<PAGE> 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, 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)
<TABLE>
<CAPTION>
DELAWARE 13-3912578
<S> <C>
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020
(Address of principal executive offices) (Zip Code)
</TABLE>
(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
25,314,744 Listed Shares; no par value outstanding as of November 11, 1998
<PAGE> 2
CAREY DIVERSIFIED LLC
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I
Item 1. - Financial Information*
Condensed Consolidated/Combined Balance Sheets,
as of September 30, 1998 and December 31, 1997 2
Condensed Consolidated/Combined Statements of Income
for the three and nine months ended September 30, 1998 and 1997 3
Condensed Consolidated/Combined Statements of
Comprehensive Income for the three months and nine months
ended September 30, 1998 and 1997 4
Condensed Consolidated/Combined Statements of Cash Flows
for the nine months ended September 30, 1998 and 1997 5-6
Notes to Condensed Consolidated/Combined Financial Statements 7-11
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-16
PART II - Other Information
Item 4. - Submission of Matters to a Vote of Security Holders 17
Item 6. - Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
*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-
<PAGE> 3
CAREY DIVERSIFIED LLC
PART I
Item 1. - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED/COMBINED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
The Company The Predecessor
Consolidated Combined
September 30, December 31,
1998 1997
---- ----
(Unaudited) (Note)
<S> <C> <C>
ASSETS:
Real estate leased to others under the
operating method, net of accumulated depreciation of $5,637
and $93,591 at September 30, 1998 and December 31, 1997 $ 385,290 $ 217,165
Net investment in direct financing leases 294,160 216,761
Operating real estate, net of accumulated depreciation of $226
and $14,627 at September 30, 1998 and December 31, 1997 6,817 23,333
Real estate under construction leased to others 40,785
Cash and cash equivalents 6,980 18,586
Assets held for sale 21,644 14,382
Equity investments 29,878 13,415
Other assets, net of accumulated amortization of $239 and
$2,109 and reserve for uncollected rent of $1,347 and
$1,103 at September 30, 1998 and December 31, 1997 16,222 19,778
--------- ---------
Total assets $ 801,776 $ 523,420
========= =========
LIABILITIES:
Mortgage notes payable $ 152,000 $ 182,718
Notes payable 111,577 24,709
Note payable to affiliate 200
Accrued interest payable 1,647 1,798
Accounts payable to affiliates 6,276 8,792
Dividends payable 10,422
Other liabilities 7,900 10,565
--------- ---------
Total liabilities 289,822 228,782
--------- ---------
Minority interest (5,119) (6,250)
--------- ---------
Commitments and contingencies
MEMBERS' EQUITY/PARTNERS' CAPITAL:
Partners' Capital 300,888
Listed Shares, no par value;
25,283,188 shares issued and outstanding 517,962
Dividends in excess of accumulated earnings (974)
Unrealized depreciation, marketable securities (158)
Foreign currency translation adjustment 243
---------
517,073
--------- ---------
Total liabilities and
members' equity/partners' capital $ 801,776 $ 523,420
========= =========
</TABLE>
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.
