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 JUNE 30, 1998
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 001-13779
CAREY DIVERSIFIED LLC
(Exact name of registrant as specified in its charter)
DELAWARE 13-3912578
(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
25,213,936 Listed Shares; no par value outstanding as of August 12, 1998
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CAREY DIVERSIFIED LLC
INDEX
Page No.
PART I
Item 1. - Financial Information*
Condensed Consolidated/Combined Balance Sheets,
as of June 30, 1998 and December 31, 1997 2
Condensed Consolidated/Combined Statements of Income
for the three and six months ended June 30, 1998 and 1997 3
Condensed Consolidated/Combined Statements of
Comprehensive Income for the three months and six months
ended June 30, 1998 and 1997 4
Condensed Consolidated/Combined Statements of Cash Flows
for the six months ended June 30, 1998 and 1997 5-6
Notes to Condensed Consolidated/Combined Financial Statements 7-13
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-17
PART II - Other Information
Item 4. - Submission of Matters to a Vote of Security Holders 18
Item 6. - Exhibits and Reports on Form 8-K 18
Signatures 19
*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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CAREY DIVERSIFIED LLC
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED/COMBINED BALANCE SHEETS
(in thousands)
The Company The Predecessor
Consolidated Combined
June 30, December 31,
1998 1997
(Unaudited) (Note)
ASSETS:
Real estate leased to others under the
operating method, net of accumulated depreciation of $3,600
and $93,591 at June 30, 1998 and December 31, 1997 $380,961 $217,165
Net investment in direct financing leases 302,296 216,761
Operating real estate, net of accumulated depreciation of $165
and $14,267 at June 30, 1998 and December 31, 1997 6,767 23,333
Real estate under construction leased to others 16,497
Cash and cash equivalents 31,750 18,586
Assets held for sale 9,860 14,382
Equity investments 30,194 13,415
Other assets, net of accumulated amortization of $126 and
$2,109 and reserve for uncollected rent of $2,418 and
$1,103 at June 30, 1998 and December 31, 1997 16,186 19,778
-------- --------
Total assets $794,511 $523,420
======== ========
LIABILITIES:
Mortgage notes payable $157,277 $182,718
Notes payable 95,072 24,709
Note payable to affiliate 200
Accrued interest payable 1,313 1,798
Accounts payable to affiliates 5,574 8,792
Dividend payable 10,376
Other liabilities 7,012 10,565
-------- --------
Total liabilities 276,624 228,782
-------- --------
Minority interest (5,639) (6,250)
-------- --------
Redeemable subsidiary partnership unit minority interest 8,227
--------
Commitments and contingencies
MEMBERS' EQUITY/PARTNERS' CAPITAL:
Partners' Capital 300,888
Listed Shares, no par value;
25,171,429 shares issued and outstanding 515,742
Distributions in excess of accumulated earnings (690)
Unrealized appreciation, marketable securities 203
Foreign currency translation adjustment 44
--------
515,299
Total liabilities and
-------- --------
members' equity/partners' capital $794,511 $523,420
======== ========
The accompanying notes are an integral part of the condensed
consolidated/combined financial statements.
Note: The condensed/combined balance sheet at December 31, 1997 has been
derived from the audited financial statement at that date.
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CAREY DIVERSIFIED LLC
CONDENSED CONSOLIDATED/COMBINED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share and share amounts)
The Company Consolidated The Predecessor Combined
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1998 1998 1997 1997
Revenues:
Rental income $10,491 $21,011 $12,004 $23,675
Interest from direct financing
leases 8,474 17,395 8,074 16,278
Other interest income 188 424 247 568
Other income 204 261 1,629 2,403
Revenue of hotel operations 1,279 3,246 3,553 7,033
---------- ---------- ------- -------
20,636 42,337 25,507 49,957
---------- ---------- ------- -------
Expenses:
Interest 4,137 8,829 4,937 10,086
Depreciation and amortization 2,046 3,891 2,727 5,462
General and administrative 1,888 3,509 1,445 2,611
Property expenses 1,224 2,483 893 1,532
Writedowns to fair value 3,666 3,666
Operating expenses of hotel
operations 1,044 2,671 2,618 5,272
---------- ---------- ------- -------
10,339 21,383 16,286 28,629
---------- ---------- ------- -------
Income before minority
interest, income from
equity investments, net gain
and extraordinary item 10,297 20,954 9,221 21,328
Minority interest in income (907) (1,838) (547) (1,334)
---------- ---------- ------- -------
Income before income from
equity investments, net gain
and extraordinary item 9,390 19,116 8,674 19,994
Income from equity investments 559 1,116 562 1,028
---------- ---------- ------- -------
Income before net gain and
extraordinary item 9,949 20,232 9,236 21,022
Net gain on sale 90 90
---------- ---------- ------- -------
Income before extraordinary item 10,039 20,322 9,236 21,022
Extraordinary loss on extinguishment of debt,
net of minority interest of $4 and $79 for
the three and six-month periods (52) (621)
---------- ---------- ------- -------
Net income $ 9,987 $19,701 $ 9,236 $21,022
========== ========== ======= =======
Basic and diluted earnings per Listed Share:
Earnings before extraordinary
item $ .40 $ .83
Extraordinary item $ $( .02)
---------- ----------
$ .40 $ .81
========== ==========
Weighted average Listed Shares
outstanding:
Basic 24,897,398 24,448,655
========== ==========
Diluted 24,919,685 24,479,996
========== ==========
The accompanying notes are an integral part of the condensed
consolidated/combined financial statements.
