<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, 1997
-------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
---------------------- -----------------------
Commission file number 001-13779
---------------------------------------------
CAREY DIVERSIFIED LLC
(Exact name of registrant as specified in its charter)
DELAWARE 13-3912578
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK 10020
(Address of principal executive offices) (Zip Code)
(212) 492-1100
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
X Yes No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
--- ---
<PAGE> 2
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I
ITEM 1. - FINANCIAL INFORMATION*
Combined Balance Sheets of Carey Diversified LLC and
Corporate Property Associates Partnerships, December 31, 1996
and September 30, 1997 2
Combined Statements of Income of Carey Diversified LLC and
Corporate Property Associates Partnerships for the three and nine
months ended September 30, 1996 and 1997 3
Combined Statements of Cash Flows of Carey Diversified LLC and
Corporate Property Associates Partnerships for the
nine months ended September 30, 1996 and 1997 4
Notes to Combined Financial Statements of Carey Diversified LLC and
Corporate Property Associates Partnerships 5-9
ITEM 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS 10-12
PART II
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K 13
Signatures 14
</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 and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
PART I
Item 1. - FINANCIAL INFORMATION
COMBINED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
------------ -------------
(Note) (Unaudited)
<S> <C> <C>
ASSETS:
Land, buildings and personal property,
net of accumulated depreciation of
$91,923 at December 31, 1996 and
$91,507 at September 30, 1997 $ 247,580 $ 218,923
Net investment in direct financing leases 215,310 216,577
Operating real estate, net of accumulated
depreciation of $13,347 at December 31, 1996
and $14,282 at September 30, 1997 24,080 23,503
Cash and cash equivalents 28,553 29,346
Real estate held for sale 434 18,471
Equity investments 13,660 13,467
Other assets, net of accumulated amortization
of $2,023 at December 31, 1996 and
$1,975 at September 30, 1997 15,111 19,718
--------- ---------
Total assets $ 544,728 $ 540,005
========= =========
LIABILITIES:
Mortgage notes payable $ 202,339 $ 192,042
Notes payable 24,709 24,709
Note payable to affiliate 500
Accounts payable to affiliates 2,543 7,815
Other liabilities 11,342 11,654
--------- ---------
Total liabilities 241,433 236,220
--------- ---------
Minority interest (750) (5,680)
--------- ---------
Commitments and contingencies
PARTNERS' CAPITAL:
Partners' capital 304,045 309,465
--------- ---------
Total liabilities and
partners' capital $ 544,728 $ 540,005
========= =========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
Note: The balance sheet at December 31, 1996 has been derived from the
audited combined financial statements at that date.
-2-
<PAGE> 4
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
COMBINED STATEMENTS OF INCOME (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1997 September 30, 1996 September 30, 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues:
Rental income from
operating leases $ 14,459 $ 12,050 $ 36,008 $ 35,725
Interest from direct
financing leases 5,293 6,701 21,549 22,979
Other interest income 415 343 1,407 911
Other income 887 588 1,177 4,019
Revenue of hotel operations 6,048 3,910 18,407 10,943
-------- -------- -------- --------
27,102 23,592 78,548 74,577
-------- -------- -------- --------
Expenses:
Interest 5,498 4,919 17,689 15,005
Depreciation and amortization 2,715 2,583 8,503 8,045
General and administrative 932 973 2,938 3,584
Property expenses 876 2,290 2,594 3,822
Writedown to net realizable value 140 1,300 3,806
Operating expenses of
hotel operations 4,147 2,714 13,026 7,986
-------- -------- -------- --------
14,168 13,619 46,050 42,248
-------- -------- -------- --------
Income before gain,
minority interest and
extraordinary item 12,934 9,973 32,498 32,329
Gain on sales of real estate 67 608 4,711 608
-------- -------- -------- --------
Income before minority interest
and extraordinary item 13,001 10,581 37,209 32,937
Minority interest in income (848) (624) (2,511) (1,958)
-------- -------- -------- --------
Income before extraordinary
item 12,153 9,957 34,698 30,979
Extraordinary loss on extin-
guishment of debt, net of minority
interest of $3 (252)
-------- -------- -------- --------
Net income $ 12,153 $ 9,957 $ 34,446 $ 30,979
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
-3-
<PAGE> 5
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
COMBINED STATEMENTS of CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
1996 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 34,446 $ 30,979
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization of financing costs,
net of deferred gains and deferred rental income 8,222 7,784
Extraordinary loss 252
Net gain on sales (4,711) (608)
Securities received in lieu of cash (1,619)
Minority interest in income in excess of distributions paid 761 215
Income recognized on operating and direct financing
leases in excess of scheduled rents (855) (1,704)
Writedown to net realizable value 1,300 3,806
Net change in operating assets and liabilities (999) (1,232)