-2-
<PAGE> 4
CAREY DIVERSIFIED LLC
CONDENSED CONSOLIDATED/COMBINED STATEMENTS OF
INCOME (UNAUDITED)
(in thousands, except per share and share amounts)
<TABLE>
<CAPTION>
The Company Consolidated The Predecessor Combined
-------------------------------- --------------------------------
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1998 1998 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 10,765 $ 31,776 $ 12,050 $ 35,725
Interest from direct financing
leases 8,559 25,954 6,701 22,979
Other interest income 183 607 343 911
Other income 45 306 10 2,413
Revenue of hotel operations 1,754 5,000 3,910 10,943
------------ ------------ ------------ ------------
21,306 63,643 23,014 72,971
------------ ------------ ------------ ------------
Expenses:
Interest 4,947 13,776 4,919 15,005
Depreciation and amortization 2,211 6,102 2,583 8,045
General and administrative 1,297 4,806 973 3,584
Property expenses 1,030 3,513 2,290 3,822
Writedowns to fair value 140 3,806
Operating expenses of hotel
operations 1,161 3,832 2,714 7,986
------------ ------------ ------------ ------------
10,646 32,029 13,619 42,248
------------ ------------ ------------ ------------
Income before minority
interest, income from
equity investments, net gain
and extraordinary item 10,660 31,614 9,395 30,723
Minority interest in income (933) (2,771) (624) (1,958)
------------ ------------ ------------ ------------
Income before income from
equity investments, net gain
and extraordinary item 9,727 28,843 8,771 28,765
Income from equity investments 431 1,547 578 1,606
------------ ------------ ------------ ------------
Income before net gain and
extraordinary item 10,158 30,390 9,349 30,371
Net gain on sale (20) 70 608 608
------------ ------------ ------------ ------------
Income before extraordinary item 10,138 30,460 9,957 30,979
Extraordinary loss on extinguishment of debt,
net of minority interest (621)
------------ ------------ ------------ ------------
Net income $ 10,138 $ 29,839 $ 9,957 $ 30,979
============ ============ ============ ============
Basic and diluted earnings per Listed Share:
Earnings before extraordinary
item $ .40 $ 1.23
Extraordinary item $ $ (0.02)
------------ ------------
$ .40 $ 1.21
============ ============
Weighted average Listed Shares
outstanding:
Basic 25,242,808 24,716,281
============ ============
Diluted 25,242,808 24,721,141
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated/combined financial statements.
-3-
<PAGE> 5
CAREY DIVERSIFIED LLC
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
The Company Consolidated The Predecessor Combined
---------------------------- ---------------------------
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1998 1998 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 10,138 $ 29,839 $ 9,957 $ 30,979
Change in unrealized (depreciation)/
appreciation of marketable securities (361) (158) 56 51
Foreign currency translation
adjustment 199 243
-------- -------- -------- --------
Comprehensive income $ 9,976 $ 29,924 $ 10,013 $ 31,030
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated/combined financial statements.
-4-
<PAGE> 6
CAREY DIVERSIFIED LLC
CONDENSED CONSOLIDATED/COMBINED STATEMENTS of CASH
FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------
The Company The Predecessor
Consolidated Combined
September 30, September 30,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 29,839 $ 30,979
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 6,102 7,784
Amortization of deferred income (719)
Extraordinary loss, net of minority interests 621
Net gain on sales (70) (608)
Securities received in lieu of cash (1,619)
Minority interest in income 2,771 215
Straight-line rent adjustments and other noncash
rent adjustments (2,088) (1,704)
Compensation costs paid by issuance of shares 651
Payment of deferred management fees (1,509)
Provision for uncollected rents 439
Writedowns to fair value 3,806
Net change in operating assets and liabilities 15 (1,369)
--------- ---------
Net cash provided by operating activities 36,052 37,484
--------- ---------
Cash flows from investing activities:
Purchases of real estate (66,558)
Additional capital expenditures (3,628) (1,455)
Proceeds from sale of properties 10,066 1,042
Distributions received from equity investments in
excess of equity income 416 137
Purchase of marketable securities (65)
--------- ---------
Net cash used in investing activities (59,769) (276)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of Listed Shares 7,243
Dividends paid (20,391)
Accrued preferred distributions paid to former
general partners (4,422)
Accrued distributions paid to former general partners (596)
Distributions paid to special limited partners (731) (25,610)
Distributions paid to subsidiary partnership unitholders (8,789)
Payments of mortgage principal (5,265) (22,997)
Proceeds from notes payable 111,577
Proceeds from mortgages payable 13,374 12,700
Prepayments of mortgages and notes payable (77,129) (500)
Deferred financing costs (1,475)
Prepayment charges paid on extinguishment of debt (700)
Other (585) (8)
--------- ---------
Net cash provided by (used in) financing activities 12,111 (36,415)
--------- ---------
Net (decrease) increase in cash and
cash equivalents (11,606) 793
Cash and cash equivalents, beginning of period 18,586 28,553
--------- ---------
Cash and cash equivalents, end of period $ 6,980 $ 29,346
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated/combined financial statements.
