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 MARCH 31, 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 incorporation (I.R.S. Employer
or organization) Identification No.)
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
CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
INDEX
Page No.
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PART I
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Item 1. - Financial Information*
Consolidated Balance Sheets, December 31, 1995
and March 31, 1996 2
Consolidated Statements of Income for the three
months ended March 31, 1995 and 1996 3
Consolidated Statements of Cash Flows for the three
months ended March 31, 1995 and 1996 4
Notes to Consolidated Financial Statements 5-7
Item 2. - Management's Discussion of Operations 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.
-1-
CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
PART I
------
Item 1. - FINANCIAL INFORMATION
-------------------------------
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
1995 1996
------------- ------------
(Note) (Unaudited)
ASSETS:
Land, buildings and personal property,
net of accumulated depreciation of
$9,947,765 at December 31, 1995 and
$10,234,135 at March 31, 1996 $34,006,723 $33,749,816
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 5,517,590
Accrued interest and rents receivable 24,838 20,647
Other assets 1,143,067 1,056,499
----------- -----------
Total assets $56,228,544 $55,886,920
=========== ===========
LIABILITIES:
Mortgage notes payable $11,928,751 $11,561,166
Note payable 9,606,837 9,606,837
Accrued interest payable 345,418 336,131
Accounts payable and accrued expenses 708,394 550,291
Accounts payable to affiliates 102,020 93,697
Prepaid and deferred rental income 428,827 435,549
----------- -----------
Total liabilities 23,120,247 22,583,671
----------- -----------
PARTNERS' CAPITAL:
General Partners 110,512 118,472
Limited Partners (45,209 Limited
Partnership Units issued and outstanding
at December 31, 1995 and March 31, 1996) 32,997,785 33,184,777
----------- -----------
Total partners' capital 33,108,297 33,303,249
----------- -----------
Total liabilities and
partners' capital $56,228,544 $55,886,920
=========== ===========
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.
-2-
CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
March 31, 1995 March 31, 1996
------------------ --------------
Revenues:
Rental income from operating leases $1,076,977 $1,051,680
Interest income from direct financing leases 559,137 557,020
Other interest income 65,581 62,782
Revenue of hotel operations 1,221,915 1,355,341
---------- ----------
2,923,610 3,026,823
---------- ----------
Expenses:
Interest expense 660,220 497,727
Operating expenses of hotel operations 925,679 1,009,592
Depreciation 321,048 286,370
General and administrative 213,973 104,000
Property expense 64,415 105,112
Amortization 17,517 7,216
---------- ----------
2,202,852 2,010,017
---------- ----------
Income before loss from equity investments,
gain on sales of real estate and earnings
from discontinued operations 720,758 1,016,806
Loss from equity investment 36,496 32,803
---------- ----------
Income before gain on sales of real estate and
earnings from discontinued operations 684,262 984,003
Gain on sales of real estate 74,729
---------- ----------
Income from continuing operations 684,262 1,058,732
Earnings from discontinued operations 303,905
---------- ----------
Net income $ 988,167 $1,058,732
========== ==========
Net income allocated to
General Partners $ 59,290 $ 59,787
========== ==========
Net income allocated to
Limited Partners $ 928,877 $ 998,945
========== ==========
Net income per Unit
(45,274 and 45,209 Limited Partnership
Units at March 31, 1995 and 1996)
Income from continuing operations $ 14.21 $ 22.10
Earnings from discontinued operations 6.31
---------- ----------
$ 20.52 $ 22.10
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
-3-
CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
CONSOLIDATED STATEMENTS of CASH FLOWS (UNAUDITED)
Three Months Ended
March 31,
------------
1995 1996
------------ ------------
Cash flows from operating activities:
Net income $ 988,167 $ 1,058,732
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 338,565 293,586
Other noncash items 37,244 37,284
Loss from equity investment 36,496 32,803
Gain on sale of real estate (74,729)
Net change in operating assets and liabilities 33,341 (163,851)
----------- -----------
Net cash provided by operating activities 1,433,813 1,183,825
----------- -----------
Cash flows from investing activities:
Additional capitalized costs (12,912) (29,463)
Distributions from equity investment 2,947 8,316
Proceeds from sales of real estate, net 617,867
----------- -----------
Net cash (used in) provided by investing activities (9,965) 596,720
----------- -----------
Cash flows from financing activities:
Distributions to partners (7,862,949) (863,780)
Payments on mortgage principal (364,304) (367,585)
----------- -----------
Net cash used in financing activities (8,227,253) (1,231,365)
----------- -----------
Net increase (decrease) in cash and cash equivalents (6,803,405) 549,180
Cash and cash equivalents, beginning of period 10,525,885 4,968,410
----------- -----------
Cash and cash equivalents, end of period $ 3,722,480 $ 5,517,590
=========== ===========
Supplemental disclosure of cash flows information:
Interest paid $ 612,867 $ 507,014
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
-4-
CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Basis of Presentation:
---------------------
The accompanying unaudited consolidated 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 three months ended
March 31, 1996 are summarized as follows:
Quarter Ended General Partners Limited Partners Per Limited Partner Unit
------------- ---------------- ---------------- ------------------------
December 31, 1995 $51,827 $811,953 $17.96
======= ======== ======
A distribution of $18.06 per Limited Partner Unit for the quarter ended
March 31, 1996 was declared and paid in April 1996.