-------- --------
Net cash provided by operating activities 38,416 37,621
-------- --------
Cash flows from investing activities:
Capital expenditures (2,816) (1,455)
Proceeds from sales of real estate 18,824 1,042
Other (429)
-------- --------
Net cash by provided by (used in) investing activities 15,579 (413)
-------- --------
Cash flows from financing activities:
Distributions to partners (25,910) (25,610)
Payments of mortgage principal (44,701) (22,997)
Proceeds from mortgages 26,900 12,700
Proceeds from notes payable to affiliate 1,000
Payments of notes payable to affiliate (3,050) (500)
Deferred financing (601)
Other (277) (8)
-------- --------
Net cash used in financing activities (46,639) (36,415)
-------- --------
Net increase in cash and cash equivalents 7,356 793
Cash and cash equivalents, beginning of period 27,711 28,553
-------- --------
Cash and cash equivalents, end of period $ 35,067 $ 29,346
======== ========
</TABLE>
Supplemental schedule of noncash investing and financing activities:
In July 1996, the Group exchanged its interest in a hotel property and related
assets and liabilities for units in the operating partnership of American
General Hospitality Corporation, a publicly-traded real estate investment trust.
The assets and liabilities transferred were as follows:
<TABLE>
<S> <C>
Operating real estate, net of accumulated
depreciation $16,098
Mortgage note payable (7,304)
Other assets and liabilities transferred, net 69
-------
Equity investment $ 8,863
=======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
-4-
<PAGE> 6
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except per share amounts)
Note 1. Basis of Presentation:
The accompanying unaudited combined financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. For further information, refer to the combined financial statements
and footnotes of Corporate Property Associates Partnerships included in Carey
Diversified LLC's ("Carey Diversified's") Registration Statement on Form S-4
dated October 15, 1997.
Note 2. Organization and Basis of Combination:
The combined financial statements consist of interests in nine Corporate
Property Associates real estate limited partnerships (individually, the
"Partnership" or "Partnerships"), their wholly-owned subsidiaries and Carey
Diversified (collectively, the "Group") which have been presented on a combined
basis at historical cost because of the affiliated general partners, common
management and common control and because the entities are the subject of a
consolidation with Carey Diversified, effective January 1, 1998 (see Note 7).
All material inter-entity transactions have been eliminated. The General
Partners' interest in the Group is classified under minority interest as such
interest will be maintained subsequent to the consolidation.
The Group is engaged in the net leasing of industrial and commercial real
estate. In accordance with the Amended Agreements of Limited Partnership of each
Partnership (the "Agreements"), the Subsidiaries will terminate between 2004 and
2050. The primary entities referred to above are as follows:
Corporate Property Associates
Corporate Property Associates 2
Corporate Property Associates 3
Corporate Property Associates 4, a California limited partnership
Corporate Property Associates 5
Corporate Property Associates 6 - a California limited partnership
Corporate Property Associates 7 - a California limited partnership
Corporate Property Associates 8, L.P., a Delaware limited partnership
Corporate Property Associates 9, L.P., a Delaware limited partnership
Note 3. Transactions with Related Parties:
The Agreements of each of the Group's Partnerships provide that the General
Partners (consisting of W. P. Carey & Co., Inc. ("W.P. Carey") or affiliated
companies as Corporate General Partners and William P. Carey as Individual
General Partner) are 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 are allocated between 90% and
99%, for the applicable Partnership, of the profits and losses as well as
Distributable Cash
-5-
<PAGE> 7
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES to COMBINED FINANCIAL STATEMENTS, Continued
From Operations. The partners are also entitled to receive an allocation of
gains and losses from the sale of properties. The General Partners may be
entitled to receive a subordinated preferred return, measured based upon the
cumulative proceeds arising from the sale of the Group's assets. Pursuant to the
provisions of the Agreements, the preferred return may be paid only after the
limited partners of a Partnership receive 100% of their initial investment from
the proceeds of asset sales and a cumulative annual return ranging from 6% to 9%
since the inception of the affected Partnership. The General Partners interest
in such preferred return amounts to $5,145 based upon the cumulative proceeds
from the sale of assets since the inception of the Partnerships through
September 30, 1997. As a result of the approval of the consent solicitation by
each of the CPA(R) Partnerships (see Note 7), the Group's ability to satisfy the
subordination provisions of the Agreement is probable, as defined pursuant to
Statement of Financial Accounting Standards No. 5, and the preferred return has
been accrued in the accompanying combined financial statements and included in
accounts payable to affiliates as of September 30, 1997.