-5-
<PAGE> 7
CAREY DIVERSIFIED LLC
CONDENSED CONSOLIDATED/COMBINED STATEMENTS of CASH FLOWS
(UNAUDITED) - CONTINUED
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------------------------
The Company The Predecessor
Consolidated Combined
September 30, September 30,
1998 1997
---- ----
<S> <C> <C>
Supplemental disclosure of cash flows information:
Interest paid $ 13,625 $ 11,099
======== ========
</TABLE>
Noncash operating, investing and financing activities:
During the nine-month period ended September 30, 1998, the Company
issued 156,924 restricted Listed Shares valued at $3,206 to certain directors,
officers and affiliates as consideration for 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.
The accompanying notes are an integral part of the condensed
consolidated/combined financial statements.
-6-
<PAGE> 8
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 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.
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.
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 of the former corporate general partners.
Limited Partner interests that did not elect to receive listed shares retained a
direct ownership interest in the applicable Partnership as a subsidiary
partnership unitholder. Pursuant to the consent solicitation for the
Consolidation transaction, the Company had an obligation to redeem all
subsidiary partnership units of each Partnership by no later than a designated
date. On July 15, 1998, the Company redeemed all subsidiary partnership units
with a cash payment of $8,377 made to subsidiary partnership unitholders. The
redemption value was based on an independent valuation of each of the CPA(R)
Partnerships as of May 31, 1998. The subsidiary partnership unitholders' share
of income is included in minority interest in income in the accompanying
condensed consolidated financial statements.
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
The Company declared a quarterly dividend of $.4125 per Listed Share on August
31, 1998 to shareholders of record as of September 30, 1998 that was paid on
October 15, 1998. Such amount is recorded in the accompanying condensed
consolidated financial statements as dividends payable at September 30, 1998.
-7-
<PAGE> 9
CAREY DIVERSIFIED LLC
NOTES to CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
(CONTINUED)
Note 3. Earnings Per Listed Share:
Basic and diluted earnings per Listed Share for the three and nine months ended
September 30,1998 were calculated as follows:
<TABLE>
<CAPTION>
Weighted Per
Income Average Listed
Available to Listed Shares Share
To Members Outstanding Amount
---------- ----------- ------
<S> <C> <C> <C>
Three months ended September 30, 1998:
Basic and diluted earnings per Listed Share $ 10,138 25,242,808 $ .40
=========== =========== ========
Nine months ended September 30, 1998:
Basic earnings per Listed Share before
extraordinary item $ 30,460 24,716,281 $ 1.23
Extraordinary item (621) (.02)
----------- ----------- --------
Basic earnings per Listed Share $ 29,839 24,716,281 $ 1.21
=========== ========
Effect of dilutive securities - options for Listed Shares 4,860
-----------
Diluted earnings per Listed Share before
extraordinary item $ 30,460 24,721,141 $ 1.23
Extraordinary item (621) (.02)
----------- ----------- --------
Diluted earnings per Listed Share $ 29,839 24,721,141 $ 1.21
=========== =========== ========
</TABLE>
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 is 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.
Until the subsidiary partnership unitholders' interests were redeemed in July
1998, a portion of the Company's share of profits and losses applicable to a
Partnership was allocated to subsidiary partnership unitholders. 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.
-8-
<PAGE> 10
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 in accounts payable to affiliates as of September 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. In consideration for
structuring the consolidation, W.P. Carey received, as compensation for
investment banking services, warrants to purchase 2,284,800 Listed Shares at $21
per share and 725,930 shares at $23 per share. The warrants are exercisable
through December 31, 2008.
