<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended March 31, 1998 Commission File Number 000-23733
---------
CAPITAL AUTOMOTIVE REIT
(Exact name of registrant)
Maryland 54-1870224
(State of organization) (I.R.S. Employer Identification Number)
1420 Spring Hill Road, Suite 525, McLean, Virginia 22102
(Address of principal executive offices and zip code)
(703) 288-3075
(Registrant's telephone Number)
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.
Yes X No
------- --------
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 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
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Number of Common Shares of Beneficial Interest outstanding as of May 11, 1998
was 24,792,115.
<PAGE>
CAPITAL AUTOMOTIVE REIT
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
Page No.
-------
<S> <C>
Part I Financial Information
Item 1 Financial Statements
Consolidated Balance Sheets - March 31, 1998 (unaudited) and
December 31, 1997 3
Consolidated Statement of Operations (unaudited)-three months
ended March 31, 1998 4
Consolidated Statements of Changes in Shareholders' Equity
(Deficit)-three months ended March 31, 1998 (unaudited)
and period from October 20, 1997 (date of organization)
through December 31, 1997 5
Consolidated Statement of Cash Flows (unaudited)-three months
ended March 31, 1998 6
Notes to Consolidated Financial Statements (unaudited) 7 - 12
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 13 - 17
Item 3 Quantitative and Qualitative Disclosures About Market Risk 17
Part II Other Information
Item I Legal Proceedings 18
Item 2 Changes in Securities and Use of Proceeds 18
Item 3 Defaults Upon Senior Securities 18
Item 4 Submission of Matters to Vote of Security Holders 18
Item 5 Other Information 18
Item 6 Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CAPITAL AUTOMOTIVE REIT
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Real estate:
Land $ 96,532 $ -
Building 57,073 -
Accumulated depreciation (329) -
------------ -------------
153,276 -
Furniture, fixtures and equipment, net
of accumulated depreciation 195 29
Cash and cash equivalents 270,264 25
Other assets, net 2,083 957
------------ -------------
TOTAL ASSETS $425,818 $1,011
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT):
LIABILITIES:
Borrowings under line of credit $ 5,100 $1,000
Accounts payable and accrued expenses 1,478 661
Security deposits payable 1,140 -
------------ -------------
TOTAL LIABILITIES 7,718 1,661
------------ -------------
Minority Interest 69,827 -
SHAREHOLDERS' EQUITY/(DEFICIT):
Preferred shares, $.01 par value; 20,000,000
shares authorized; none outstanding - -
Common shares, $.01 par value; 100,000,000 shares
authorized; 24,792,115 and 10 shares issued
and outstanding, respectively 248 -
Additional paid-in-capital 346,972 -
Retained earnings (accumulated deficit) 1,053 (650)
------------ -------------
TOTAL SHAREHOLDERS' EQUITY/(DEFICIT) 348,273 (650)
------------ -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT) $425,818 $1,011
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CAPITAL AUTOMOTIVE REIT
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
<S> <C>
Revenue:
Rental income $ 1,731
Interest income 1,590
-------
Total revenue 3,321
-------
Expenses:
Depreciation and amortization 344
General and administrative 892
Interest expense 41
-------
Total expenses 1,277
-------
Net income before minority interest 2,044
Minority interest (341)
-------
Net income applicable to common shareholders $ 1,703
=======
Shares of common stock outstanding used to
compute basic earnings per share 12,147
=======
Basic earnings per share $0.14
=======
Shares of common stock outstanding used to
compute diluted earnings per share 12,267
=======
Diluted earnings per share $0.14
=======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CAPITAL AUTOMOTIVE REIT
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands, except share data)
<TABLE>
<CAPTION>
Retained
Additional Earnings/
Common Shares Paid-in (Accumulated
Shares Amount Capital Deficit) Total
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at October 20, 1997 - $ - $ - $ - $ -
Net loss - - - (650) (650)
Capital contribution 10 - - - -
----------- ----------- ----------- ------------ -----------
Balance at December 31, 1997 10 - - (650) (650)
Repurchase of initial shares (10) - - - -
Proceeds from initial public offering 20,000,000 200 299,800 - 300,000
Proceeds from exercise of underwriters'