Under the Agreements, certain affiliates are entitled to receive property
management or leasing fees and reimbursement of certain expenses incurred in
connection with the Group'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 Group.
Property management and leasing fees were $705 and $825 for the nine months
ended September 30, 1996 and 1997, respectively. General and administrative
reimbursements were $618 and $1,085 for the nine months ended September 30, 1996
and 1997, respectively.
The Group 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 Group, other affiliated real estate entities and W.P. Carey and for
sharing the associated costs. Pursuant to the terms of the agreement, the
Group's share of rental, occupancy and leasehold improvement costs is based on
adjusted gross revenues, as defined. Net expenses incurred were $579 and $450
for the nine months ended September 30, 1996 and 1997, respectively.
Note 4. Industry Segment Information:
The Group's operations consist of the investment in and the leasing of
industrial and commercial real estate and owning and operating hotels.
-6-
<PAGE> 8
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
For the nine months ended September 30, 1996 and 1997, the Group earned its 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>
1996 % 1997 %
---- ---- ---- --
<S> <C> <C> <C> <C>
Hughes Markets, Inc. $ 3,017 5% $ 4,338 7%
Dr Pepper Bottling Company
of Texas 2,999 5 2,999 5
Detroit Diesel Corporation 2,734 5 2,734 5
Gibson Greetings, Inc. 2,535 4 2,590 4
Sybron Acquisition Company 2,483 4 2,483 4
Advanced System
Applications, Inc. 3,453 6 2,267 4
Stoody Deloro Stellite, Inc. 1,976 3 2,042 4
Amerisig, Inc. 1,902 3 1,965 3
Pre Finish Metals Incorporated 1,798 3 1,816 3
Furon Company 1,925 3 1,812 3
AutoZone, Inc. 1,721 3 1,775 3
Orbital Sciences Corporation 1,615 3 1,615 3
The Gap, Inc. 1,615 3 1,615 3
Simplicity Manufacturing, Inc. 1,498 3 1,498 3
Cleo, Inc. 1,331 3 1,378 2
AP Parts Manufacturing, Inc. 1,293 2 1,377 2
NVRyan, L.P. 1,415 2 1,363 2
Peerless Chain Company 1,184 2 1,281 2
Unisource Worldwide, Inc. 1,235 2 1,240 2
Red Bank Distribution, Inc. 1,050 2 1,050 2
Brodart, Co. 986 2 982 2
Gould, Inc. 911 2 911 2
High Voltage Engineering
Corporation 887 2 881 2
Spreckels Industries, Inc. 766 1 766 1
Other 15,228 27 15,926 27
------- ------- ------- ---
$57,557 100% $58,704 100%
======= ======= ======= ===
</TABLE>
Results for the Group's hotel operations for the nine-month periods ended
September 30, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Revenues $ 18,407 $ 10,943
Fees paid to hotel management company (497) (296)
Other operating expenses (12,529) (7,690)
-------- --------
Hotel operating income $ 5,381 $ 2,957
======== ========
</TABLE>
-7-
<PAGE> 9
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Note 5. Equity Investments:
An interest in the operating partnership of American General Hospitality
Corporation ("AGH"), a publicly-traded real estate investment trust, which
interest was acquired in July 1996, is accounted for under the equity method.
The share of income from this investment was $274 for the period from
acquisition through September 30, 1996 and $1,155 for the nine months ended
September 30, 1997. The Group did not receive any distributions from this
investment prior to September 30, 1996. Distributions received were $1,142 for
the nine months ended September 30, 1997.
The Group has the right to convert its 920,672 limited partnership units in the
operating partnership on a one-for-one basis to shares of common stock in AGH at
any time. On September 22, 1997, AGH filed a registration statement with the
United States Securities Commission which would allow shares of AGH converted
from units to be freely transferred. As of September 30, 1997, the quoted market
value of AGH common stock was $27 15/16 per share resulting in an underlying
fair value of the Group's equity investment of approximately $25,721.