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 $266 and $797 for the three months and
nine months ended September 30, 1998, respectively. General and administrative
reimbursements were $313 and $1,040 for the three months and nine months ended
September 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 $194 and $563 for the three months and
nine months ended September 30, 1998, respectively. For the nine-month period
ended September 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 to Carey Management. Property
management fees were $297 and $824 for the three and nine months ended September
30, 1997, respectively. General and administrative reimbursements were $408 and
$1,085 for the three months and nine months ended September 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 $373 and $450 for
the nine months ended September 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 nine months ended September 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:
-9-
<PAGE> 11
CAREY DIVERSIFIED LLC
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1998 % 1997 %
---- - ---- -
<S> <C> <C> <C> <C>
Dr Pepper Bottling Company of Texas $ 2,999 5% $ 2,999 5%
Gibson Greetings, Inc. 2,896 5 2,590 4
Detroit Diesel Corporation 2,744 5 2,734 5
Sybron International Corporation 2,483 4 2,483 4
Livho, Inc. 2,151 4
Hughes Markets, Inc. 1,928 3 4,338 7
Quebecor Printing, Inc. 1,898 3 1,965 3
Furon Company 1,812 3 1,812 3
AutoZone, Inc. 1,780 3 1,775 3
Thermadyne Holdings Corporation. 1,676 3 2,042 4
The Gap, Inc. 1,645 3 1,615 3
Orbital Sciences Corporation 1,615 3 1,615 3
Pre Finish Metals Incorporated 1,561 3 1,816 3
AP Parts International, Inc. 1,377 2 1,377 2
NVR, Inc. 1,343 2 1,363 2
Unisource Worldwide, Inc. 1,284 2 1,240 2
Lockheed Martin Corporation 1,210 2 911 2
CSS Industries, Inc. 1,184 2 1,378 2
Peerless Chain Company 1,098 2 1,281 2
Brodart, Co. 1,052 2 982 2
Red Bank Distribution, Inc. 1,050 2 1,050 2
High Voltage Engineering Corporation 881 2 881 1
Duff-Norton Company, Inc. 873 2 766 1
KSG, Inc. 849 1 770 1
United States Postal Service 817 1 628 1
Copeland Beverage Group, Inc. 750 1
Other 16,774 30 18,293 33
------- --- ------- ---
$57,730 100% $58,704 100%
======= === ======= ===
</TABLE>
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
-10-
<PAGE> 12
CAREY DIVERSIFIED LLC
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
(CONTINUED)
income from the investment in the operating partnerships of AGH and Meristar
(for the period subsequent to the merger of AGH) was $1,071 and $1,155 and
distributions received were $1,328 and $1,142 for the nine months ended
September 30, 1998 and September 30, 1997 respectively. The Company's share of
income from the two real estate limited partnerships was $476 and $451 and
distributions received from such investments were $635 and $601 for the nine
months ended September 30, 1998 and September 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 November 9, 1998, the quoted
market value of a share of MeriStar common stock was $18 9/16 per share
resulting in an underlying fair value of the Company's equity investment of
approximately $14,484.
Note 7. Purchase of Real Estate:
On July 1, 1998, the Company purchased land in Rio Rancho, New Mexico for $1,120
upon which a building was to be 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 construction was completed in October 1998 at which time a ten-year
lease with Sprint commenced. 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 $1,154.
The Company will exchange its interest in the Sprint property and lease for
tax-exempt industrial bonds issued by the City of Rio Rancho before December 31,
1998 in an amount approximating the total project costs. In connection with the
conversion of its ownership interest in the property to the tax-exempt bonds,
the Company will receive a 25-year real estate tax abatement. The Company will
receive principal and interest payments from Rio Rancho in an amount that
approximates Sprint's rent. The bonds bear interest of 9% per annum and mature
on July 1, 2023. The Company has the right to cause the bonds to be redeemed, in
full or in part, at any time. The principal and interest payments due under the
bonds are special obligations payable solely from the Sprint rents, and not a
general obligation of the City of Rio Rancho. The Company has an option to
purchase the Sprint property for a nominal amount at the expiration or sooner
termination of the lease and following payment of the bonds.
Note 8. 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, as issuing bank and
administrative agent to a syndicate of banks. The agreement was amended on
October 15, 1998, and an increase of the line of credit to $185,000 with the
number of lenders participating in the syndicating increasing to eight from
three. The other terms of the agreement are substantially unchanged.
As of September 30, 1998, the Company had drawn advances of $108,000 from the
line of credit. Advances have been used to pay off limited recourse mortgage
debt of $48,098 and notes payable of $24,709, to fund construction draws on the
Company's build-to-suit projects and for certain working capital purposes. An
additional advance of $18,000 was drawn from the line of credit on October 15,
1998.
-11-
<PAGE> 13
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 September
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 nine-month periods ended September 30, 1998 and 1997 is not
comparable because (i) the limitations imposed by the Partnership structure are
reflected in the prior year period ended September 30, 1997 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.