over-allotment option 3,000,000 30 44,970 - 45,000
Proceeds from private placement 1,792,115 18 24,982 - 25,000
Payment of underwriting discounts,
commissions and other offering
expenses - - (27,715) - (27,715)
Adjustment to reflect minority interest
ownership in Operating Partnership - - 4,935 - 4,935
Net income - - - 1,703 1,703
----------- ----------- ----------- ------------ -----------
Balance at March 31, 1998 (unaudited) 24,792,115 $ 248 $ 346,972 $ 1,053 $ 348,273
=========== =========== =========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
CAPITAL AUTOMOTIVE REIT
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C>
Net income $ 1,703
Adjustments to reconcile net income to net cash
provided by operating activities:
Income applicable to minority interest 341
Depreciation and amortization 344
Increase in other assets (1,135)
Increase in accounts payable and accrued expenses 817
Increase in security deposits payable 1,140
--------
Net cash provided by operating activities 3,210
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (172)
Real estate acquisitions (79,184)
--------
Net cash used in investing activities (79,356)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank line of credit 5,100
Repayment of short-term revolving line of credit (1,000)
Proceeds from issuance of initial public offering of
common shares and underwriters' over-allotment
option, net of issuance costs 317,285
Proceeds from issuance of private placement,
net of issuance costs 25,000
--------
Net cash provided by financing activities 346,385
--------
NET INCREASE IN CASH AND CASH EQUIVALENTS 270,239
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 25
--------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $270,264
========
SUPPLEMENTAL DATA:
Real Estate Acquisitions in exchange for Partnership Units $ 74,421
========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
CAPITAL AUTOMOTIVE REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Capital Automotive REIT (the "Company") was formed as a Maryland real estate
investment trust on October 20, 1997 and was initially capitalized on such date
through the sale of 10 common shares of beneficial interest, par value $.01 per
share. The Company's mission is to invest in the real property and improvements
used by multi-site, multi-franchised dealerships and related businesses located
in major metropolitan areas throughout the United States, through its ownership
interest in Capital Automotive L.P. (the "Operating Partnership").
In February 1998, the Company completed an Initial Public Offering ("IPO") of
its common shares of beneficial interest, par value $.01 per share (the "Common
Shares"), whereby 20.0 million Common Shares were issued at $15 per Common
Share, resulting in net proceeds of approximately $275.4 million, after
underwriting discounts and commissions and other expenses of the IPO. In
addition, FBR Asset Investment Corporation, an affiliate of Friedman, Billings,
Ramsey & Co., Inc. ("FBR"), the representative of the underwriters in the IPO,
purchased 1,792,115 Common Shares of the Company at the IPO price in a private
placement offering, resulting in net proceeds of $25 million, net of
underwriting discounts (the "FBR Offering"). In March 1998, 3.0 million Common
Shares subject to the underwriters' over-allotment option were issued at $15 per
Common Share, resulting in net proceeds of approximately $41.9 million, after
underwriting discounts and commissions. The Company contributed the net
proceeds of the IPO, over-allotment option and the FBR Offering to the Operating
Partnership in exchange for an equal number of units of limited partnership
interest ("Units") in the Operating Partnership.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
by the Company's management in accordance with generally accepted accounting
principles for interim financial information and in conformity with the rules
and regulations 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. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. The results of
operations for the three months ended March 31, 1998, are not necessarily
indicative of the results that may be expected for the full year. These
financial statements should be read in conjunction with the Company's audited
consolidated financial statements and footnotes thereto, included in the
Company's Annual Report on Form 10-K/A for the period from October 20, 1997
(date of organization) through December 31, 1997.
