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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended September 30, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
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COMMISSION FILE NUMBER 000-23733
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CAPITAL AUTOMOTIVE REIT
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Maryland 54-1870224
(State of organization) (I.R.S. Employer Identification Number)
</TABLE>
1420 Spring Hill Road, Suite 525, McLean, Virginia 22102
(Address of principal executive offices and zip code)
(703) 288-3075
(Registrant's telephone Number, including area code)
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
------- --------
Number of common shares of beneficial interest outstanding as of October 31,
2000 was 20,905,230.
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CAPITAL AUTOMOTIVE REIT
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C>
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets - September 30, 2000 (unaudited) and
December 31, 1999 3
Consolidated Statements of Operations (unaudited) - three months
and nine months ended September 30, 2000 and
September 30, 1999 4
Consolidated Statements of Cash Flows (unaudited) - nine months
ended September 30, 2000 and September 30, 1999 5
Notes to Consolidated Financial Statements (unaudited) 6 - 11
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 12 - 19
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 19
Part II - Other Information
Item 1 - Legal Proceedings 20
Item 2 - Changes in Securities 20
Item 3 - Defaults Upon Senior Securities 20
Item 4 - Submission of Matters to Vote to Security Holders 20
Item 5 - Other Information 20
Item 6 - Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
CAPITAL AUTOMOTIVE REIT
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------------- --------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Real estate:
Land $ 437,588 $ 423,757
Buildings and improvements 546,574 511,768
Accumulated depreciation (34,042) (21,202)
-------------------- --------------------
950,120 914,323
Cash and cash equivalents 4,149 11,886
Other assets, net 16,145 16,350
-------------------- --------------------
TOTAL ASSETS $ 970,414 $ 942,559
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Mortgage loans $ 507,540 $ 501,510
Borrowings under credit facilities 32,800 -
Accounts payable and accrued expenses 10,106 21,298
Security deposits payable 5,161 4,768
-------------------- --------------------
TOTAL LIABILITIES 555,607 527,576
-------------------- --------------------
Minority Interest 119,647 115,384
SHAREHOLDERS' EQUITY
Preferred shares, $.01 par value; 20,000,000
shares authorized; none outstanding - -
Common shares, $.01 par value; $100 million authorized shares;
24,938,378 issued shares at September 30, 2000 and 24,792,115 issued
shares at December 31, 1999 249 248
Additional paid-in-capital 346,571 344,981
Accumulated deficit (8,326) (12,159)
Less treasury shares at cost, 4,084,700 at September 30, 2000 and
3,184,700 at December 31, 1999 (43,334) (33,471)
-------------------- --------------------
TOTAL SHAREHOLDERS' EQUITY 295,160 299,599
-------------------- --------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 970,414 $ 942,559
==================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
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CAPITAL AUTOMOTIVE REIT
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------------- ------------------ ------------------- -----------------
<S> <C> <C> <C> <C>
Revenue:
Rental $ 25,612 $ 20,183 $ 75,378 $ 50,380
Interest and other 156 574 830 1,063
------------------- ------------------ ------------------- -----------------
Total revenue 25,768 20,757 76,208 51,443
------------------- ------------------ ------------------- -----------------
Expenses:
Depreciation and amortization 4,421 3,497 13,075 11,177
General and administrative 1,646 1,603 4,970 5,230
Interest 10,595 7,401 31,227 14,400
------------------- ------------------ ------------------- -----------------
Total expenses 16,662 12,501 49,272 30,807
------------------- ------------------ ------------------- -----------------
Net income before minority interest 9,106 8,256 26,936 20,636
Minority interest (2,619) (2,074) (7,711) (5,100)
------------------- ------------------ ------------------- -----------------
Net income $ 6,487 $ 6,182 $ 19,225 $ 15,536
=================== ================== =================== =================
Shares of common stock outstanding used to
compute basic earnings per share 20,811 21,607 20,867 21,607
=================== ================== =================== =================
Basic earnings per share $ 0.31 $ 0.29 $ 0.92 $ 0.72
=================== ================== =================== =================
Shares of common stock outstanding used to
compute diluted earnings per share 21,096 21,640 21,061 21,626
=================== ================== =================== =================
Diluted earnings per share $ 0.31 $ 0.29 $ 0.91 $ 0.72
=================== ================== =================== =================
</TABLE>
See accompanying notes to consolidated financial statements.