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CAREY DIVERSIFIED LLC
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
The Company Consolidated The Predecessor Combined
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1998 1998 1997 1997
Net income $ 9,987 $19,701 $ 9,236 $21,022
Change in unrealized appreciation
of marketable securities 43 203 11 (5)
Foreign currency translation
adjustment 44 44
------- ------- ------- -------
Comprehensive income $10,074 $19,948 $ 9,247 $21,017
======= ======= ======= =======
The accompanying notes are an integral part of the condensed
consolidated/combined financial statements.
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CAREY DIVERSIFIED LLC
CONDENSED CONSOLIDATED/COMBINED STATEMENTS of CASH FLOWS (UNAUDITED)
(in thousands)
Six Months Ended
----------------------------------
The Company The Predecessor
Consolidated Combined
June 30, June 30,
1998 1997
Cash flows from operating activities:
Net income $ 19,701 $ 21,022
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 3,891 5,462
Amortization of deferred income (479) (174)
Extraordinary loss, net of minority interest 621
Securities received in lieu of cash (1,619)
Minority interest in income 1,759 1,334
Straight-line rent adjustments and other noncash
rent adjustments (1,545) (993)
Compensation costs paid by issuance of shares 484
Payment of deferred management fees (1,509)
Provision for uncollected rents 297
Writedowns to fair value 3,666
Net change in operating assets and liabilities (2,265) (2,266)
-------- --------
Net cash provided by operating activities 20,955 26,432
-------- --------
Cash flows from investing activities:
Purchase of real estate (35,172)
Additional capital expenditures (936) (1,354)
Proceeds from sale of property 9,684
Distributions received from equity investments in
excess of equity income 101 136
Purchase of marketable securities (65)
-------- --------
Net cash used in investing activities (26,388) (1,218)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of Listed Shares 5,410
Dividends paid (10,015)
Accrued preferred distributions paid to former
general partners (3,676)
Accrued distributions paid to former general partners (596)
Distributions paid to limited partners (17,336)
Distributions paid to minority interest (1,117) (1,162)
Payments of mortgage principal (3,496) (20,692)
Proceeds from notes payable 95,072
Proceeds from mortgages payable 8,343 12,700
Prepayments of mortgages and notes payable (68,590)
Deferred financing costs (1,561) (178)
Prepayment charges paid on extinguishment of debt (700)
Other (477) (20)
-------- --------
Net cash provided by (used in) financing activities 18,597 (26,688)
-------- --------
Net increase (decrease) in cash and
cash equivalents 13,164 (1,474)
Cash and cash equivalents, beginning of period 18,586 28,553
-------- --------
Cash and cash equivalents, end of period $ 31,750 $ 27,079
======== ========
(Continued)
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CAREY DIVERSIFIED LLC
CONDENSED CONSOLIDATED/COMBINED STATEMENTS of CASH FLOWS
(UNAUDITED) - CONTINUED
(in thousands)
Six Months Ended
----------------------------------
The Company The Predecessor
Consolidated Combined
June 30, June 30,
1998 1997
------------ ---------------
Supplemental disclosure of cash flows information:
Interest paid $ 9,314 $ 10,161
======== ========
Noncash operating, investing and financing activities:
During the six-month period ended June 30, 1998, the Company issued
105,123 restricted Listed Shares valued at $2,197 to certain directors, officers
and affiliates in consideration of services rendered.
In connection with the acquisition of properties in 1998, the Company
assumed mortgage obligations of $13,593 and issued 784,169 Listed Shares valued
at $16,377.
During 1998, the Company's hotel property in Livonia, Michigan, was
reclassified from operating real estate to real estate accounted for under the
operating method. The carrying value of the property at the time of
reclassification was $16,503.
The accompanying notes are an integral part of the condensed
consolidated/combined financial statements.
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CAREY DIVERSIFIED LLC
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except per share amounts)
Note 1. Organization and Basis of Consolidation:
The condensed consolidated/combined financial statements consist of Carey
Diversified LLC and its wholly-owned subsidiaries ("Carey Diversified") and nine
Corporate Property Associates ("CPA(R)") real estate limited partnerships (each,
a "Partnership") and their wholly-owned subsidiaries (collectively, the
"Company"). The majority ownership interests in the CPA(R) Partnerships were
transferred to Carey Diversified, effective January 1, 1998, pursuant to a
Consolidation transaction in which the majority of limited partnership
unitholders in each Partnership exchanged their partnership interests for Listed
Shares of Carey Diversified.
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 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 generally accepted accounting principles
for complete financial statements. All significant interentity balances and
transactions have been eliminated. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation 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. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
Combined financial statements of the nine CPA(R) Partnerships and the Company
for periods prior to January 1, 1998 have been presented as a predecessor
company. Because of the application of purchase accounting to the Consolidation
of Carey Diversified and the CPA(R) Partnerships and the organization of the
Company as an infinite-life entity with the ability to reinvest sales proceeds
in new investments, the results of the Company and the predecessor CPA(R)
Partnerships are not comparable. The predecessor entity has been presented on
the historical basis of accounting. The former general partners' interest in the
CPA(R) Partnerships is classified under minority interest because such interest
in the CPA(R) Partnerships is held subsequent to January 1, 1998 by two special
limited partners: William P. Carey, formerly the Individual General Partner of
the nine CPA(R) Partnerships, and Carey Management LLC ("Carey Management"),
successor to the interests to the former corporate general partners.