7
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include all accounts of the
Company and the Operating Partnership. All intercompany amounts have been
eliminated in the consolidation.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of highly liquid instruments purchased
with original maturities of three months or less.
Real Estate Properties
Real estate properties are recorded at cost. External acquisition costs
directly related to each property are capitalized as a cost of the respective
property. The cost of real estate properties acquired is allocated between land
and buildings based upon estimated market values at the time of acquisition.
Depreciation is computed using the straight-line method over an estimated useful
life of 20 years for the buildings and improvements.
Leases and Rental Income
The leases are triple net leases, and require the lessees to pay substantially
all expenses associated with operations, including taxes, utilities, insurance,
repairs, maintenance and other expenses. Substantially all the initial leases
have initial terms of ten years, and generally may be extended upon the same
terms and conditions for one or two additional ten-year terms, at the option of
the lessees. Base rent will be increased annually over the term of the leases
by a factor of the consumer price index. All leases are accounted for as
operating leases.
Income Taxes
The Company intends to qualify as a real estate investment trust under the
provisions of the Internal Revenue Code of 1986, as amended. As a real estate
investment trust, the Company is required to distribute at least 95% of its
taxable income to shareholders and meet certain other requirements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. ACQUISITION OF INITIAL PROPERTIES
At the time of the IPO, the Company, through the Operating Partnership, had
entered into agreements to acquire 36 parcels of real property and improvements
(the "Initial Properties") from the affiliates of seven motor vehicle dealers
(the "Dealers") on which 54 franchisees of 24 brands of motor vehicles are
located. Concurrent with the IPO, the Operating Partnership acquired 21 of the
Initial
8
<PAGE>
Properties that are located primarily in suburban communities of the Washington,
D.C. Metropolitan Area and Pennsylvania. These properties were contributed by
the respective Dealers to the Operating Partnership in exchange for the
assumption of approximately $41.3 million of mortgage debt (immediately repaid
by the Company with the proceeds of the IPO) and approximately 5.0 million Units
(valued at approximately $74.4 million), which at March 31, 1998 represented a
16.7% limited partnership interest in the Operating Partnership.
Subsequent to the IPO, the Company acquired 14 of the Initial Properties located
on the Eastern Shore of Maryland, Texas, southern Virginia and Colorado. These
properties were contributed by the respective Dealers to the Operating
Partnership in exchange for approximately $36.5 million in cash. The
acquisition of the Cross-Continent Initial Property located in Las Vegas, Nevada
is scheduled to close during the second quarter of 1998, for approximately $13.7
million in cash.
4. EARNINGS PER SHARE
For the three months ended March 31, 1998, basic and diluted earnings per share
were computed based on 12.1 million weighted average shares outstanding during
the quarter and 12.3 million weighted average shares outstanding during the
quarter adjusted for the assumed conversion of dilutive securities,
respectively.
A reconciliation of net income and weighted average shares used to calculate
basic and diluted earnings per share for the three months ended March 31, 1998
is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Net Weighted Earnings
Income Average Shares Per Share
------- -------------- ---------
<S> <C> <C> <C>
Earnings per share-basic $1,703 12,147 $0.14
Effect of dilutive securities:
Options (1) (16) 120 n/a
------ -------------- ---------
Earnings per share-diluted $1,687 12,267 $0.14
====== ============== =========
</TABLE>
(1) Adjustment to net income reflects change in Minority Interest share of
income based on ownership calculation including common share equivalents.
Adjustment to weighted average shares reflects exercise of dilutive options
for shares assuming treasury stock method.
5. BORROWINGS UNDER LINE OF CREDIT
In October 1997, and amended as of January 30, 1998, Friedman, Billings, Ramsey
Group, Inc., an affiliate of FBR, issued to the Company a short-term revolving
line of credit in the amount of approximately $2.5 million. Draws on the line
of credit were used by the Company for organizational costs and offering costs,
and were repaid with the proceeds of the IPO.