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CAPITAL AUTOMOTIVE REIT
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,225 $ 15,536
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13,826 11,592
Income applicable to minority interest 7,711 5,100
Increase in other assets (1,119) (16,892)
Increase (decrease) in accounts payable and accrued expenses (2,497) 1,121
Increase in security deposits payable 393 775
------------------- --------------------
Net cash provided by operating activities 37,539 17,232
------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment, net of disposals (25) (68)
Real estate acquisitions, net of sales (43,887) (342,885)
------------------- --------------------
Net cash used in investing activities (43,912) (342,953)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings 44,500 62,000
Proceeds from mortgage loans 13,962 335,000
Repayment of bank borrowings (11,700) (62,000)
Mortgage principal payments (7,932) (3,847)
Payment of cash dividend (23,182) (21,416)
Payment of partner distribution (9,133) (6,658)
Purchase of treasury shares (9,863) -
Issuance of common shares, net of fees 1,984 (129)
------------------- --------------------
Net cash (used in) provided by financing activities (1,364) 302,950
------------------- --------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (7,737) (22,771)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,886 72,106
------------------- --------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,149 $ 49,335
=================== ====================
SUPPLEMENTAL DATA:
Real estate acquisitions in exchange for equity issuance $ 1,897 $ 9,806
=================== ====================
Interest paid during the period $ 35,526 $ 9,971
=================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
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1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Capital Automotive REIT (the "Company") is a Maryland real estate investment
trust formed in October 1997. The Company owns its property interests through
Capital Automotive L.P. (the "Operating Partnership") and its subsidiaries. The
Company is the sole general partner of the Operating Partnership. As of
September 30, 2000, the Company held a 71.2% general partnership interest in the
Operating Partnership. The Company completed its initial public offering of
common shares and began generating rental income in February 1998. References to
"we," "us," "our," refer to the Company or, if the context otherwise requires,
the Operating Partnership and our business and operations conducted through the
Operating Partnership and/or its directly and indirectly owned subsidiaries.
Our primary business purpose is to own and lease real estate properties (land,
buildings and other improvements) to operators of franchised automobile
dealerships, motor vehicle service, repair or parts businesses and related
businesses. We use (i) the term dealerships to refer to these types of
businesses that are operated on our properties, (ii) the term dealer group to
refer to a group of related persons and companies who sell us properties, and
(iii) the term dealer group, tenant or lessee to refer to the related persons
and companies that lease our properties. Our primary strategy focuses on
acquiring real estate used by multi-site, multi-franchised dealerships located
primarily in major metropolitan areas throughout the United States.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
by our management in accordance with U.S. generally accepted accounting
principles ("GAAP") 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 GAAP 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
and nine months ended September 30, 2000, are not necessarily indicative of the
results that may be expected for the full year. These financial statements
should be read in conjunction with our audited consolidated financial statements
and footnotes thereto, included in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in
accordance with GAAP and include our accounts, net of minority interest as
defined in Note 7 herein. All intercompany balances and transactions have been
eliminated in consolidation.
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Real Estate and Depreciation
Real estate assets 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 to 30 years for the buildings and improvements.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of highly liquid instruments purchased
with original maturities of three months or less.
Deferred Loan Costs
Included in other assets are costs incurred in connection with obtaining our
revolving secured credit facilities and issuance of mortgage notes through
September 30, 2000, which are amortized over the terms of the respective credit
facilities or notes on a straight-line basis (which approximates the effective
interest method).
Capitalized Leasing Costs
Certain initial direct costs incurred by us in negotiating and consummating a
successful lease are capitalized and generally amortized over the initial term
of the lease. These costs, net of accumulated amortization, are included in
other assets. Capitalized leasing costs include employee compensation and
payroll related fringe benefits directly related to time spent performing
leasing related activities. Such activities include evaluating the prospective
tenant's financial condition, evaluating and recording guarantees, collateral
and other security arrangements, negotiating lease terms, preparing lease
documents and closing the transaction.
Income Taxes
We are qualified as a real estate investment trust under the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"). As a real estate
investment trust, we are generally not subject to federal income tax to the
extent that we distribute annually at least 95% of our taxable income to our
shareholders and comply with certain other requirements.