Additionally, interests of the limited partners of the CPA(R) Partnerships that
did not elect to receive Listed Shares and retained a direct interest in a
Partnership as a subsidiary partnership unitholder are classified under minority
interest. The Company redeemed all subsidiary partnership units in July 1998.
The Company paid the subsidiary partnership unitholders $8,377 to redeem such
units with the redemption value based on an independent valuation of each of the
CPA(R) Partnerships as of May 31, 1998.
Effective January 1, 1998, the exchange of CPA(R) Partnership Limited Partner
interests for interests in Carey Diversified ("Listed Shares") was accounted for
as a purchase and recorded at the fair value of the Listed Shares exchanged. The
excess of fair value over the related historical cost basis of $191,453 was
allocated principally to real estate under operating leases, net investment in
direct financing leases and equity investments. The exchange of the former
general partners' interests for Listed Shares was accounted for on the
historical basis of accounting.
Certain 1997 amounts have been reclassified to conform to the 1998 financial
statement presentation.
Note 2. Dividends
On January 26, 1998 and April 8, 1998, the Company declared quarterly dividends
of .4125 per Listed Share for the quarters ended March 31, 1998 and June 30,
1998, to shareholders of record as of March 31, 1998 and June 30, 1998,
respectively. The dividend to shareholders of record as of June 30, 1998 was
paid on July 15, 1998.
Note 3. Earnings Per Listed Share:
Basic and diluted earnings per Listed Share for the three and six months ended
June 30, 1998 were calculated as follows:
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CAREY DIVERSIFIED LLC
NOTES to CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
(CONTINUED)
Weighted Per
Income Average Listed
Available to Listed Shares Share
To Members Outstanding Amount
Three months ended June 30, 1998:
Basic earnings per Listed Share before
extraordinary item $10,039 24,897,398 $ .40
Extraordinary item (52)
------- ---------- -----
Basic earnings per Listed Share $ 9,987 24,897,398 $ .40
======= =====
Effect of dilutive securities - options for Listed Shares 22,287
Diluted earnings per Listed Share before
extraordinary item $10,039 24,919,685 $ .40
Extraordinary item (52)
------- ---------- -----
Diluted earnings per Listed Share $ 9,987 24,919,685 $ .40
======= ========== =====
Six months ended June 30, 1998:
Basic earnings per Listed Share before
extraordinary item $20,322 24,448,655 $ .83
Extraordinary item (621) (.02)
------- ---------- -----
Basic earnings per Listed Share $19,701 24,448,655 $ .81
======= =====
Effect of dilutive securities - options for Listed Shares 31,341
Diluted earnings per Listed Share before
extraordinary item $20,322 24,479,996 $ .83
Extraordinary item (621) (.02)
------- ---------- -----
Diluted earnings per Listed Share $19,701 24,479,996 $ .81
======= ========== =====
Note 4. Transactions with Related Parties:
Until December 31, 1997, the Agreements of Limited Partnership (the
"Agreements") of each of the Partnerships provided that the General Partners
were allocated between 1% and 10% and the Limited Partners were allocated
between 90% and 99%, for the applicable Partnership, of the profits and losses
as well as Distributable Cash From Operations, as defined. Effective January 1,
1998, as a result of the merger of the Partnerships into subsidiary partnerships
of the Company, the Company is the sole general partner of the nine
Partnerships. The Company and holders of Subsidiary Partnership Units are
allocated between 90% and 99% of the profits and losses and Distributable Cash
from Operations of the applicable Partnership, and two special limited partners,
Carey Management and William P. Carey assumed the interests of the former
general partners and are allocated between 1% and 10% of the profits and losses
and distributable cash of the applicable Partnership. The Company's management
fee, payable to Carey Management, is reduced on a dollar-for-dollar basis for
distributions paid to the special limited partners.
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CAREY DIVERSIFIED LLC
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
In connection with the merger of the CPA(R) Partnerships with Carey Diversified
and the listing of Listed Shares of Carey Diversified on the New York Stock
Exchange, the former Corporate General Partners of eight CPA(R) Partnerships
satisfied provisions for receiving a subordinated preferred return from the
Partnerships totaling $4,422 based upon the cumulative proceeds from the sale of
the assets of each Partnership from inception through the date of the
Consolidation. Payment of this preferred return, paid in 1998, was based on
achieving a specified cumulative return to limited partners. The value of the
Listed Shares of Carey Diversified received by the limited partners in exchange
for their Limited Partnership Units was included in calculating the cumulative
return from each of the CPA(R) Partnerships. For the Partnership that has not
yet achieved the specified cumulative return, its subordinated preferred return
of $1,423 is included as payable to affiliates as of June 30, 1998. To satisfy
the conditions for receiving this remaining preferred return, the Listed Shares
of Carey Diversified must achieve a closing price equal to or in excess of
$23.11 for five consecutive trading days.
Under the Agreements, certain affiliates were entitled to receive property
management fees and reimbursement of certain expenses incurred in connection
with the Company's operations. General and administrative reimbursements consist
primarily of the cost of personnel needed in providing services to the Company.
Effective January 1, 1998, the fees and reimbursements are payable to Carey
Management. Property management fees were $262 and $531 for the three months and
six months ended June 30, 1998, respectively. General and administrative
reimbursements were $375 and $727 for the three months and six months ended June
30, 1998, respectively. Management and performance fees are payable, each at an
annual rate of one-half of one percent of the total market capitalization of the
Company. The performance fee is payable in the form of restricted Listed Shares
issued by the Company and vests ratably over a five-year period. Performance
fees were $185 and $369 for the three months and six months ended June 30, 1998,
respectively. For the six-month period ended June 30, 1998, the Company's
management fee was offset in its entirety by distributions paid to special
limited partners and property management fees paid by the Partnerships. Property
management fees were $274 and $528 for the three and six months ended June 30,
1997, respectively. General and administrative reimbursements were $336 and $677
for the three months and six months ended June 30, 1997, respectively.