In February 1998, the Company entered into a secured revolving line of credit
from NationsBank,
9
<PAGE>
N.A. providing for a borrowing capacity of $10 million, of which $5.1 million
was drawn down at the closing of the IPO. Borrowings bear interest at a
fluctuating rate equal to the Libor plus 1.50 percent (7.13 percent as of
March 31, 1998). The line of credit is secured by a blanket mortgage or
mortgages on all of the Initial Properties acquired from certain affiliates.
The line of credit matures in August 1998. At maturity, the principal payment
in the aggregate amount of the then outstanding borrowings plus any accrued and
unpaid interest will be due and payable, unless the line of credit is renewed
or is refinanced as is currently contemplated by the Company. The line of
credit may be paid in full at any time without prepayment penalty or premium.
In addition, approximately $2.8 million of the line of credit is guaranteed by
affiliates of Robert M. Rosenthal and approximately $2.3 million is guaranteed
by affiliates of Vincent A. Sheehy.
6. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which establishes standards for the reporting and display of
comprehensive income in the Company's financial statements. This statement is
effective for fiscal years beginning after December 31, 1997. The Company does
not believe that the adoption of this statement will have a material impact on
the Company's consolidated financial position, results of operations or cash
flows.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which requires financial and descriptive
information about reportable operating segments and related products, services,
geographic areas and major customers. SFAS No. 131 is effective for fiscal
years beginning after December 31, 1997. The Company believes that the adoption
of SFAS No. 131 will not have an impact on the Company's consolidated financial
position, results of operations or cash flows.
7. MINORITY INTEREST
Minority interest is calculated at approximately 16.7 percent of the Operating
Partnership's partners' capital and net income. The ownership of the Operating
Partnership as of March 31, 1998 is as follows (Units in thousands):
Units %
----------- -----------
Partners' capital:
Certain Initial Sellers 4,961 16.7%
The Company 24,792 83.3%
----------- -----------
Total 29,753 100.0%
=========== ===========
8. PRO FORMA FINANCIAL STATEMENTS
Although the Company was formed prior to January 1, 1998, it did not complete
its IPO until February 19, 1998, at which time it began generating rental
income. Unaudited summarized pro forma information for the Company, assuming
the IPO and acquisition of certain of the Initial
10
<PAGE>
Properties and commencement of the Initial Leases occurred as of January 1,
1998 is as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Total revenue $ 5,558
Total expenses 1,836
Minority interest 621
Net income 3,101
Net income per common share-basic 0.20
Net income per common share-diluted 0.19
Weighted average common shares outstanding - basic 15,762
Weighted average common shares outstanding - diluted 15,882
</TABLE>
The above mentioned pro-forma information does not include rental income of
approximately $608,000 and depreciation of approximately $115,000 as related to
the two Cross-Continent Properties, located in Denver, Colorado and Las Vegas,
Nevada as they were still under construction as of January 1, 1998.
Construction of the Cross-Continent Property located in Denver, Colorado was
completed during the first quarter of 1998 and closed on March 31, 1998. Pro
forma weighted average Common Shares represent the number of shares whose
proceeds were committed for specific use (i.e. the Initial Properties,
repayment of Friedman, Billings, Ramsey Group, Inc. revolving short-term line of
credit and underwriting discounts and commissions) as of January 1, 1998
through February 18, 1998 and total Common Shares issued in conjunction with the
IPO, FBR Offering and underwriters' over-allotment from February 19, 1998
through March 31, 1998.
9. SUBSEQUENT EVENTS
Declaration of Dividend
On April 28, 1998, the Company declared a dividend of $0.076 per share which
will be paid on May 26, 1998 to shareholders of record as of May 12, 1998.