-12-
<PAGE> 14
CAREY DIVERSIFIED LLC
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS, Continued
The Company has to date been distributing 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 provided the Company with a line of
credit of $150,000. Since September 30, 1998, the revolving credit agreement was
amended to increase capacity available under the line of credit to $185,000. As
of September 30, 1998, the Company had used $108,000 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. The Company has used
$69,909 from the line of credit and $2,898 of cash reserves to pay off mortgage
loans with an aggregate balance of $48,098 and three notes payable totaling
$24,709. 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
currently to obtain a credit rating from one or more major rating institutions.
For the period ended September 30, 1998, the Company's other
significant financing activities included raising additional equity capital of
$7,243 pursuant to the Company's dividend reinvestment and stock purchase plan,
paying scheduled principal payments of $5,266 on the Company's limited recourse
mortgage debt and paying preferred distributions of $4,422 to the former general
partners of the CPA(R) Partnerships. The payment of the preferred distributions
was a one-time event and was 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. In July 1998, the Company
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 has two
outstanding limited recourse mortgage loans with balloon payments scheduled for
December 1998 and January 1999 for $4,035 and $13,662, respectively. To meet
these obligations, the Company may use its cash reserves or draw upon its line
of credit to pay off the loans, or seek to refinance the loans with new limited
recourse mortgages.
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 nine months ended September 30, 1998, the Company used (i)
$39,354 of cash in connection with three new build-to-suit projects, (ii)
$14,088 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 acquisition and (iv) issued
784,169 Listed Shares in connection with the acquisition of the Houston
properties and the Eagle Hardware property in Bellevue, Washington. In April
1998, the Company registered 4,500,000 Listed Shares that provides the Company
the ability to acquire properties in tax free exchanges for sellers by issuing
Listed Shares for property acquisitions rather than using cash or debt. The
Company is committed to fund up to $4,000 for improvements at the Livonia hotel
property leased to Livho, Inc. in order to meet certain requirements necessary
for the retention of the Holiday Inn license. In April 1998, the Company sold a
property to Simplicity Manufacturing, Inc. for $9,684 pursuant to the exercise
of a purchase option.
One of the Company's build-to-suit project includes four buildings in
Colliersville, Tennessee leased to Federal Express Corporation, another is for
an office building in Tempe, Arizona leased to America West Holdings Corporation
and the third is for an office building in Rio Rancho, New Mexico leased to
Sprint Spectrum L.P. Completion of the construction of the first 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 Sprint Spectrum project was completed in October 1998
with the annual rent following completion of construction of approximately
$1,154. In September 1998, the Company also completed construction of property
in Rouen, France at a cost of approximately $5,900 of which $4,636 was financed
through a limited recourse mortgage loan.
-13-
<PAGE> 15
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 will continue to
consider additional real estate investments internationally where opportunities
for higher yielding investments are available and that have acceptable risk
profiles.
Since December 31, 1997, cash balances have decreased by $11,606. Cash
flow from operations of $36,052 was sufficient to fund quarterly distributions
of $20,391 paid to holders of Listed Shares in April and July 1998 and scheduled
mortgage principal payments of $5,265. The reduction in debt service through the
use of the line of credit to pay off higher interest rate debt and the Company's
acquisitions of the Eagle Hardware retail property, the portfolio of properties
in Houston, Texas and the French properties have had a positive impact on
operating cash flow.
Net income for the three-month and nine-month periods ended September
30, 1998 is not comparable to net income for the three-month and nine-month
periods ended September 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 nine-month periods reflect the results of
a combination of static and liquidating Partnership portfolios.
In addition, the results of the periods ended September 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,
with Advanced System Applications, Inc. ("ASA"), represented 4% 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.
For the comparable nine month periods, lease revenues decreased by
$974. The decrease was primarily a result of the termination of the lease in
June 1997 with ASA at the Bloomingdale property and the termination of the
Hughes Markets lease. Lease revenues from ASA and Hughes for the nine months
ended September 30, 1997 were $2,267 and $4,338, respectively. This was offset,
in part, by $2,151 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 decreased by $1,996, but the sales proceeds are being redeployed for
investments in new properties. Leases on the properties acquired in 1998 with
Eagle Hardware & Garden, Inc., Tellit Assurance, the lessees of the Houston
portfolio of properties and the Pantin, France multi-tenant property will
provide base annual revenues of $4,853 as well as percentage rents from Eagle
Hardware. On April 30, 1998, the Company's two-year extension term with Hughes
Markets 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 before Hughes' two-year
extension 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 significant expenditures were required.
