<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 March 31, 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
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(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
25,000,287 Listed Shares; no par value outstanding as of May 18, 1998
<PAGE> 2
CAREY DIVERSIFIED LLC
INDEX
Page No.
PART I
Item 1. - Financial Information*
Condensed Consolidated/Combined Balance Sheets,
as of March 31, 1998 and December 31, 1997 2
Condensed Consolidated/Combined Statements of Income for the
three months ended March 31, 1998 and 1997 3
Condensed Consolidated Statement of Members' Equity for the
three months ended March 31, 1998 and 1997 4
Condensed Consolidated/Combined Statements of Cash Flows for the
three months ended March 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statement 6-11
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-15
PART II - Other Information
Item 6. - Exhibits and Reports on Form 8-K 16
Signatures 17
*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
March 31, December 31,
1998 1997
------------ ---------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS:
Real estate leased to others under the
operating method, net of accumulated depreciation of $1,752
and $93,591 at March 31, 1998 and December 31, 1997 $ 329,918 $ 217,165
Net investment in direct financing leases 302,027 216,761
Operating real estate, net of accumulated depreciation of $80
and $14,267 at March 31, 1998 and December 31, 1997 6,804 23,333
Real estate leased to others under construction 8,086
Cash and cash equivalents 13,692 18,586
Assets held for sale 19,544 14,382
Equity investments 30,234 13,415
Other assets, net of accumulated amortization of $18 and
$2,109 reserve for uncollected rent of $1,082 and
$1,103 at March 31, 1998 and December 31, 1997 15,015 19,778
--------- ---------
Total assets $ 725,320 $ 523,420
========= =========
LIABILITIES:
Mortgage notes payable $ 147,626 $ 182,718
Notes payable 55,000 24,709
Note payable to affiliate 200 200
Accrued interest payable 931 1,798
Accounts payable to affiliates 3,376 8,792
Dividend payable 10,015
Other liabilities 7,452 10,565
--------- ---------
Total liabilities 224,600 228,782
--------- ---------
Minority interest (6,278) (6,250)
--------- ---------
Redeemable subsidiary partnership unit minority interest 8,455
---------
Commitments and contingencies
MEMBERS' EQUITY/PARTNERS' CAPITAL:
Partners' Capital 300,888
---------
Listed Shares, no par value;
24,279 shares issued and outstanding 498,684
Distributions in excess of accumulated earnings (301)
Unrealized appreciation, marketable securities 160
---------
498,543
---------
Total liabilities and
members' equity/partners' capital $ 725,320 $ 523,420
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated/combined financial statements.
Note: The 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 amounts)
<TABLE>
<CAPTION>
Three Months Ended
------------------
The Company The Predecessor
Consolidated Combined
March 31, March 31,
1998 1997
------------ ---------------
<S> <C> <C>
Revenues:
Rental income from operating leases $ 10,520 $ 11,671
Interest from direct financing leases 8,921 8,204
Other interest income 236 321
Other income 57 774
Revenue of hotel operations 1,967 3,480
---------- ---------
21,701 24,450
---------- ---------
Expenses:
Interest 4,692 5,149
Depreciation and amortization 1,845 2,735
General and administrative 1,621 1,166
Property expenses 1,259 639
Operating expenses of hotel operations 1,627 2,654
---------- ---------
11,044 12,343
---------- ---------
Income before minority interest,
income from equity investments
and extraordinary item 10,657 12,107
Minority interest in income (931) (787)
---------- ---------
Income before income from equity
investments and extraordinary item 9,726 11,320
Income from equity investments 557 466
---------- ---------
Income before extraordinary item 10,283 11,786
Extraordinary loss on extinguishment of
debt, net of minority interest of $75 (569)
---------- ---------
Net income $ 9,714 $ 11,786
========== =========
Basic and diluted earnings per Listed Share:
Earnings before extraordinary item $ 0.43
Extraordinary item $ (0.03)
$ 0.40
Weighted average Listed Shares outstanding:
Basic 23,994,926
==========
Diluted 24,003,074
==========
</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
MEMBERS' EQUITY/PARTNERS' CAPITAL (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
------------------
The Company The Predecessor
Consolidated Combined
March 31, March 31,
1998 1997
------------ ---------------
<S> <C> <C>
Balance, beginning of period $ 492,341 $ 304,045
Issuance of Listed Shares 6,343
Dividends/distributions declared (10,015) (9,068)
Comprehensive income:
Net income 9,714 11,786
Unrealized appreciation (depreciation),
marketable securities 160 (16)
--------- ---------
Comprehensive income 9,874 11,770
--------- ---------
Balance, end of period $ 498,543 $ 306,747
========= =========
</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>
Three Months Ended
------------------
The Company The Predecessor
Consolidated Combined