Note 3. Transactions with Related Parties:
---------------------------------
For the three-month periods ended March 31, 1995 and 1996, the Partnership
incurred management fees of $27,239 and $23,720, respectively, and general
and administrative expense reimbursements of $26,326 and $37,499,
respectively.
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 three
months ended March 31, 1995 and 1996 were $38,359 and $21,223,
respectively.
-5-
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 three-month periods ended March 31, 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. $ 394,658 25% $ 394,658 25%
The Gap, Inc. 231,892 14 231,892 14
KSG, Inc. 204,791 12 205,726 13
Sybron Acquisition Company 204,445 12 204,800 12
Swiss M-Tex, L.P. 136,097 8 133,205 8
AutoZone, Inc. 108,591 7 105,194 7
Northern Automotive, Inc. 97,208 6 97,208 6
Other 99,525 6 77,110 5
NVRyan L.P. 72,889 5 72,889 5
NYNEX Corporation 53,900 3 53,900 3
Winn-Dixie Stores, Inc. 32,118 2 32,118 2
---------- --- ---------- ---
$1,636,114 100% $1,608,700 100%
========== === ========== ===
Results for the Partnership's hotel operations of a Holiday Inn in Livonia,
Michigan for the three-month periods ended March 31, 1996 and 1995 are
summarized as follows:
1995 1996
----------- -----------
Revenues $1,221,915 $1,355,341
Fees paid to hotel management company (31,564) (36,314)
Other operating expenses (894,115) (973,278)
---------- ----------
Income from hotel operations $ 296,236 $ 345,749
========== ==========
Note 5. Discontinued Operations:
-----------------------
The Partnership sold its food service business in December 1995. Results
for the food service business for the three-month period ended March 31,
1995 is summarized as follows:
1995
----
Sales $1,517,310
Cost of goods sold (431,900)
Other operating expenses (781,505)
----------
Food service operating income $ 303,905
==========
-6-
CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Note 6. Sales of Real Estate:
--------------------
On February 12, 1996, the Partnership sold a property located in Denham
Springs, Louisiana to its lessee, AutoZone, Inc. ("AutoZone"), for
$431,779, net of selling costs, realizing a gain of $74,729 on the sale.
AutoZone's lease allows it to offer to purchase properties which it judges
to be unsuitable for its continued use. In connection with the sale of the
property, pursuant to the lease, annual rent from AutoZone will be reduced
by $40,766.
On February 14, 1996, the Partnership sold a property in Monte Vista,
Colorado which had previously been leased to Yellow Front Stores, Inc. for
$186,090, net of selling costs. As the property was written down to a net
realizable value at December 31, 1995 to an amount equal to the net sales
proceeds, no gain or loss was recognized on the sale. Annual rent from the
Monte Vista property was $20,000.
Note 7. Property Leased to Advanced System Applications, Inc.:
-----------------------------------------------------
The Partnership and CPA(R):8 own property in Bloomingdale, Illinois, as
tenants-in-common with 33.64% and 66.36% ownership interests, respectively
which is leased to Advanced System Applications, Inc. ("ASA"). In July
1994 the Partnership and CPA(R):8 entered into a lease modification
agreement with ASA which allows ASA to terminate its lease in June 1997
instead of June 2003. Under the modification agreement, annual rent
increased to $5,200,000 (of which the Partnership's share is $1,749,280)
from $1,850,000 (of which the Partnership's share was $622,340). In
consenting to the modification, the mortgage loan payments were
substantially increased so that the loan fully amortized on March 1, 1996.