AGH's unaudited financial statements in its Quarterly Report on Form 10-Q for
the nine months ended September 30, 1997 reported total assets of $562,013,
shareholders' equity of $284,629, total revenues of $143,439 and net income of
$17,212.
The Group's income from equity investments in two real estate limited
partnerships was $436 and $451 for the nine months ended September 30, 1996 and
1997, respectively. Distributions received from such investments were $594 and
$601 for the nine months ended September 30, 1996 and 1997, respectively. The
Group is the sole limited partner in the two partnerships with the general
partner interests owned by Corporate Property Associates 10 Incorporated
("CPA(R):10"), an affiliate.
Equity income has been included in other income in the accompanying combined
financial statements.
Note 6. Other Income:
In August 1995, the Group reached a settlement with The Leslie Fay Company
("Leslie Fay") in connection with releasing Leslie Fay from its lease
obligations including the consummation of a purchase option which Leslie Fay had
exercised. Under the settlement agreement, the Group's bankruptcy claim against
Leslie Fay, as an unsecured creditor, was limited to $2,650. In June 1997, the
Group received securities with a market value of $1,619 as a distribution on its
claim. The June 1997 distribution represents 79% of the total settlement amount;
there is no assurance; however, that the remaining amount of the claim will be
distributed.
In connection with a bankruptcy claim against the former lessee of two hotel
properties, the Group received a bankruptcy distribution of $777 in 1997.
Note 7. Consent Solicitation:
On October 15, 1997, Carey Diversified filed a Consent Solicitation
Statement/Prospectus ("consent solicitation") with the United States Securities
and Exchange Commission. The General Partners proposed that the Limited Partners
of the Group approve a transaction in which each CPA(R) limited partnership
would be merged with a subsidiary partnership of Carey Diversified, of which
Carey Diversified is the general partner. Each limited partner had the option of
either exchanging his or her limited partnership units for an interest in Carey
Diversified ("Listed Shares") or to retain a limited partnership interest in the
subsidiary partnership ("Subsidiary Partnership Units"). As the holders of a
majority of the outstanding limited partnership units of
-8-
<PAGE> 10
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
each CPA(R) Partnership consented to the transaction, the merger of the
Partnership with the corresponding subsidiary partnership of Carey Diversified
was consummated on January 1, 1998. Upon consummation of the transaction, the
General Partners exchanged a portion of their general partnership interests in
exchange for Listed Shares.
The Listed Shares will be listed and commence trading on the New York Stock
Exchange on January 21, 1998. Subsidiary Partnership Units will provide
substantially the same economic interest and legal rights as those of a limited
partnership unit in the Partnership, but will not be listed on a securities
exchange. Conversion of limited partnership units to Listed Shares or Subsidiary
Partnership Units will not generally result in a taxable event to the limited
partners.
-9-
<PAGE> 11
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS
(all amounts in thousands)
Overview
Carey Diversified LLC ("Carey Diversified") and the CPA(R) Partnerships
(collectively, the "Group") are in the business of investing in commercial and
industrial real estate. Most of the existing properties owned by the Group are
net leased to corporations throughout the United States. A net lease is
typically structured so that the lessee is responsible during the initial term
of the lease for all operating expenses of the leased properties including
property taxes, insurance and maintenance and repairs. Each investment was made
pursuant to an extensive evaluation of the lessee's credit, management, position
within its industry, operating history and profitability. The Group's real
estate portfolio is diversified by type of property, geographic location and
industry. Net lease investments are structured to provide stable cash flow by
entering into long-term net leases that require lessees to pay all operating
expenses of the properties. Leases may also include operational and financial
covenants that lessees must satisfy in order to protect the CPA(R) Partnerships'
investments.
As described in Note 7 to the Combined Financial Statements, the Group
completed a transaction on January 1, 1998 which resulted in Carey Diversified
owning a majority interest in the CPA(R) Partnerships, as general partner.
During January 1998, Carey Diversified will be listed and traded on the New York
Stock Exchange.