March 31, March 31,
1998 1997
------------ ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,714 $ 11,786
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,845 2,735
Amortization of deferred income and gains (240) (87)
Extraordinary loss, net of minority interest 569
Minority interest in income 931 787
Straight-line rent adjustments and other noncash
rent adjustments (907) (511)
Compensation costs paid by issuance of shares 150
Payment of deferred leasing fees (1,509)
Provision for uncollected rents 165
Net change in operating assets and liabilities (1,914) (2,101)
--------- ---------
Net cash provided by operating activities 8,804 12,609
--------- ---------
Cash flows from investing activities:
Capital expenditures (8,155) (1,308)
Distributions received from equity investments in
excess of equity income 61 166
--------- ---------
Net cash used in investing activities (8,094) (1,142)
--------- ---------
Cash flows from financing activities:
Proceeds from sale of Listed Shares 5,410
Payment of accrued preferred distributions to former
general partners (3,676)
Distributions to general partners (596) (581)
Distributions to limited partners (9,068)
Payments of mortgage principal (1,903) (4,381)
Proceeds from note payable 55,000
Prepayments of mortgages and notes payable (57,898)
Deferred financing costs (1,297)
Prepayment charges paid on extinguishment of debt (644)
--------- ---------
Net cash used in financing activities (5,604) (14,030)
--------- ---------
Net decrease in cash and cash equivalents (4,894) (2,563)
Cash and cash equivalents, beginning of period 18,586 28,553
--------- ---------
Cash and cash equivalents, end of period $ 13,692 $ 25,990
========= =========
Supplemental disclosure of cash flows information:
Interest paid (including capitalized interest) $ 5,560 $ 4,884
========= =========
</TABLE>
In connection with a lease, effective during the three-month period ended
March 31, 1998 for the Company's hotel property in Livonia, Michigan, $16,503 of
operating real estate was reclassified to real estate accounted for under the
operating method.
Noncash financing activities:
During the three-month period ended March 31, 1998, the Company issued
restricted Listed Shares of $933 to certain directors, officers and affiliates
in consideration of fees.
The accompanying notes are an integral part of the condensed
consolidated/combined financial statements.
-5-
<PAGE> 7
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
(individually, a "Partnership") and their wholly-owned subsidiaries
(collectively, the "Company"). The majority ownership interests in the
predecessor 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 in 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 Partnerships and the Company 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 are not comparable. 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 Partnerships that did
not elect to receive Listed Shares and have retained a direct interest in a
Partnership as a subsidiary partnership unitholder are classified under minority
interest. The Company is scheduled to redeem all subsidiary partnership units in
July 1998 based on an independent appraisal of the 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. The predecessor entity has been presented 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, the Company declared a dividend of .4125 per Listed Share
for the quarter ended March 31, 1998, payable in April 1998 to shareholders of
record as of March 31, 1998.
On April 8, 1998, the Company declared a dividend of .4125 per Listed Share for
the quarter ended June 30, 1998, payable in July 1998 to shareholders of record
as of June 30, 1998.
Note 3. Earnings Per Listed Share:
Basic and diluted earnings per Listed Share for the three months ended March 31,
1998 were calculated as follows:
-6-
<PAGE> 8
CAREY DIVERSIFIED LLC
NOTES to CONDENSED CONSOLIDATED/ COMBINED FINANCIAL STATEMENTS,
Continued
<TABLE>
<CAPTION>
Weighted Per
Income Average Listed
Available to Listed Shares Share
To Members Outstanding Amount
---------- ----------- ------
<S> <C> <C> <C>
Basic earnings per Listed Shares before
extraordinary items $ 10,283 23,995 $ .43
Basic earnings per Listed Shares - extraordinary items (569) (.03)
-------- ---------- ----------
$ 9,714 23,995 $ .40
======== ========== ==========
Effect of dilutive securities - options for Listed Shares 8
Diluted earnings per Listed Share before
extraordinary items $ 10,283 24,003 $ .43
Diluted earnings per Listed Share - extraordinary items (569) (.03)
-------- ---------- ----------
$ 9,714 24,003 $ .40
======== ========== ==========
</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%, for the applicable Partnership, of the
profits and losses as well as Distributable Cash From Operations, as defined,
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. 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 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 partners
are also entitled to receive an allocation of gains and losses from the sale of
properties. 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.