Rental Revenue Recognition
We lease our real estate pursuant to long-term triple-net leases which typically
require the tenants to pay substantially all expenses associated with the
operations of the real estate, including, but not limited to, taxes, assessments
and other government charges, insurance, utilities, service, repairs,
maintenance and other expenses. All leases are accounted for as operating
leases.
Rental income attributable to leases is recorded when due from tenants. Certain
of the leases provide for fixed minimum escalators, which are recognized on a
straight-line basis over the initial term of the lease. We began, on a
prospective basis, straight-lining our rents for our leases with fixed minimum
escalators during the third quarter of 1999. The effect of straight-lining our
rents with fixed minimum escalators on prior periods was not material.
Straight-lined rents are included in other assets.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make
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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. ACQUISITIONS AND DISPOSITIONS
During the three months ended September 30, 2000, we closed on approximately
$32.5 million in real estate, which included the acquisition of eight dealership
properties and several facility improvement projects. The property acquisitions
included one wholesale vehicle auction property from Auction Broadcasting
Company valued at $9.5 million and located in Indianapolis, Indiana. The
remaining acquisitions were leased to existing tenants. Consideration for the
properties consisted of approximately $1.9 million in operating partnership
units (at an average price of $14.41 per unit), $1.6 million in permanent
financing and the remainder from a combination of funds drawn down on our
short-term credit facilities and cash on hand. The properties acquired total
approximately 296,000 square feet of buildings and improvements on approximately
96.6 acres of land and are located in six states (Alabama, Florida, Illinois,
Indiana, North Carolina and Texas). The average initial lease term for these
properties was 16.2 years, with multiple renewal options.
During the third quarter, we introduced a program for our tenants that, in
certain circumstances, provides funding for certain facility improvements and
expansions on properties that we own. Under this program, we follow a policy
that resets the lease period back to the original lease term, thereby ensuring
that our returns on the improvements will be generated over the same period as
our original lease term. Rental payments are increased by applying current cap
rates to the amount advanced, thereby creating a new blended rate on the
property lease. We have structured certain of our underlying debt to allow for
the flexibility to complete these types of transactions and achieve appropriate
leverage as well as fixed investment spreads. During the third quarter, we
funded approximately $2.7 million in facility improvement projects.
Of the approximately $32.5 million of real estate acquisitions closed during the
third quarter, approximately $19.2 million of the acquisitions, including the
acquisition of six properties and all the facility improvement projects,
utilized our variable cap rate program. Under this program, which was introduced
during the first quarter of 2000, lease rates change monthly based upon a spread
over an applicable index, generally LIBOR. Such leases generally are or will be
financed with long-term, floating rate debt thereby fixing our investment
spread.
As of September 30, 2000, our portfolio included 239 dealership properties, in
which 355 automotive franchises reside, with a total investment of approximately
$984.2 million. These properties total approximately 8.4 million square feet of
buildings and improvements on 1,401 acres of land and are located in 27 states.
These properties have initial lease terms generally ranging from ten to 20 years
with a weighted average initial lease term of approximately 13.4 years, and have
renewal options (ranging from a total of ten to 40 years). The renewal options
are exercisable at the option of the tenant.
4. EARNINGS PER SHARE
Basic earnings per share is computed as net income divided by the weighted
average common shares outstanding for the period. Diluted earnings per share is
computed as net income divided by the weighted average common shares outstanding
for the period plus the effect of dilutive common equivalent shares outstanding
for the period, based on the treasury stock method. Dilutive common equivalent
shares include restricted shares, options and warrants. For the three months and
nine months ended September 30, 2000, there were 286,000 and 194,000 dilutive
common equivalent
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shares outstanding, respectively. For the three months and nine months ended
September 30, 1999, there were 32,000 and 18,000 dilutive common equivalent
shares outstanding, respectively.
5. MORTGAGE LOANS AND CREDIT FACILITIES
As of September 30, 2000, we had total debt outstanding of $540.3 million. Of
this debt, approximately $507.5 million was mortgage indebtedness secured by
approximately 200 of our dealership properties. In addition, we had $32.8
million outstanding on our revolving credit facilities.