Acquisitions
On April 15, 1998, the Company announced the signing of definitive agreements
for a series of acquisitions totaling approximately $97.6 million, including
$62.5 million in cash and $35.1 million in Units. The acquisitions include 25
properties used by 23 dealerships in seven states totaling 136.3 acres,
representing 14 brands of motor vehicles. The acquisitions are expected to
close during the second quarter of 1998. Transfer of ownership of certain of
the properties is contingent upon manufacturer approval and completion of due
diligence.
The acquisitions include:
. Twelve properties from The Kelley Automotive Group totaling approximately
73.09 acres, located in Fort Wayne, Decatur and Evansville, Indiana and
Atlanta, Georgia for approximately $47.5 million. These properties include 20
franchises, representing eight automotive brands, including Chevrolet, Buick
and Saturn. The lease terms are 15 years with five 5-year renewal options by
the tenant.
11
<PAGE>
. Eight properties from Roundtree Automotive Group totaling approximately 37.76
acres, located in Shreveport and Bossier City, Louisiana and Boise, Idaho for
approximately $25 million. These properties include seven franchises,
representing six automotive brands including, Chevrolet and Ford. The lease
terms are 15 years with three 5-year renewal options by the tenant. The
acquisition of the Roundtree Property located in Boise, Idaho closed on May 6,
1998, for approximately $9.8 million, paid in a combination of Units and the
assumption and repayment of mortgage debt.
. One property from O'Rielly Motor Company totaling approximately 8.54 acres,
located in Tucson, Arizona for approximately $11.5 million. The property
includes two franchises, representing six brands, including Chevrolet. The
lease term is 15 years with two 10-year renewal options by the tenant.
. One property from Ken Dixon Automotive totaling approximately 9.21 acres,
located in Waldorf, Maryland, a suburb of Washington, D.C. for approximately
$7.3 million. The property includes five franchises, including Chevrolet,
Buick and Honda. The lease term is 15 years with two 10-year renewal options
by the tenant.
. Three properties, with one franchise, from McCluskey Chevrolet totaling
approximately 7.64 acres, located in Cincinnati, Ohio for approximately $6.3
million. The lease terms are 10 to 14 years with one 10-year and four 5-year
renewal options by the tenant.
401(k) Plan
Effective April 1, 1998, the Company adopted the Capital Automotive L.P.
Employee 401 (k) Plan available to all employees hired prior to April 1, 1998
who are at least 21 years of age. Employees hired subsequent to April 1, 1998
are eligible to participate in the plan after three months of service.
Participants may contribute up to 20% of their earnings, on a pre-tax basis,
subject to annual limitations imposed by the Internal Revenue Code. The Company
may make matching or discretionary contributions to the plan at the discretion
of management. Employer contributions generally vest over five years.
12
<PAGE>
CAPITAL AUTOMOTIVE REIT
ITEM II - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-THREE MONTHS ENDED
MARCH 31, 1998
The following discussion should be read in conjunction with the accompanying
unaudited consolidated financial statements and notes thereto.
OVERVIEW
Capital Automotive REIT was formed as a Maryland real estate investment trust on
October 20, 1997 and was initially capitalized on such date through the sale of
10 common shares of beneficial interest, par value $.01 per share. The
Company's mission is to invest in the real property and improvements used by
mult-site, multi-franchised dealerships and related businesses located in major
metropolitan areas throughout the United States, through its ownership interest
in Capital Automotive L.P. The Company is the first publicly-traded real estate
investment trust formed primarily to acquire and lease back properties for use
by automotive dealers.
The Company will incur operating and administrative expenses including
principally, compensation expense for its executive officers and other
employees, professional fees and various expenses incurred in the process of
acquiring additional properties. The Company will be self-administered and
managed by its executive officers and staff, and will not engage a separate
advisor or pay an advisory fee for services, although the Company will engage
legal, accounting, tax and financial advisors from time to time. The primary
non-cash expense of the Company will be the depreciation of its properties. The
Company will depreciate buildings and improvements on the properties currently
owned by it over a 39.5-year and 20-year period for tax and financial reporting
purposes, respectively. The Company does not own or lease any significant
personal property, furniture or equipment at any property currently owned by it.