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 of the nine 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 January and April
1998, was based on achieving a specified cumulative return to limited partners.
For a 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 March 31, 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. The
General Partner believes that it is probable, as defined by Statement of
Financial Accounting Standards No. 5, that the conditions for this Partnership
paying the preferred return will be achieved. The Exchange Values of the Listed
Shares of Carey Diversified was included in calculating the cumulative return
for each of the CPA(R) Partnerships.
Under the Agreements, certain affiliates were entitled to receive property
management or leasing fees and reimbursement of certain expenses incurred in
connection with the Company's operations. General and administrative
reimbursements consist primarily of the actual cost of personnel needed in
providing administrative services necessary to the operation of the Company.
Effective January 1, 1998, the fees and reimbursements are payable to Carey
Management. Property management and leasing fees were $269 and $254 for the
three months ended March 31, 1998 and March 31, 1997, respectively. General and
administrative reimbursements were $352 and $341 for the three months ended
March 31, 1998 and March 31,
-7-
<PAGE> 9
CAREY DIVERSIFIED LLC
NOTES TO CONDENSED CONSOLIDATED/ COMBINED FINANCIAL STATEMENTS
(CONTINUED)
1997, respectively. Management and performance fees are payable, each at an
annual rate of one-half of 1% 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 over a five-year period. For the three-month period ended
March 31, 1998, the Company's management fee was offset in its entirety by
distributions paid to special limited partners and property management and
leasing fees paid by the Partnerships.
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 $133 for
the three months ended March 31, 1997 and 1998, 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 three months ended March 31, 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:
<TABLE>
<CAPTION>
1998 % 1997 %
---- --- ---- ---
<S> <C> <C> <C> <C>
Hughes Markets, Inc. $ 1,446 7% $ 1,446 7%
Dr Pepper Bottling Company of Texas 1,000 5 1,000 5
Gibson Greetings, Inc. 960 5 858 4
Detroit Diesel Corporation 915 5 911 5
Sybron International Corporation 828 4 828 4
Quebecor Printing, Inc. 657 3 651 3
Pre Finish Metals Incorporated 609 3 604 3
Furon Company 604 3 604 3
AutoZone, Inc. 560 3 560 3
Thermadyne Holdings Corporation 559 3 559 3
The Gap, Inc. 545 3 538 3
Orbital Sciences Corporation 538 3 538 3
Livho, Inc. 538 3
Simplicity Manufacturing, Inc. 499 2 499 2
AP Parts International, Inc. 459 2 459 2
NVR, Inc. 447 2 454 2
Lockheed Martin Corporation 401 2 260 1
CSS Industries, Inc./Cleo, Inc. 394 2 456 2
Peerless Chain Company 366 2 427 2
Red Bank Distribution, Inc. 350 2 350 2
Brodart, Co. 336 2 327 2
Unisource Worldwide, Inc. 319 2 412 2
High Voltage Engineering Corporation 294 1 296 2
Duff-Norton Company, Inc. 291 1 256 1
KSG, Inc. 283 1 204 1
United States Postal Service 272 1 181 1
Other 4,971 28 6,197 32
------- ------- ------- -------
$19,441 100% $19,875 100%
======= ======= ======= =======
</TABLE>
-8-
<PAGE> 10
CAREY DIVERSIFIED LLC
NOTES TO CONDENSED CONSOLIDATED/ COMBINED FINANCIAL STATEMENTS
(CONTINUED)
The Company currently owns two hotel properties located in Alpena and Petoskey,
Michigan that it operates as Holiday Inns. As more fully described in Note 9,
effective February 1, 1998, a hotel in Livonia, Michigan that had been directly
operated by the Company as a Holiday Inn was net leased to an affiliate. For the
three-month period ended March 31, 1998, the hotels' operating revenues
represented 9% of total revenues. With the transfer of the hotel operations of
the Livonia hotel to a lessee, hotel operating revenues are expected to decrease
as a percentage of overall revenues.