The Company is a participant in an agreement with W.P. Carey and certain
affiliates for the purpose of leasing office space used for the administration
of the Company, other affiliated real estate entities and W.P. Carey and for
sharing the associated costs. Pursuant to the terms of the agreement, the
Company's share of rental, occupancy and leasehold improvement costs is based on
adjusted gross revenues, as defined. Expenses incurred were $213 and $331 for
the six months ended June 30, 1998 and 1997, respectively.
Note 5. Operating Revenues:
The Company's operations consist primarily of the investment in and the leasing
of industrial and commercial real estate and operating hotels.
For the six months ended June 30, 1998 and 1997, the Company and its predecessor
earned their net leasing revenues (i.e., rental income and interest income from
direct financing leases) from over 75 lessees. A summary of net leasing revenues
including all current lease obligors with more than $1,000 in annual revenues is
as follows:
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CAREY DIVERSIFIED LLC
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
1998 % 1997 %
------- ---- ------- ----
Dr Pepper Bottling Company of Texas $ 1,999 5% $ 1,999 5%
Hughes Markets, Inc. 1,935 5 2,892 8
Gibson Greetings, Inc. 1,926 5 1,721 5
Detroit Diesel Corporation 1,829 5 1,823 5
Sybron International Corporation 1,656 4 1,656 4
Livho, Inc. 1,344 4
Quebecor Printing, Inc. 1,285 3 1,309 3
Pre Finish Metals Incorporated 1,219 3 1,208 3
Furon Company 1,208 3 1,208 3
AutoZone, Inc. 1,163 3 1,215 3
Thermadyne Holdings Corporation. 1,117 3 1,117 3
The Gap, Inc. 1,094 3 1,077 3
Orbital Sciences Corporation 1,077 3 1,077 3
AP Parts International, Inc. 918 2 918 2
NVR, Inc. 895 2 908 2
Unisource Worldwide, Inc. 848 2 827 2
Lockheed Martin Corporation 802 2 608 2
CSS Industries, Inc./Cleo, Inc. 789 2 915 2
Peerless Chain Company 732 2 854 2
Red Bank Distribution, Inc. 700 2 700 2
Brodart, Co. 672 2 655 2
High Voltage Engineering Corporation 587 2 587 1
Duff-Norton Company, Inc. 582 2 510 1
KSG, Inc. 566 2 487 1
United States Postal Service 545 1 361 1
Simplicity Manufacturing, Inc. 499 1 998 2
Other 10,419 27 12,323 30
------- ---- ------- ----
$38,406 100% $39,953 100%
======= ==== ======= ====
The Company currently owns two hotel properties located in Alpena and Petoskey,
Michigan that it operates as Holiday Inns. A hotel in Livonia, Michigan was
operated by the Company through January 1998.
Note 6. Equity Investments:
The Company owns equity interests in the operating partnership of MeriStar
Hospitality Corporation ("MeriStar"), a publicly-traded real estate investment
trust, and two real estate limited partnerships. The MeriStar operating
partnership units were received in August 1998 in connection with the merger of
American General Hospitality Corporation ("AGH") and CapStar Hotel Co. As a
result of the August 1998 merger, units of AGH, acquired in 1996, were exchanged
for units of the operating partnership of MeriStar. The Company is also the sole
limited partner in the two real estate limited partnerships, the general partner
share interests of which are owned by Corporate Property Associates 10
Incorporated ("CPA(R):10"), an affiliate. The share of
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CAREY DIVERSIFIED LLC
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
income from the investment in the operating partnership of AGH was $800 and $731
and distributions received were $787 and $767 for the six months ended June 30,
1998 and June 30, 1997. The Company's share of income from the two real estate
limited partnerships was $316 and $297 and distributions received from such
investments were $430 and $397 for the six months ended June 30, 1998 and June
30, 1997, respectively.
The Company has the right to convert its 780,269 limited partnership units in
the operating partnership of MeriStar on a one-for-one basis to shares of common
stock in MeriStar at any time. Because such shares are registered, the shares
would be freely transferable upon conversion. As of August 7, 1998, the quoted
market value of a share of MeriStar common stock was $19 5/8 per share resulting
in an underlying fair value of the Company's equity investment of approximately
$15,352.
Note 7. Purchases of Real Estate:
On April 23, 1998, the Company acquired Keystone Capital Company ("Keystone"), a
company whose business consists solely of owning and net leasing a retail
property in Bellevue, Washington leased to Eagle Hardware and Garden, Inc.
("Eagle"), as lessee, in exchange for 721,695 Listed Shares. Based on the value
of the Company's shares on that date, the cost of acquiring Keystone was
$15,065.
The lease with Eagle has a remaining term of 19 years and currently provides for
annual rent of $1,058 with annual increases based on a formula indexed to
increases in the Consumer Price Index. In addition, for each lease year, Eagle
is required to pay 1.50% of gross sales in excess of a stated amount. Such
percentage rents currently approximate $300 annually. There is no assurance;
however, that such rents will continue to be realized at current levels.