The Company also expects to employ leverage, using a combination of debt or
other equity securities and a bank credit facility, to fund additional
investments, and will incur long and short-term indebtedness, and related
interest expense, from time to time.
The Company intends to make distributions to its shareholders in amounts not
less than the amounts required to maintain its status as a real estate
investment trust under the Code.
INITIAL PUBLIC OFFERING
In February 1998, the Company completed its IPO of its Common Shares whereby
20.0 million Common Shares were issued at $15 per Common Share, resulting in net
proceeds of approximately $275.4 million, after underwriting discounts and
commissions and other expenses of the IPO. In addition, FBR Asset Investment
Corporation, an affiliate of FBR, purchased 1,792,115 Common Shares of the
Company at the IPO price in a private placement offering, resulting in net
proceeds of $25 million, net of underwriting discounts. In March 1998, 3.0
million Common Shares subject to the underwriters' over-allotment option were
issued at $15 per Common Share, resulting in net proceeds of approximately $41.9
million, after underwriting discounts and commissions. The Company contributed
the net proceeds of the IPO, over-allotment option and the FBR Offering to the
Operating Partnership in exchange for an equal number of Units.
13
<PAGE>
ACQUISITIONS
At the time of the IPO, the Company, through the Operating Partnership, had
entered into agreements to acquire 36 Initial Properties from the affiliates of
seven Dealers on which 54 franchisees of 24 brands of motor vehicles are
located. Concurrent with the IPO, the Operating Partnership acquired 21 of the
Initial Properties that are located primarily in suburban communities of the
Washington, D.C. Metropolitan Area and Pennsylvania. These properties were
contributed by the respective Dealers to the Operating Partnership in exchange
for the assumption of approximately $41.3 million of mortgage debt (immediately
repaid by the Company with the proceeds of the IPO) and approximately 5.0
million Units (valued at approximately $74.4 million), which at March 31, 1998
represented a 16.7% limited partnership interest in the Operating Partnership.
Subsequent to the IPO, the Company acquired 14 of the Initial Properties located
on the Eastern Shore of Maryland, Texas, southern Virginia and Colorado. These
properties were contributed by the respective Dealers to the Operating
Partnership in exchange for approximately $36.5 million in cash. The
acquisition of the Cross-Continent Initial Property located in Las Vegas, Nevada
is scheduled to close during the second quarter of 1998, for approximately $13.7
million in cash.
On April 15, 1998, the Company announced the signing of definitive agreements
for a series of acquisitions of properties from The Kelley Automotive Group,
Roundtree Automotive Group, O'Rielly Motor Company, Ken Dixon Automotive and
McCluskey Chevrolet totaling approximately $97.6 million, including $62.5
million in cash and $35.1 million in Units. The acquisitions include 25
properties used by 23 dealerships in seven states totaling 136.3 acres,
representing 14 brands of motor vehicles. The acquisitions are expected to
close during the second quarter of 1998. Transfer of ownership of certain of
the properties is contingent upon manufacturer approval and completion of due
diligence.
RESULTS OF OPERATIONS
The Company had no operations prior to October 20, 1997 (the date of
organization). Although the Company was formed prior to January 1, 1998, it did
not complete its IPO until February 19, 1998, at which time it began generating
rental income.
For the three months ended March 31, 1998, the Company earned $1.7 million in
rental revenue. The rental revenue was generated from the immediate leaseback
of 35 of the Initial Properties purchased during the quarter. Of the 35 Initial
Properties, 21 of the Properties closed on February 19, 1998, four closed on
February 25, 1998, nine closed on February 27, 1998 and one closed on March 31,
1998.