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. As a result, the percentage of
hotel revenues has decreased to 8% of overall revenues.
-14-
<PAGE> 16
CAREY DIVERSIFIED LLC
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS, Continued
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 the refinancing of 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 $185,000 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 $621. 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,
thereby increasing availability under the line of credit.
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.
The so-called "Year 2000 issue" is the name that has been given to the
series of problems that have resulted or may result from computer programs
having been written using two digits rather than four to define a year. For
example, any program that has time-software may recognize a date using "00" as
the year 1900 rather than 2000. This shortcoming could result in the failure of
major systems or miscalculations causing major disruptions to business
operations. The Company has no computer systems of its own, but is dependent
upon the systems maintained by an affiliate of its Advisor and certain other
third parties including its bank and transfer agent.
The Company and its affiliates are actively evaluating their readiness
relating to the Year 2000 issue. In 1998, the Company, its Advisor, and
affiliates commenced an assessment of their local area network of personal
computers and related equipment and are in the process of replacing or upgrading
the equipment that has been identified as not being Year 2000 compliant. The
program is expected to be completed in the first or second quarter of 1999. The
Company and its affiliates have also engaged outside consultants experienced in
detecting and addressing Year 2000 issues, and they will continue to research
and test the affiliate's applications and systems.
At the same time, the Company, its Advisor, and affiliates are
evaluating all of their applications software, all of which are commercial "off
the shelf" programs that have not been customized. During 1998, the Company
commenced a project to select a comprehensive integrated real estate accounting
and asset management software package to replace its existing applications. A
commercial Windows-based integrated accounting and asset management based
application is being tested and is scheduled to be installed during the second
or third quarter of 1999. This software has been designed to use four digits to
define a year. Because the Company's primary operations consist of investing in
and receiving rents on long-term net leases of real estate, while the failure of
the Advisor and its affiliates to correct fully Year 2000 issues could disrupt
its administrative operations, the resulting disruptions would not likely have a
material impact on the Company's results of operations, financial condition or
liquidity. Contingency plans to address potential disruptions are in the process
of being developed. The Company's share of costs associated with required
modifications to become Year 2000 compliant is not expected to be material to
the Company's financial position. The Company's share of the estimated total
cost of the Year 2000 project is expected to be approximately $325.
-15-
<PAGE> 17
CAREY DIVERSIFIED LLC
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS, Continued
Although the Company believes that it will address its internal Year
2000 issues in a timely manner, there is a risk that the inability of
third-party suppliers and lessees to meet Year 2000 readiness issues could have
an adverse impact on the Company. The Company and its affiliates have identified
their critical suppliers and are requiring that these suppliers communicate
their plans and progress in addressing Year 2000 readiness. The most critical
processes provided by third-party suppliers are the Company's bank and transfer
agent. The Company's operations may be significantly affected if such providers
are ineffective or untimely in addressing Year 2000 issues.
The Company contacted each of its lessees regarding Year 2000 readiness
and has emphasized the need to address Year 2000 issues. Generally, lessees are
contractually required to maintain their leased properties in good working order
and to make necessary alterations, foreseen or unforeseen, to meet their
contractual obligations. Because of those obligations, the Company believes that
the risks and costs of upgrading systems related to operations of the buildings
and that contain technology affected by Year 2000 issues will generally be
absorbed by lessees rather than the Company. The major risk to the Company is
that Year 2000 issues have such an adverse effect on the financial condition of
a lessee that its ability to meet its lease obligations, including the timely
payment of rent, is impaired. In such an event, the Company may ultimately incur
the costs for Year 2000 readiness at the affected properties. The potential
materiality of any impact is not known at this time.
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.
-16-
<PAGE> 18
CAREY DIVERSIFIED LLC
PART II
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended September 30, 1998 no matters were
submitted to a vote of Security Holders.
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
During the quarter ended September 30, 1998 the Company was
not required to file any report on Form 8-K.
-17-
<PAGE> 19
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
11/11/98 By: /s/ John J. Park
- ------------------------ -------------------------------------
Date John J. Park
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
11/11/98 By: /s/ Claude Fernandez
- ------------------------ -------------------------------------
Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Accounting Officer)
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
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