The Company is obligated to issue additional shares to former Keystone
shareholders if gross sales during any four quarters exceeds certain thresholds
at any time prior to April 23, 2008. The Company will issue the sellers an
additional 17,504 Listed Shares if gross sales reach $50,000 and up to 50,001
Listed Shares if sales reach $57,500.
On June 15, 1998, the Company acquired a portfolio of seven properties in the
Houston, Texas metropolitan area from J. A. Billipp Development Corporation and
certain of its affiliates ("Billipp") for $9,845 in cash, assumption of $13,593
of mortgage debt and 62,474 Listed Shares of the Company with a value of $1,312
on that date. In connection with the purchase, Billipp assigned and the Company
assumed, as lessor, 15 leases at the acquired properties. Annual rents from the
assumed leases aggregate approximately $2,345. Among the lessees are Sears
Roebuck & Co., Chrysler Corporation, Lockheed Martin Corporation, Continental
Airlines, Inc. and Honeywell, Inc. The initial lease terms are scheduled to
expire between January 1999 and June 2006. The leases are generally either net
leases whereby the tenant has the obligation to pay real estate taxes,
maintenance costs and insurance or provide for reimbursement for a substantial
portion of such costs. Subsequent to the purchase of the properties, the Company
paid off $3,097 of the mortgage debt assumed.
The remaining mortgage debt of $10,496 is comprised of three loans. The loans
are scheduled to mature between January 2002 and October 2006 at which time
balloon payments ranging from $1,442 to $4,918 will be due. The loans bear
annual interest ranging from 7.75% to 9.125% and provide for combined monthly
principal and interest payments of $98. The loans may be prepaid at any time,
subject to prepayment premiums.
The Company has entered into management agreements with Billipp to manage the
properties on behalf of the Company and to perform leasing activities.
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CAREY DIVERSIFIED LLC
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
On May 27, 1998, the Company, through its 75% majority interest in a
newly-formed subsidiary, acquired an office building in Pantin, France, located
in the Paris metropolitan area. The purchase price for the property was $10,269
and was financed by a limited recourse mortgage loan of $8,343. The building is
leased to four lessees consisting of three governmental agencies and Hoechst
Roussel Vet. Annual rent from these leases approximates $928. Rents will
increase annually based on increases in the INSEE index, an index of increases
in construction costs published by the French government. The leases have
initial terms of six years and expire between March 2004 and August 2004. Each
of these leases provides for a six-year renewal option. The leases are net
leases. Under certain of the leases; however, the lessor retains the obligation
to pay real estate taxes.
The $8,343 mortgage loan collateralized by the Pantin property has a 15-year
term with 75% of the balance amortizing over that period with a balloon payment
of approximately $2,086 scheduled on the maturity date. The loan bears annual
interest of 5.50% during the first five years with the rate to be reset based on
the then prevailing interest rates.
On June 10, 1998, the Company, through its 75% majority interest in a
newly-formed subsidiary, purchased land for $265 in Mont Saint Argnan, France, a
suburb of Rouen in Upper Normandy, upon which an office facility is being
constructed pursuant to a lease with Tellit Assurance ("Tellit"). The total cost
of the project is estimated to amount to $5,458. Construction is expected to be
completed in August 1998 at which time Tellit will take occupancy and commence a
12-year initial lease term. Annual rent will approximate $522 with annual rent
increases based on increases in the INSEE index. Tellit will have an option to
terminate the lease at the end of the ninth lease year. The lease obligations of
Tellit are unconditionally guaranteed by its parent company, Sun Alliance
Assurances S.A., a subsidiary of Royal Sun Alliance Insurance Group plc.
In connection with the Tellit property purchase, the subsidiary has received a
commitment of $4,262 of limited recourse financing collateralized by the Tellit
property. The loan, which will have a 15-year term, provides for an annual
interest rate at a floating rate of .85% above the Paris InterBank Offered Rate
to a maximum annual interest rate of 7% during the first five years. 75% of the
loan balance will amortize over the term of the loan with a balloon payment of
approximately $1,066 due on the maturity date.
An independent director of the Company has an ownership interest in the minority
interest in the French subsidiaries. Such ownership is subject to the same terms
and conditions as all other ownership interests in the subsidiary companies.
The French transactions use the local currency, French Francs, as the functional
currency. Foreign currency translation adjustments are reflected as a separate
component of members' equity in the accompanying condensed consolidated/combined
financial statements.
Note 8. Sale of Real Estate:
On April 1, 1998 Simplicity Manufacturing, Inc. purchased its leased property in
Port Washington, Wisconsin for $9,684 pursuant to a purchase option exercised in
1997. After paying off the limited recourse mortgage loan on the property, the
Company realized cash proceeds of approximately $5,268. As the carrying value of
the property was $9,684, no gain or loss was recognized on the sale. Annual cash
flow (rent less mortgage debt service on the property) from Simplicity was $934.
Note 9. Line of Credit Agreement:
On March 26, 1998, the Company obtained a line of credit of $150,000 pursuant to
a revolving credit agreement with The Chase Manhattan Bank. The revolving credit
agreement has a term of three years.
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CAREY DIVERSIFIED LLC
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
As of June 30, 1998, the Company has drawn advances of $93,000 from the line of
credit. Such advances have been used to pay off limited recourse mortgage debt
of $39,558 and notes payable of $24,709, funded construction draws on the
Company's build-to-suit projects and for certain working capital purposes.