The CPA(R) Partnerships financed property acquisitions with limited
recourse mortgage debt where the cost of such financing has been favorable. The
real estate portfolio consists of the properties acquired with the proceeds of
the initial offerings of the CPA(R) Partnerships. Pursuant to their Partnership
Agreements, the CPA(R) Partnerships were not able to reinvest the proceeds from
the sale of properties in new investments. Subsequent to the consummation of the
consolidation with Carey Diversified, the Group will have the ability to
reinvest proceeds from sales and will have greater operating flexibility to
achieve its growth objectives. Depending on prevailing market conditions, the
portfolio's leverage may be restructured to reduce financing costs and increase
cash flow. A substantial portion of the financing used by the CPA(R)
Partnerships has been in the form of amortizing limited recourse mortgage debt.
As a publicly traded entity, Carey Diversified is expected to have other
financing options available for its capital needs. Proceeds from property
dispositions may be reinvested to increase the portfolio's rate of return. In
addition, Carey Diversified will have the option of raising new equity capital
in order to expand the portfolio and increase revenues.
Results of Operations
Net income decreased by $2,196 and $3,467 for the three-month and
nine-month periods ended September 30, 1997 as compared with the similar periods
ended September 30, 1996.
Income before noncash writedowns, net gains and extraordinary items
reflected for the comparable nine-month periods an increase of $2,890 due to an
increase in lease revenues and other income and reductions in interest expense
and depreciation and amortization. Lease revenues increased by $1,147 primarily
as the result of a lease modification and the commencement of new leases. The
1996 lease extension agreement with Hughes Markets and new leases provided
$1,321 and $924, respectively, of additional revenues for the nine-month period.
Of such increase, $1,186 was offset by the expiration of a lease on June 30,
1997. The lease with Hughes Markets is scheduled to expire in April 1998. The
Company has entered into a net lease agreement with Copeland Beverage Group,
Inc. for the property currently occupied by Hughes Markets. Copeland's right of
possession of the property and the date which it will be required to commence
paying annual rent of $1,800 shall be the date, on or after April 30, 1998, that
Hughes Markets vacates the property. Scheduled rent increases contributed
additional revenues of $530 and were partially offset by a reduction in rents
due to property sales in 1996 and 1997. Other income increased by $2,842
primarily due to distributions of proceeds received in connection with
bankruptcy claims against two former tenants.
-10-
<PAGE> 12
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS, Continued
Results of Operations (continued)
The trend of decreasing expenses for interest and depreciation has
continued as a result of the retirement of debt and property sales,
respectively. Of the $2,684 decrease in interest expense, $674 was due to
satisfaction of mortgage loans in connection with the sales of properties,
$1,090 from the prepayment of debt on properties which remain under lease, with
the remaining reductions due to the continuing amortization of existing mortgage
debt and the benefits of refinancing mortgage loans at lower rates of interest.
Depreciation and amortization expense decreased by $458 primarily due to the
sale of properties. General and administrative expenses increased due to higher
accruals for state and local taxes and an increase in administrative costs
related to the consolidation. Property expenses increased by $1,228 due to an
increase in charges for uncollected rents and receivables, a litigation
settlement of $237 and increased legal costs related to a bankruptcy claim being
pursued against a former tenant.
Operating income for the hotel properties decreased by $2,424 for the nine
months ended September 30, 1997 as compared to the similar period in 1996 due to
the sale of the Group's hotel property in Rapid City, South Dakota and the
exchange of another hotel property in Kenner, Louisiana in 1996 for limited
partnership units in the operating partnership of American General Hospitality
Corporation, a newly-formed, publicly-traded real estate investment trust.
Excluding the operations from the two hotels disposed of in 1996, operating
income from the three remaining properties, Holiday Inn hotels in Alpena,
Petoskey and Livonia, Michigan, increased by $369 or 14%. Revenues from the
three hotels increased by 4% while expenses were stable. The growth in revenues
is due to a strategy of increasing room rates while occupancy rates generally
remained constant. For the nine-month period, the average room rate increased by
10% in Livonia, 6% in Alpena and 3% in Petoskey.
Income before noncash writedowns to net realizable value, net gains and
extraordinary items for the comparable three-month periods decreased by $2,897
primarily due to a decrease in lease revenues of $1,001, an increase in property
expenses and a decrease in hotel earnings, as described below. The decrease in
lease revenues was primarily due to the expiration of a lease in June 1997 which
was modified in June 1994 to allow the termination in 1997 rather than 2003 in
consideration for an increase in annual rents of $3,383.