Interest income of $1.6 million was earned for the three months ended March 31,
1998 from the investment of the net proceeds of the IPO, the FBR Offering and
exercise of the underwriters' over-allotment option.
Depreciation and amortization was $344,000 for the three months ended March 31,
1998 and consisted primarily of depreciation on the Initial Properties purchased
during the quarter.
General and administrative expenses were $892,000 for the three months ended
March 31, 1998 and consisted primarily of payroll and related benefits,
professional services and other administrative costs.
14
<PAGE>
Interest expense was $41,000 for the three months ended March 31, 1998 and
consisted of interest charged on the amount drawn down on the Company's line of
credit on February 19, 1998 (the IPO closing date).
LIQUIDITY AND CAPITAL RESOURCES
Upon the completion of the IPO, the FBR Offering and the underwriters' over-
allotment option, the Company received net proceeds of approximately $342.3
million, after underwriting discounts and commissions and other expenses of the
IPO.
Concurrent with the IPO, the Company purchased 21 of the Initial Properties in
exchange for the assumption of approximately $41.3 million of mortgage debt
(immediately repaid by the Company with the proceeds of the IPO), approximately
5.0 million Units valued at approximately $74.4 million and cash payments
totaling $1.4 million. In addition, the Company purchased 14 of the Initial
Properties subsequent to the IPO in exchange for approximately $36.5 million in
cash.
The Company anticipates that the proceeds of the IPO, the FBR Offering and the
underwriters' over-allotment option, together with its cash from operations, and
any bank credit facility anticipated to be available to the Company, will
provide adequate liquidity to acquire additional Properties, conduct its
operations, fund administrative and operating costs and interest payments, and
allow distributions to shareholders in accordance with the Code's requirements
for qualification as a real estate investment trust and to avoid any corporate
level federal income or excise tax for at least the next 12 months.
In order to qualify as a real estate investment trust for federal income tax
purposes, the Company will be required to make substantial distributions to its
shareholders. The following factors, among others, will influence the decisions
of the Board of Trustees regarding distributions: (i) annual base rent under the
Leases; and (ii) returns from short-term investments. Although the Company will
receive most of its rental payments on a monthly basis, it intends to make
distributions quarterly. Amounts accumulated for distribution will be invested
by the Company in short-term investments.
On February 19, 1998, the Company entered into a secured revolving line of
credit from NationsBank, N.A. providing for a borrowing capacity of $10
million, of which $5.1 million was drawn down on that date. The NationsBank
line of credit is secured by the Initial Properties that the Company acquired
from certain affiliates. The Company also intends to obtain an additional line
of credit for acquisition of properties and may borrow additional amounts in
connection with the acquisition of additional properties, the renovation or
expansion of properties, or, as necessary, to meet certain distribution
requirements imposed on a real estate investment fund under the Code. The
Company may raise additional long-term capital by issuing, in public or private
transactions, debt or other equity securities, but the availability and terms of
any such issuance will depend upon the market and other conditions. The Company
anticipates that as a result of its initially low ratio of debt to total market
capitalization and its intention to maintain such ratio at no more than 50%, it
will be able to obtain financing for its long-term capital needs. However,
there can be no assurance that additional financing or capital will be
available, or that the terms will be acceptable or advantageous to the Company.
Acquisitions will be made subject to the investment objectives and policies of
the Company to maximize both current income and long-term growth in income. The
Company's liquidity requirements with respect to future acquisitions may be
reduced to the extent the Company uses Common Shares or Units as consideration
for such purchases.
15
<PAGE>
FUNDS FROM OPERATIONS
Funds From Operations ("FFO") is defined under the revised definition adopted by
the National Association of Real Estate Investment Trusts (NAREIT) as net income
(loss) (computed in accordance with generally accepted accounting principles)
excluding gains (or losses) from debt restructuring plus
depreciation/amortization of assets unique to the real estate industry.