Advances made bear interest at an annual rate of either (i) the one, two, three
or six-month LIBOR Rate, as defined, plus a spread which ranges from 0.6% to
1.45% depending on leverage or credit rating or (ii) the greater of the bank's
Prime Rate and the Federal Funds Effective Rate, plus .50%, plus a spread
ranging from 0% to .125% depending upon the Company's leverage. In addition, the
Company pays a fee ranging between 0.15% and 0.20% per annum of the unused
portion of the credit facility, depending on the Company's leverage, if no
minimum credit rating for the Company is in effect. The fee will equal .15% of
the total commitment amount if the Company obtains a certain minimum credit
rating.
The revolving credit agreement has financial covenants that require the Company
to (i) maintain minimum equity value of $400,000 plus 85% of amounts received by
the Company as proceeds from the issuance of equity interests and (ii) meet or
exceed certain operating and coverage ratios. Such operating and coverage ratios
include, but are not limited to, (a) ratios of earnings before interest, taxes,
depreciation and amortization to fixed charges for interest and (b) ratios of
net operating income, as defined, to interest expense. As of August 11, 1998,
the Company is in compliance with the financial covenants.
Note 10. Registration of Listed Shares:
On April 17, 1998, the Company filed a Form S-11/A with the Securities and
Exchange Commission to register an additional 4,500,000 Listed Shares. Such
Listed Shares may be offered and issued from time to time in connection with
acquisition of real estate investments either directly or through the
acquisition of entities owning such investments. Shares were issued in
connection with the purchase of the Eagle Hardware and Billipp portfolio of
properties (see Note 7).
Note 11. Subsequent Events:
On July 1, 1998, the Company purchased land in Rio Rancho, New Mexico for $1,120
upon which a building is being constructed pursuant to a construction management
agreement with Teleservices Development International LLC ("Teleservices"). In
connection with the purchase, Teleservices assigned its lessor's interest in a
net lease with Sprint Spectrum L.P. ("Sprint") to the Company. The aggregate
cost for the property, including the cost of funding construction for a new
building, is estimated to amount to approximately $10,075. Upon substantial
completion of the improvements, a ten-year lease term with Sprint will commence.
The lease provides for two five-year renewal terms with Sprint having an option
to terminate the lease on the seventh anniversary of the lease commencement in
consideration for an amount equal to all base rent payable for the remainder of
the initial term. Annual rent during the initial term will be based on the total
square footage of the building and will range between $1,081 and $1,158.
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CAREY DIVERSIFIED LLC
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS
(all dollar amounts in thousands)
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the Company's
condensed consolidated financial statements and notes thereto as of June 30,
1998 included in this quarterly report and the Company's Annual Report on Form
10-K for the year ended December 31, 1997. This quarterly report contains
forward looking statements. Such statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievement of the Company to be materially different from the results of
operations or plan expressed or implied by such forward looking statements.
Accordingly, such information should not be regarded as representations by the
Company that the results or conditions described in such statements or the
objectives and plans of the Company will be achieved.
Carey Diversified LLC ("Carey Diversified" or the "Company"), which
commenced public trading on the New York Stock Exchange on January 21, 1998, was
organized to combine and continue the business of the nine Corporate Property
Associates real estate limited partnerships. The Company owns and manages a
diverse portfolio of real properties, generally leased to corporate tenants
pursuant to long-term net leases. The Company intends to expand the existing net
lease portfolio and, as appropriate, engage in new lines of business.
From 1979 through 1990, the CPA(R) Partnerships raised approximately
$400 million of equity through public offerings of limited partnership units.
Each CPA(R) Partnership was structured so that holders of limited partnership
units anticipated a return of their investment over the finite life of the
Partnership with a disposition strategy that included the sale of assets and
liquidation of the Partnership. Accordingly, each CPA(R) Partnership was
structured so that there would be no additional raising of equity after the
initial offering, nor, after a defined period, reinvestment of sales proceeds in
new properties. This structure restricted the ability of a CPA(R) Partnership to
increase its asset base after the investment of offering proceeds was completed.
As a Partnership disposed of a property, its asset base and income from
continuing operations would decrease. Further, the stated objective of a
Partnership was to use its cash flow to pay distributions at an increasing rate
rather than for reinvestment. In contrast, the Company is an infinite life
entity that has the ability to raise additional capital and acquire additional
properties either through stock or debt offerings or by exchanging shares in the
Company for properties. Accordingly, the comparison of historical results of
operations for the six-month periods ended June 30, 1998 and 1997 is not
comparable because (i) the prior year period ended June 30, 1997 reflects the
limitations imposed by the Partnership structure, and (ii) the change in the
basis of accounting as of January 1, 1998 due to the application of purchase
accounting.
The CPA(R) Partnerships' portfolio of properties was acquired with
funds from the offering of each Partnership and with financing provided by
limited recourse mortgage debt. Cash flow from operations was used to pay
scheduled principal payment obligations on the mortgage debt and to fund
quarterly distributions to partners, generally at an increasing rate each
quarter. Net proceeds from the sale of assets and lump sums received in the
settlement of bankruptcy and other claims were used, after reviewing the
adequacy of cash reserves, to pay off high rate mortgage debt or to fund special
distributions to partners.