Note 6. Equity Investments:
The Company owns equity interests in the operating partnership of American
General Hospitality Corporation ("AGH"), a publicly-traded real estate
investment trust, and two real estate limited partnerships. The Company is the
sole limited partner in the two real estate limited partnerships, the general
partner interests which are owned by Corporate Property Associates 10
Incorporated ("CPA(R):10"), an affiliate. The share of income from the
investment in the operating partnership of AGH was $400 and $317 and
distributions received were $394 and $374 for the three months ended March 31,
1998 and March 31, 1997, respectively. The Company's share of income from the
two real estate limited partnerships was $157 and $149 and distributions
received from such investments were $225 and $199 for the three months ended
March 31, 1998 and March 31, 1997, respectively.
The Company has the right to convert its 920,672 limited partnership units in
the operating partnership of AGH on a one-for-one basis to shares of common
stock in AGH at any time. Because such shares are registered, shares of AGH
converted from units would be freely transferable. As of March 31, 1998, the
quoted market value of AGH common stock was $251/16 per share resulting in an
underlying fair value of the Company's equity investment of approximately
$23,074. AGH's audited financial statements for the year ended December 31, 1997
reported total assets of $585,088, shareholders' equity of $443,250, total
revenues of $61,912 and net income of $23,485.
Note 7. Purchases of Real Estate:
A. On February 18, 1998, the Company and an unaffiliated limited liability
company, AWHQ LLC, acquired land in Tempe, Arizona as tenants-in-common
with 80% and 20% interests, respectively. A nine-story 225,000 square foot
office building with an attached parking garage is to be constructed on
the land pursuant to construction agency and net lease agreements with
America West Holdings Corporation ("America West"). Total acquisition and
project costs are estimated to be $37,000. America West has the obligation
for any costs in excess of such amount necessary to complete the project.
During the construction period, America West will pay monthly rent based
on the weighted average amount advanced for project costs. The lease
provides for an initial term of 15 years, commencing May 1, 1999, with two
five-year renewal terms. Annual rent will initially be equal to total
project costs multiplied by 9.2%. Rent increases are scheduled May 2003
and every five-years thereafter, on a formula indexed to increases in the
Consumer Price Index ("CPI"), with each increase capped at 11.77%.
The lease provides America West with options to purchase its leased
property at the end of the tenth lease year of the initial term and the
end of the initial term at an option price equal to the greater of fair
value as affected and encumbered by the lease or the Company's and AWHQ
LLC's project costs for the property.
B. On March 17, 1998, the Company acquired approximately 46 acres of land in
Collierville, Tennessee upon which four office buildings totaling up to
400,000 square feet are being constructed. At the end of the construction
period, the buildings will be occupied by Federal Express Corporation
("Federal Express") pursuant to a master net lease.
-9-
<PAGE> 11
CAREY DIVERSIFIED LLC
NOTES TO CONDENSED CONSOLIDATED/ COMBINED FINANCIAL STATEMENTS
(CONTINUED)
In connection with the acquisition of the land, the Group entered into a
lease agreement with FEEC II, L.P. ("FEEC") which in turn is the sublessor
to Federal Express. The lease between the Company and FEEC provides for a
development period term ending on the earlier of the completion of the
project or November 30, 1999 followed by a twenty-year initial term.
The FEEC lease grants the Company an exclusive option to acquire FEEC's
leasehold estate in the Federal Express net lease, as lessor, with such
option exercisable at any time after the end of the development period.
The option price will be based on a formula indexed to Federal Express'
annual rent under its lease with FEEC less all amounts previously advanced
by the Company to FEEC for project costs. The Company expects that the
total cost will not exceed $77,000. The Company intends to exercise its
option at the earliest practicable date, and at such time will assume the
Federal Express lease.
Federal Express' initial annual rent will be based on the actual costs
necessary to complete the build-to-suit project with such rent capped at
$6,628. Rent increases are scheduled annually and are indexed to increases
in the CPI with annual increases limited to 1.7%. The Federal Express
lease provides for an initial term of 20 years with two ten-year renewal
terms at the option of the lessee.
Note 8. Line of Credit Agreement and Extraordinary Charge on Extinguishment of
Debt:
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.
Advances from the line of credit must be for at least $3,000 and in multiples of
$500 for any single advance. Advances made will 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 corporate 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 will pay a fee (a) 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 or (b) equal to .15% of the total commitment amount, if the Company
has obtained 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.