Although ASA is obligated to make its lease payments through June 1997, it
is in the process of vacating the property. To the extent that the
Partnership and CPA(R):8 enter into new leases for any vacated space, ASA
is entitled to one-third of all rentals received, net of any landlord
costs, during the remaining term of its lease.
On January 31, 1996, the Partnership and CPA(R):8 entered into a lease with
the United States Postal Service (the "Postal Service") for approximately
35% of the leasable space at the ASA property. The lease has a 10-year
term commencing May 1, 1996 with annual rentals of $722,800 (of which the
Partnership's share will be $243,150), increasing to $822,800 after five
years. The Partnership and CPA(R):8 retain the obligation to provide
maintenance and support services to the lessee. The lease provides for
rent escalations in 1998 based on increases in certain operating costs of
the property incurred by the Partnership and CPA(R):8. In addition, the
Postal Service will reimburse the Partnership and CPA(R):8 for its pro rata
share of real estate taxes. The Postal Service has an option to terminate
the lease after five years and right of first refusal on space vacated by
ASA.
The Partnership and CPA(R):8 will provide the Postal Service a tenant
improvement allowance of up to $600,000 (of which the Partnership's share
is $201,840).
-7-
CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS
-----------------------------------------------
Results of Operations:
---------------------
The results of operations for the periods ended March 31, 1996 and
1995 are not directly comparable due to the sale of the Partnership's food
service operations in December 1995. Excluding the results of the food
service business for the three-month period ended March 31, 1995, which
contributed $304,000 to 1995 net income, income before gain on the sales of
real estate increased by $300,000 (or 44%) in 1996. The increase in income
was due to an improvement in earnings from the hotel business and decreases
in depreciation, interest and general and administrative expenses. These
benefits were partially offset by an increase in property expenses. Lease
revenues for the comparable periods were stable. The decrease in
depreciation was due to the full depreciation of certain furniture,
fixtures and equipment at the hotel property in Livonia, Michigan
subsequent to March 31, 1995. The decrease in interest expense was due to
the satisfaction of the Jupiter, Florida mortgage in December 1995 in
connection with the sale of the food service business and the full
amortization of the mortgage loan on the Advanced System Applications, Inc.
("ASA") property in March 1996. The decrease in general and administrative
expenses was due, in part, to higher accruals for partnership level state
franchise taxes in 1995. Hotel earnings benefitted from an increase in
average room rates which offset a decrease in the occupancy rate from 78%
to 74%.
Financial Condition:
-------------------
There has been no material change in the Partnership's financial
condition since December 31, 1995. Cash reserves increased by $549,000,
primarily due to proceeds of $618,000 that was received from the sale of
two properties. Although cash flow from operations and distributions from
equity investments which totalled $1,193,000 was slightly less than the
amounts used to pay cash distributions and scheduled mortgage principal
payments, the Partnership will benefit from the commencement in May 1996 of
the Partnership's lease with the United States Postal Service (the "Postal
Service") and the satisfaction of the ASA loan. Annual rent from the
Postal Service lease will be approximately $243,000 before operating costs;
however, until June 1997, the Partnership is obligated to share one-third
of Postal Service rentals, net of expenses, with ASA in lieu of reducing
ASA's rent for relinquishing its space. With the satisfaction of the ASA
loan, the Partnership's annual cash flow will increase by approximately
$1,344,000 until the expiration of the ASA lease in June 1997.
Accordingly, Management projects that cash flow from operations will
substantially exceed the amounts needed to meet distribution objectives and
scheduled mortgage principal installments. Based on current cash balances,
the Partnership has the ability to fully fund from cash reserves its
$202,000 tenant improvement allowance for the Postal Service and other
costs which may be necessary to retrofit the ASA property for multi-tenant
use. A $1,000,000 mortgage balloon payment, which is collateralized by the
property leased to Winn-Dixie Stores, Inc., is due in September 1996. In
the event the Partnership chooses not to seek refinancing, such payment
could be funded from cash reserves; however, it is currently anticipated
that the loan will be refinanced.
-8-
CORPORATE PROPERTY ASSOCIATES 7
- a California limited partnership
PART II
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Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
------------------------------------------
(a) Exhibits:
None
(b) Reports on Form 8-K:
During the quarter ended March 31, 1996 the Partnership was not
required to file any reports on Form 8-K.
-9-
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.
05/10/96 By: /s/ Claude Fernandez
-------------- ------------------------------
Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Financial Officer)
05/10/96 By: /s/ Michael D. Roberts
-------------- -------------------------------
Date Michael D. Roberts
First Vice President and Controller
(Principal Accounting Officer)
-10-