Depreciation/amortization of assets not unique to the industry, such as
amortization of deferred financing costs and non-real estate assets, is not
added back. FFO does not represent cash flows from operating activities in
accordance with generally accepted accounting principles (which, unlike FFO,
generally reflects all cash effects of transactions and other events in the
determination of net income) and should not be considered an alternative to net
income as an indication of the Company's performance or to cash flow as a
measure of liquidity or ability to make distributions. The Company considers
FFO a meaningful, additional measure of operating performance because it
primarily excludes the assumption that the value of the real estate assets
diminishes predictably over time, and because industry analysts have accepted it
as a performance measure. Comparison of the Company's presentation of FFO,
using the NAREIT definition, to similarly titled measures for other REITs may
not necessarily be meaningful due to possible differences in the application of
the NAREIT definition used by such REITs.
Funds From Operations for the three months ended March 31, 1998 is computed as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Net Income before Minority Interest $2,044
Real Estate Depreciation 329
------
Funds From Operations $2,373
======
</TABLE>
FORWARD LOOKING STATEMENTS
Certain statements in this Form 10-Q are "forward-looking statements" made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward looking statements involve a number of risks and
uncertainties. The Company's actual operations may differ significantly from
the results discussed in the forward looking statements. Such statements can be
identified by the use of forward-looking terminology such as "may," "will,"
"could," "should," "expect," "anticipate," "estimate," or "continue" or the
negative thereof or other variations thereon or comparable terminology. Factors
which may cause the actual results of operations in future periods to differ
materially from forecast or anticipated results include, but are not limited to
(i) the failure of any lessee of real property owned by Capital Automotive REIT
to perform the terms of its lease in any material respects, (ii) the inability
of the Company to acquire suitable real properties that conform to its business
strategy, (iii) the termination or abandonment of the dealerships or other motor
vehicle related businesses that occupy any real property owned by the Company,
(iv) the inability of the Company to release any real property, (v) general
economic and business conditions, both nationally and in the regions in which
the Company owns real property, including, but not limited to, those conditions
affecting real estate generally or the motor vehicle retail and related
businesses specifically, (vi) zoning changes in locations in which any such real
property is located, (vii) existing governmental regulations and changes in, or
the failure to comply with government regulations, (viii) changes to laws, rules
and regulations affecting the Company, including the tax laws affecting real
estate investment trusts, (ix) competition, (x) changes in business strategy,
16
<PAGE>
(xi) divestiture of real property, (xii) retention of the Company's executive
officers, (xiii) the ability of the Company to attract and retain key personnel,
(xiv) the availability and terms of additional capital to fund the acquisition
of additional properties and for working capital purposes, and (xv) other risks
described from time to time in the registrant's filings with the Securities and
Exchange Commission. Given these uncertainties, readers are cautioned not to
place undue reliance on such statements. The registrant undertakes no
obligation to publicly release the result of any revisions to these forward-
looking statements that may be made to reflect any future events or
circumstances.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
-----------------------------------------------------------
Not applicable.
17
<PAGE>
CAPITAL AUTOMOTIVE REIT
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
--------
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
None
18
<PAGE>
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.
CAPITAL AUTOMOTIVE REIT
(Registrant)
BY: /s/ Thomas D. Eckert
-------------------------------------
Thomas D. Eckert
Chief Executive Officer and President
BY: /s/ David S. Kay
-------------------------------------
David S. Kay
Vice President and Chief Financial and
Accounting Officer
Dated: May 11, 1998
------------
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 270,264
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,083
<PP&E> 153,807
<DEPRECIATION> 336
<TOTAL-ASSETS> 425,818
<CURRENT-LIABILITIES> 7,718
<BONDS> 0
0
0
<COMMON> 248
<OTHER-SE> 348,025
<TOTAL-LIABILITY-AND-EQUITY> 425,818
<SALES> 0
<TOTAL-REVENUES> 3,321
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,236
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41
<INCOME-PRETAX> 1,703
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,703
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,703
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