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16
CAREY DIVERSIFIED LLC
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS, Continued
The Company will initially distribute a significant portion of its cash
flow to shareholders, but will review from time to time whether a greater return
to Shareholders may be realized by reinvesting rather than distributing a
greater or smaller proportion of its available excess cash flow. The Company
will also have more flexibility in structuring its debt and lowering debt
service such as through the use of non-amortizing and unsecured debt, issued in
the private or public markets. On March 26, 1998, the Company entered into a
three year revolving credit agreement which provides the Company with a line of
credit of $150,000. The Company has used $93,000 under the line to fund
acquisitions and build-to-suit projects, to pay off higher interest and/or
maturing debt and for certain working capital purposes. On March 26, 1998, using
$55,000 from its initial draw on the line of credit and $2,898 of cash reserves,
the Company paid off four mortgage loans with an aggregate balance of $33,189
and three notes payable totaling $24,709. The Company has subsequently used the
line to payoff an additional $14,917 of mortgage debt, including $8,540
subsequent to June 30, 1998. The use of unsecured financing requires the Company
to meet financial covenant requirements. Such requirements include maintaining
defined net worth levels and operating cash flow and interest coverage ratios.
The Company intends to obtain a credit rating from one or more major rating
institutions.
For the period ended June 30, 1998, the Company's other significant
financing activities included raising additional equity capital of $5,410
pursuant to the Company's dividend reinvestment and stock purchase plan, paying
scheduled principal payments of $3,497 on the Company's limited recourse
mortgage debt, issuing 784,169 Listed Shares (valued at $16,377) in connection
with two property acquisitions and paying preferred distributions of $4,422 to
the former general partners of the CPA(R) Partnerships. Such preferred
distributions were a one-time event and based upon cumulative proceeds from the
sale of the assets of each Partnership (see Note 4 to the accompanying financial
statements). The Company has a remaining preferred distribution obligation of
$1,423, which is not payable until the Company achieves a specified closing
price for its Listed Shares for five consecutive days. Since June 30, 1998, the
Company has used $8,377 to redeem the subsidiary partnership units of the CPA(R)
Partnerships. Management believes that such redemption will allow the Company
operational flexibility that was not previously available.
The Company's investing activities consisted primarily of using cash,
issuance of Listed Shares and assumption of mortgage debt for purchases of real
estate. During the six months ended June 30, 1998, the Company used (i) $14,575
of cash for the purchase and commencement of construction on two build-to-suit
projects, (ii) $11,819 of cash in connection with the purchase of a portfolio of
properties in Houston, Texas and for two properties in France, (iii) assumed
mortgage debt of $13,593 in connection with the Houston, Texas purchase and (iv)
issued 784,169 Listed Shares in connection with the purchase of the Houston
properties and the Eagle Hardware property in Bellevue, Washington. One
build-to-suit project includes four buildings in Colliersville, Tennessee leased
to Federal Express Corporation and the other is for an office building in Tempe,
Arizona leased to America West Holdings Corporation. Completion of the
construction of the two projects is scheduled for May and November 1999, at
which time the Company's share of annual rent, assuming maximum project costs of
$106,600 are incurred, will be approximately $9,350. The Company also has a
commitment of $3,895 to complete a build-to-suit transaction for one of the
French purchases. Of such commitment, $3,197 will be financed through a limited
recourse mortgage loan. The Company also expects to use up to $4,000 for
improvements at the Livonia hotel property in order to meet certain requirements
from Holiday Inn in order to retain its franchise. In April 1998, the Company
sold a property to Simplicity Manufacturing, Inc. for $9,684 pursuant to the
exercise of a purchase option. The Company will redeploy the funds from the
sale, after paying off the related mortgage loan, for new investments in real
estate. In April 1998, the company registered 4,500,000 Listed Shares that will
permit the Company to acquire properties in tax free exchanges for sellers by
issuing Listed Shares for property acquisitions rather than using cash or debt.
In July 1998, the Company entered into a build-to-suit commitment at a
property in Rio Rancho, New Mexico leased to Sprint Spectrum L.P. The total
commitment is expected to amount to $10,075 with annual rent of up to $1,158
commencing with the completion of construction.
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17
CAREY DIVERSIFIED LLC
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS, Continued
The Company has engaged in its first two international transactions by
purchasing the two properties in France. Both of the transactions use the local
currency, French Francs, as the functional currency. Because the two
transactions are also leveraged with mortgage debt denominated in French Francs
of at least 75% of the purchase price, the Company believes that its exposure to
foreign currency fluctuations is mitigated. The Company is continuing to seek
additional real estate investments in France as the Company believes that
opportunities for higher yielding investments are available due to the current
cycle of restructuring of French financial institutions.
Since December 31, 1997, cash balances have increased by $13,164. Cash
flow from operations of $20,995 was sufficient to fund a quarterly distribution
of $10,015 paid to holders of Listed Shares in April 1998 and scheduled mortgage
principal payments of $3,497. As a result of the reduction in debt service
through the use of the line of credit to pay off higher interest rate debt and
the acquisitions of the Eagle Hardware retail property, the portfolio of
properties in Houston, Texas and the two French properties, Management believes
that operating cash flow will continue to increase.
Net income for the three-month and six-month periods ended June 30,
1998 is not comparable to net income for the three-month and six-month periods
ended June 30, 1997. As noted, the Company commenced operations on a
consolidated basis as an ongoing and growing business on January 1, 1998, while
the prior year's three-month and six-month periods reflect the results of a
combination of static and liquidating Partnership portfolios.
In addition, the results of the periods ended June 30, 1997 reflect
several nonrecurring items. During that period, the Company recognized other
income of $2,386 in connection with bankruptcy claims and revenues of $1,400 in
excess of market under a lease that ended in June 1997. That lease, which
represented 6% of the prior period's lease revenues (rental income and interest
income from direct financing leases), had been renegotiated in 1994 to allow the
lessee to terminate the lease in 1997 rather than 2003. The rents received
during the abbreviated term were intended to provide the Company with a
significant portion of the rents that would have been due over the remainder of
the original term and the current year's three-month period.