On March 26, 1998, the Company used $55,000 from the line of credit and $2,898
of cash to pay off existing debt of $57,898. Four mortgage loans aggregating
$33,189, with annual interest rates ranging from 9.1% to 11.85%, collateralized
by properties leased to Motorola, Inc., Livho, Inc., Orbital Sciences
Corporation ("Orbital") and Dr Pepper Bottling Company of Texas ("Dr Pepper")
were paid off. Additionally, three notes payable, with an annual interest rate
of LIBOR plus 4.5%, totaling $24,709 were paid off. In connection with the
satisfaction of the Dr Pepper and Orbital loans, the Company incurred $644 in
prepayment charges, resulting in an extraordinary loss on the extinguishment of
debt of $569, net of $75 attributable to minority interests.
-10-
<PAGE> 12
CAREY DIVERSIFIED LLC
NOTES TO CONDENSED CONSOLIDATED/ COMBINED FINANCIAL STATEMENTS
(CONTINUED)
Note 9. Hotel Property in Livonia, Michigan:
In January 1998, the Company finalized an agreement to lease the Livonia
property to Livho, Inc. ("Livho"), effective February 1, 1998. In connection
with the agreement, the Company transferred all of the licenses and franchise
agreements of the hotel operation to Livho. The lease has an initial term of 10
years with four five-year renewal options, and initially provides for annual
rent of $2,348 increasing to $2,923 in 1999 with stated increases every year
thereafter. The lease includes net lease provisions requiring Livho to pay the
costs of insurance, real estate taxes and repairs and maintenance. The Company
will retain the obligation to fund capital improvements. The security holder of
the common stock of Livho is an affiliate. If the Company continued to operate
the hotel directly, there would have been adverse tax consequences for those
holders of Listed Shares who had exchanged their limited partnership units for
interests in Carey Diversified.
Note 10. Subsequent Events:
A. 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. Solely as a result of the sale, annual cash
flow (rent less mortgage debt service on the property) will decrease by
$934.
B. On April 23, 1998, the Company acquired Keystone Capital Company
("Keystone"), a company whose business consists solely of owning and net
leasing land and a retail store in Bellevue, Washington leased to Eagle
Hardware and Garden, Inc. ("Eagle"), as lessee, in exchange for 721,695
Listed Shares. Based on the quoted value of the Company's shares, the
acquisition cost of acquiring Keystone was $15,065.
The Keystone lease to 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 the Bellevue store's
gross sales in excess of a stated amount.
The Company is obligated to issue additional Listed Shares to the former
Keystone shareholders, if the lessee's gross sales during any four
quarters exceeds certain thresholds at any time during the ten-year period
ending 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.
C. On April 17, 1998, the Company filed 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.
-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 March 31,
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 public stock or debt offerings or by exchanging shares in the Company
for properties. Accordingly, the comparison of historical results of operations
for the three-month periods ended March 31, 1998 and 1997 is not comparable
because the prior year period ended March 31, 1997 reflects the limitations
imposed by the Partnership structure.
Limited Partners in the CPA(R) Partnerships that elected to receive Listed
Shares in the Company in exchange for Limited Partnership Units were issued
23,233,000 Listed Shares on the effective date of the Consolidation, January 1,
1998. The allocation of Listed Shares was based on Total Exchange Value as
determined pursuant to an independent valuation. The listing of the Listed
Shares on the New York Stock Exchange provides the holders of the Listed Shares
with liquidity.
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 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 initially expects to use the funds available
under the line to fund acquisitions and build-to-suit projects and to pay off
higher interest and/or maturing debt. On March 26, 1998, using $55,000 from 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. As a result of paying off the loans, annual interest expense is
expected to decrease by approximately $2,300. The use of unsecured financing
will require the Company to meet financial covenant requirements. Such
requirements generally 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 March 31, 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 $1,903 on the Company's limited recourse
mortgage debt, and paying an accrued preferred distribution of $3,676 to the
former general partners of the CPA(R) Partnerships. Such preferred distribution
was a one-time event and based upon cumulative proceeds from the sale of the
assets of each Partnership (see Note 4 to the financial statements). The Company
has a remaining preferred distribution obligation of $2,169, a portion of which
is not payable until the Company achieves a specified closing price for its
Listed Shares for five consecutive days.
The Company's investing activities consisted primarily of using $8,086 for
the purchase and commencement of construction on two build-to-suit projects, for
four buildings in Colliersville, Tennessee leased to Federal Express Corporation
and 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 are incurred, will be approximately $9,350.