Liquidity and Capital Resources
There was no material change in the Group's financial condition since
December 31, 1996. Cash balances increased by $793 to $29,346. For the
nine-month period ended September 30, 1997, cash flow from operations of $37,621
was sufficient to pay distributions of $25,610, scheduled principal payment
installments of $6,262 on the Group's mortgage debt and fund capital
improvements of $1,455. In addition, the Group paid off mortgage loan balances
of $16,735 of which $12,700 was funded by refinancing a limited recourse loan at
a lower rate of interest.
-11-
<PAGE> 13
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
Item 2. - MANAGEMENT'S DISCUSSION OF OPERATIONS, Continued
Liquidity and Capital Resources (continued)
The capital expenditures were comprised of $1,076 used to meet an
obligation to improve a property in Reno, Nevada in connection with the
commencement of a lease, in December 1996, and to replace furniture, fixtures
and equipment at the hotel properties. As of September 30, 1997, the Group had
no significant commitments to fund improvements at leased properties. The Group
is considering funding improvements for several lessees. Such improvements would
be committed to in exchange for either increased rents, extensions of existing
lease terms or both. The Group is committed to funding improvements over the
next several years for the hotel properties in order to meet the requirements of
the Holiday Inn Product Improvement Plan.
The Group expects to meet certain long-term liquidity requirements, such
as capital improvements, scheduled debt maturities and new property acquisitions
by obtaining long-term secured and unsecured financing, the issuance of equity
securities and operating cash flow. Upon consummation of the consolidation, the
Group will have a real estate portfolio with an appraised value of approximately
$682,000, limited recourse mortgage debt of approximately $190,000 and recourse
debt of $24,709. Management believes that a refinancing of debt will provide an
opportunity to enhance cash flow and future growth. Historically a significant
amount of cash flow has been used to funds scheduled amortization of mortgage
principal. Scheduled mortgage principal amortization paid in 1996 and for the
nine-month period ended September 30, 1997 was $8,844 and $6,088, respectively.
The Group may use non-amortizing debt in the future to reduce debt service
levels and provide additional cash flow for funding capital improvements or the
acquisition of new properties. As a perpetual life entity, the Group may utilize
unsecured financing, in addition to nonrecourse mortgage financing, to lower
financing costs and improve operating flexibility. Management believes that the
Group will have additional borrowing capacity that can be used to fund capital
needs.
The CPA(R) Partnerships have historically distributed a significant
portion of cash flow to their partners. The Group currently plans to initially
to continue distributing a significant portion of its cash flow to holders of
Subsidiary Partnership Units and shareholders.
The Group expects to meet its short-term liquidity requirements, including
general and administrative and property expenses, scheduled principal payment
installment obligations and distribution objectives from cash generated from
operations and from existing cash balances. The CPA(R) Partnerships maintained
working capital reserves in order to fund their non-recurring needs, including
capital improvements and maturing debt. The Group's cash balance may decrease in
the future to the extent the Group uses lines of credit to supplement cash flow
from operations to fund short-term liquidity needs.
-12-
<PAGE> 14
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
PART II
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
During the quarter ended September 30, 1997 the Group
was not required to file any reports on Form 8-K.
-13-
<PAGE> 15
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
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
01/16/98 By: /s/ John J. Park
------------ -----------------------------------
Date John J. Park
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
01/16/98 By: /s/ Claude Fernandez
------------ -----------------------------------
Date Claude Fernandez
Executive Vice President and
Chief Administrative Officer
(Principal Accounting Officer)
-14-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-G FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THE AMOUNTS ARE STATED AT
HISTORICAL COST. FOR THE PERIOD SUBSEQUENT TO JANUARY 1, 1996, FINANCIAL
STATEMENTS WILL REFLECT PURCHASE ADJUSTMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 29,346
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,346
<PP&E> 564,792
<DEPRECIATION> 105,789
<TOTAL-ASSETS> 540,005
<CURRENT-LIABILITIES> 19,469
<BONDS> 216,751
0
0
<COMMON> 0
<OTHER-SE> 303,785
<TOTAL-LIABILITY-AND-EQUITY> 540,005
<SALES> 0
<TOTAL-REVENUES> 75,577
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 27,243
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,005
<INCOME-PRETAX> 30,979
<INCOME-TAX> 0
<INCOME-CONTINUING> 30,979
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,979
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