For the comparable six month periods, lease revenues decreased by
$1,548. The decrease was primarily as a result of the termination of the lease
in June 1997 with Advanced System Applications, Inc. at the Bloomingdale
property. Lease revenues from Advance System Applications for the six months
ended June 30, 1997 were $2,267. This was offset, in part, by $1,344 of lease
revenues in 1998 from the Livonia property, which has been net leased to an
affiliate since February 1, 1998. As a result of the sale of the Simplicity
Manufacturing, Inc. property in April 1998, annual lease revenues will decrease
by $1,996, as noted, but the sales proceeds are being redeployed for investments
in new properties. The Eagle Hardware & Garden, Inc. lease, the Houston
portfolio of properties and the Pantin, France multi-tenant property, all of
which were acquired during the second quarter, will provide base annual revenues
of $4,331 as well as any percentage rents which may be realized from Eagle
Hardware. On April 30, 1998, the Company's two-year extension term with Hughes
Markets, Inc. for a dairy processing plant in Los Angeles, California ended, and
a new lease for the property with Copeland Beverage Group, Inc. became
effective. The Hughes lease had been renegotiated at the end of the initial
lease term in 1996 at rents in excess of market rates. Although annual rentals
from Copeland of $1,800 will approximate the rents that were in effect at the
end of Hughes' initial term, annual lease revenues from the property will
decrease by $3,984. In April 1998, the Company received a final rent payment of
$3,500 from Hughes. At the time the extension term was negotiated, Management
had anticipated that the funds would be used to retrofit the property for
alternative uses and to cover carrying costs during a period of vacancy. As a
result of entering into the Copeland lease, no such expenditures were required.
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CAREY DIVERSIFIED LLC
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS, Continued
The decrease in hotel revenues and related operating expenses resulted
from the change in status of the Livonia property in February 1998 from a
Company operated property to a leased property. Hotel revenues have decreased to
8% of overall revenues.
Interest expense has continued to decrease as a result of paying off
several mortgage loans in 1997, the continuing amortization of the Company's
remaining mortgage debt and refinancing a $12,700 limited recourse mortgage loan
collateralized by properties leased to Furon Company at a lower rate of interest
in June 1997. The Company will continue to seek opportunities to refinance
mortgage loans on a limited recourse basis at lower rates of interest.
Independently, the Company has used its $150,000 line of credit from a syndicate
of banks to refinance high interest debt and fund acquisitions on a transitional
basis. In connection with paying off two mortgage loans with funds advanced from
the line of credit, the Company incurred an extraordinary charge on the
extinguishment of debt of $569. In addition, the Company paid a scheduled
balloon payment of $8,500 in August 1998 in satisfaction of a limited recourse
mortgage loan collateralized by properties leased to AutoZone, Inc. Management
believes that the use of limited recourse mortgage debt will remain an integral
part of the Company's financing strategy. The Company is currently evaluating
opportunities for re-leveraging certain of its properties with limited recourse
mortgage debt.
The increase in general and administrative expense was due, in part, to
the Company's transition from a collection of static finite-life entities to a
publicly-traded infinite-life entity. In particular, as an infinite-life and
growing entity, the Company is incurring and will continue to incur business
development and acquisition expenditures that had not been necessary or
appropriate in the past. The increase in property expenses resulted from
recording a provision for potential future uncollected rents, higher accruals
for real estate taxes on specific properties, accruals for legal costs in
connection with lease disputes and higher overall management and performance
fees.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 131, "Disclosure about
Segments of an Enterprise and Related Information". SFAS No. 131 establishes
accounting standards for the way that public business enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products, geographic area and major customers. The statement is effective
for financial periods beginning after December 15, 1997, however, SFAS No. 131
does not need to be applied to interim financial statements in 1998. In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities". SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 is effective
for all quarters of fiscal years beginning after June 15, 1999. The Company is
currently evaluating the impact, if any, of SFAS No. 131 and SFAS No. 133.
The Company's Advisor has responsibility for maintaining the Company's
books and records. An affiliate of the Advisor services the computer systems
used for maintaining such books and records. In its preliminary assessment of
Year 2000 issues, the affiliate believes that such issues will not have a
material effect on the Company's operations, however, such assessment has not
been completed. The Company relies on its bank and transfer agent for certain
computer-related services and has initiated discussions to determine whether
they are addressing Year 2000 issues that may affect the Company.
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CAREY DIVERSIFIED LLC
PART II
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual Shareholders meeting was held on June 9, 1998, at
which time a vote was taken to elect directors of the Company
through the solicitation of proxies. The following directors
were elected for a three year term:
Total Shares Shares Shares
Name Of Director Shares Voting Voting Yes Voting No Abstaining
- -------------------- ------------- ---------- --------- ----------
Steven M. Berzin 17,899,252 17,739,028 160,224 -
Gordon F. DuGan 17,899,252 17,730,708 168,544 -
Reginald Winssinger 17,899,252 17,741,787 157,465 -
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
During the quarter ended June 30, 1998 the Company
filed a report on Form 8-K dated May 15, 1998 under
Item 5, Other Events.
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20
CAREY DIVERSIFIED LLC
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.
CAREY DIVERSIFIED LLC
08/12/98 By: /s/ John J. Park
Date John J. Park
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
08/12/98 By: /s/ Claude Fernandez
Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Accounting Officer)
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