Remaining costs of completion, as of March 31, 1998 are approximately $106,000.
In addition, the Company expects to use $4,000 for improvements at the Livonia
hotel property in order to meet certain requirements from Holiday Inn in order
for the hotel to retain its franchise. On April 17, 1998, the Company filed a
registration of 4,500,000 Listed Shares that will permit the Company to acquire
properties in tax free exchanges for the sellers by issuing Listed Shares for
property acquisitions rather than using cash or debt. Since the filing of the
registration, the Company has issued 721,695 Listed Shares for the purchase of
property.
Since December 31, 1997, cash balances decreased by $4,895 primarily as a
result of using funds to prepay debt and for capital expenditures. This decrease
was partially offset by the proceeds from the issuance of Listed Shares. Cash
flow from operations of $8,803 reflected the one-time payoff of $1,509 of
accrued leasing fees, which had been voluntarily deferred by the general
partners of a CPA(R) Partnership prior to the Consolidation. The cash flow from
operations and available cash was sufficient to fund a quarterly distribution of
$10,015 paid to holders of Listed Shares in April 1998. As a result of the
anticipated reduction in debt service through the use of the line of credit to
pay off higher interest rate debt and the acquisition of the Eagle Hardware
retail property in Bellevue, Washington, Management believes that operating cash
flow will increase.
Net income for the three-month period ended March 31, 1998 is not
comparable to net income for the three-month period ended March 31, 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
period reflects the results of a combination of static and liquidating
Partnership portfolios. Effective January 1, 1998, the Company restated its
assets and liabilities in accordance with purchase accounting while the prior
year is presented using the historical cost basis of the predecessor
Partnerships.
-13-
<PAGE> 15
CAREY DIVERSIFIED LLC
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS, Continued
In addition, the results of the period ended March 31, 1997 reflect
several nonrecurring items. During that period, the Company recognized other
income of $768 in connection with a bankruptcy claim and revenues of $700 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.
Lease revenues decreased by $433, primarily as a result of the termination
of the lease in June 1997 with Advanced System Applications, Inc. at the
Bloomingdale property. This was offset, in part, by $538 of lease revenues in
1998 from the Livonia property, which has been net leased to an affiliate since
February 1, 1998. The revenues from the Livonia property are expected to
approximate the operating income that the Company earned when it operated the
Livonia property itself. As a result of the sale of the Simplicity
Manufacturing, Inc. property in April 1998, annual lease revenues will decrease
by $1,996 but are expected to increase following redeployment of the proceeds.
The Eagle Hardware & Garden, Inc. lease, acquired in April 1998, will provide
annual revenues of $1,058. The Eagle Hardware lease also provides for annual
rent increases based on increases in the Consumer Price Index as well as the
potential for percentage rents at this retail property. Percentage rents are
payable when annual gross sales exceed $25,000. 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
are required.
The decrease in hotel revenues and related operating expenses resulted
from the change in status of the Livonia property from a Company operated
property to a leased property. For the year ended December 31, 1997, the Livonia
hotel represented 62% of the Company's hotel operating revenues and 72% of hotel
earnings. Because the three-months ended March 31, 1998 include a month of
operations of the Livonia property for the period prior to the commencement of
the Livonia lease, hotel earnings are expected to decrease further in future
periods.
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 obtained a $150,000 line of credit from a
syndicate of banks to refinance high interest debt and fund acquisitions on a
transitional basis. To date, the Company has used $55,000 of the facility to pay
off high interest debt. In connection with paying off two
-14-
<PAGE> 16
CAREY DIVERSIFIED LLC
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS, Continued
mortgage loans, the Company incurred an extraordinary charge on the
extinguishment of debt of $569. As a result of paying off this debt and
replacing it with a draw on the line of credit, annual interest expense is
expected to decrease by $2,300. Management believes that the use of limited
recourse mortgage debt will remain an integral part of the Company's financing
strategy.
The increase in general and administrative expense is 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.
-15-
<PAGE> 17
CAREY DIVERSIFIED LLC
PART II
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
During the quarter ended March 31, 1998 the Company was not
required to file any reports on Form 8-K.
-16-
<PAGE> 18
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
05/18/98 By: /s/ John J. Park
-------- ------------------------------------
Date John J. Park
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
05/18/98 By: /s/ Claude Fernandez
-------- ------------------------------------
Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Accounting Officer)
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
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<SECURITIES> 0
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