fees of
$22,854 and $72,148, respectively, and general and administrative expense
reimbursements of $20,973 and $88,916, respectively, payable to an affiliate.
The Partnership, in conjunction with certain affiliates, is a participant in a
cost sharing agreement for the purpose of renting and occupying office space.
Under the agreement, the Partnership pays its proportionate share of rent and
other costs of occupancy. Net expenses incurred for the nine months ended
September 30, 1995 and 1996 were $65,551 and $61,918, respectively.
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CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Note 4. Industry Segment Information:
The Partnership's operations consist of the investment in and the leasing of
industrial and commercial real estate and the operation of a hotel business. For
the nine-month periods ended September 30, 1996 and 1995, the Partnership earned
its lease revenues (rental income plus interest income from financing leases)
from the following lease obligors:
1995 % 1996 %
---- ---- ---- --
Advanced System Applications, Inc. $1,183,974 24% $1,162,425 24%
The Gap, Inc. 695,676 14 695,676 14
KSG, Inc. 617,713 13 615,817 12
Sybron Acquisition Company 614,372 13 614,372 12
Swiss M-Tex, L.P. 410,878 8 396,384 8
AutoZone, Inc. 325,774 7 342,791 7
Northern Automotive, Inc. 291,623 6 291,623 6
Other 304,321 6 245,830 6
NVRyan L.P. 218,667 4 218,667 4
NYNEX Corporation 161,700 3 161,700 3
United States Postal Service 101,313 2
Winn-Dixie Stores, Inc. 96,352 2 96,352 2
---------- ---- ---------- ---
$4,921,050 100% $4,942,950 100%
========== ==== ========== ====
Results for the Partnership's hotel operations of a Holiday Inn in Livonia,
Michigan for the nine-month periods ended September 30, 1995 and 1996 are
summarized as follows:
1995 1996
---- ----
Revenues $ 4,005,659 $ 4,217,754
Fees paid to hotel management company (94,950) (107,367)
Other operating expenses (2,837,780) (2,966,542)
----------- -----------
Income from hotel operations $ 1,072,929 $ 1,143,845
=========== ===========
Note 5. Discontinued Operations:
The Partnership sold its food service operations in December 1995. Operating
results for the food service business in Jupiter, Florida for the nine-month
period ended September 30, 1995 are summarized as follows:
Sales $ 3,210,536
Cost of goods sold (936,379)
Other operating expenses (1,883,335)
-----------
Food service operating income $ 390,822
===========
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CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS
Results of Operations:
Income from continuing operations increased by $444,000 and $1,024,000
for the three-month and nine-month periods ended September 30, 1996 as compared
with the same periods ended September 30, 1995. The increase in earnings for the
comparable nine-month periods was primarily due to decreases in interest,
depreciation and general and administrative expenses, increases in earnings from
the hotel operation and other interest income, a $75,000 gain on the sale of
real estate in the second quarter and nonrecurring other income of $144,000.
This was partially offset by an increase in property expense. Lease revenues
were substantially unchanged. The decrease in interest expense was due to the
satisfaction of the mortgage debt on the Advanced Systems Applications, Inc.
("ASA") property, which was fully amortized in March 1996, and of the loan on
the Jupiter, Florida property in December 1995 at the time the property was
sold. The decrease in depreciation was primarily attributable to the sale of the
Jupiter property. The decrease in general and administrative expense was due to
higher accruals for partnership level state franchise taxes in 1995. The
increase in other interest income was due to higher average cash balances in
1996. The increase in property expenses was due to the Partnership's assuming
the responsibility for the operating costs of the ASA property, as described
below, and costs incurred with executing a lease with the United States Postal
Service (the "Postal Service") for a portion of the ASA property. The increase
for the three-month periods was also due to lower interest and depreciation
expenses and nonrecurring other income; however, the Partnership was not
significantly affected by fluctuations in earnings from the hotel operations or
general and administrative and property expenses for the comparable periods.
The increase in hotel earnings for the nine-months ended September 30,
1996 was due to an 11% increase in the average room rate which more than offset
a decline in the occupancy rate from 79% to 76%. Hotel management was successful
in sustaining rate increases for virtually all rate categories including, but
not limited to, regular, corporate and group rate categories. The ability to
increase rates is affected by economic conditions in the Detroit metropolitan
area as approximately 29% of occupied rooms were sold at corporate rates.
Under its agreement with the Partnership, ASA whose lease expires in
June 1997, had been entitled to share one-third of all rents from lessees for
space it had relinquished. Under a separate agreement, the Partnership is not
sharing any of Postal Service's rent with ASA and is receiving all the rents of
an ASA subtenant in consideration for a reduction of ASA's monthly rent by
approximately $23,400 to $122,400 and releasing ASA from its lease obligations
for bearing the costs of repair and maintenance, insurance and real estate
taxes. Such costs are now the responsibility of the Partnership. Monthly rentals
from the Postal Service and the ASA subtenant are $39,100.
Other income consisted of a payment received from the bankruptcy
trustee administering the bankruptcy of the former lessee of the hotel property
in Livonia, Michigan. While there may be additional distributions made on the
Partnership's claim against the former lessee, the Partnership recognizes income
from any settlement as distributions are received. There can be no assurance
that the Partnership will receive additional amounts under its claim against the
former lessee.
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CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS, Continued
Financial Condition:
There has been no material change in the Partnership's financial
condition since December 31, 1995. Cash flow from operations of $4,081,000 was
sufficient to pay quarterly distributions to partners of $2,606,000 and
scheduled principal payment installments of $530,000. Cash reserves increased
from the proceeds of the property sales in the first quarter; however, the
Partnership also used $1,000,000 to pay a scheduled balloon payment on the
mortgage loan collateralized by the property leased to Winn Dixie Stores, Inc.
The Partnership may consider refinancing the property in the future; however, no
refinancing is currently being pursued. While the Partnership has substantially
funded a tenant improvement allowance which was required under the Postal
Service lease, the Partnership expects to incur additional costs in retrofitting
the ASA property for multi-tenant use. A significant portion of such costs may
not be incurred until after ASA fully vacates the property at the end of its
lease.
The General Partners are currently investigating ways to provide
liquidity for limited partners on a tax-effective basis.
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CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
PART II
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
During the quarter ended September 30, 1996 the
Partnership filed a report on Form 8-K/A on July 17,
1996 under Item 2, Acquisition and Disposition of
Assets and Item 7(b), Pro Forma Financial
Information.
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CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
By: SEVENTH CAREY CORPORATE PROPERTY, INC.
11/8/96 By: /s/ Claude Fernandez
------- --------------------------------------
Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Financial Officer)
11/8/96 By: /s/ Michael D. Roberts
------- --------------------------------------
Date Michael D. Roberts
First Vice President and Controller
(Principal Accounting Officer)
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