The following is a summary of our total debt outstanding as of September 30,
2000 and December 31, 1999:
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL
ORIGINAL DEBT BALANCE AS OF BALANCE AS OF EFFECTIVE TERM/
ISSUED SEPTEMBER 30, DECEMBER 31, INTEREST AMORTIZATION
DESCRIPTION OF DEBT 2000 1999 RATE* SCHEDULE
<S> <C> <C> <C> <C> <C>
7.59% mortgage fixed rate debt due 12/1/08 $38,050 $37,395 $38,050 7.99% 10 yr/17 yr
7.635% mortgage fixed rate debt due 10/1/14 111,950 104,770 107,675 7.93% 15 yr/15 yr
8.05% mortgage fixed rate debt due 10/1/14 85,000 82,334 84,528 8.32% 15 yr/15 yr
7.54% mortgage fixed rate debt due 7/6/11 100,000 98,093 99,527 7.71% 12 yr/25 yr
8.03% mortgage fixed rate debt due 9/29/11 150,000 150,000 150,000 8.08% 12 yr/25 yr (4)
7.50% mortgage fixed rate debt due 1/20/03 12,000 11,494 11,730 7.75% 4.25 yr/20 yr
-------------- -------------- -------------
Total Mortgage Fixed $497,000 $484,086 $491,510
10 to 10.75 yr/25
Various floating rate debt (1) 23,962 23,454 10,000 8.81% yr, level principal
-------------- -------------- -------------
TOTAL MORTGAGE DEBT $520,962 $507,540 $501,510 8.03%
$50 million revolving partially secured facility (2) 15,390 - 9.01% 3 yr
$100 million revolving secured facility (3) 17,410 - 8.96% 1 yr
---------------- ---------------
TOTAL CREDIT FACILITIES $32,800 -
---------------- ---------------
TOTAL DEBT OUTSTANDING $540,340 $501,510 8.08%
========= ========= =====
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</TABLE>
(1) These loans bear interest at variable rates ranging from 200 to 340 basis
points per annum above the A1-P1 Commercial Paper Rate and have maturity
dates ranging from December 22, 2009 to September 29, 2011.
(2) This facility bears interest equal to the 30-day LIBOR rate plus 175
basis points and requires the payment of secured borrowings within 12
months and unsecured borrowings within 150 days. The facility matures on
March 3, 2002.
(3) This facility bears interest equal to the 30-day LIBOR rate plus 225
basis points and requires the repayment of principal within 150 days. The
facility has a one-year term, which terminates on March 21, 2001 and is
renewable annually.
(4) Payments are interest only until January 2002.
* Includes deferred loan fees amortized over the life of the loans.
As of September 30, 2000, we were in compliance with all of the loan covenants
related to our mortgage indebtedness and credit facilities.
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6. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement was originally effective for
all fiscal quarters of fiscal years beginning after June 15, 1999; however,
during the second quarter of 1999 the FASB deferred the effective date until
June 15, 2000. SFAS No. 133 does not require restatement of financial statements
from prior periods. SFAS No. 133 requires an entity to recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. We believe that the adoption of SFAS
No. 133 has not had a significant impact on our consolidated financial position,
results of operations or cash flows.
7. MINORITY INTEREST
Minority interest is calculated at approximately 28.8% of the Operating
Partnership's partners' capital as of September 30, 2000 and 28.8% of the
Operating Partnership's partners' net income for the three months ended
September 30, 2000 and 28.7% for the nine months ended September 30, 2000. The
ownership of the Operating Partnership as of September 30, 2000 is as follows
(units of limited partnership interest in the Operating Partnership ("Units"),
in thousands):
<TABLE>
<CAPTION>
Units Percent
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<S> <C> <C>
Partners' capital:
Limited Partners 8,453.3 28.8%
The Company 20,853.7 71.2%
--------- ------
Total 29,307.0 100.0%
========= ======
</TABLE>
8. 401(K) PLAN
During 1998, we adopted the Capital Automotive L.P. Employee 401(k) Plan (the
"401(k) Plan"). Employees who are at least 21 years of age are eligible to
participate in the 401(k) 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 Code. We may make matching or discretionary
contributions to the 401(k) Plan at the discretion of management. During
December 1999, we approved a 20% match of the participant's elected deferral
contribution during 2000 (subject to maximum limits). Our matching contribution
vests ratably over five years from each employee's date of service.
9. DIVIDEND REINVESTMENT AND SHARE PURCHASE PLAN
During April 2000, we implemented a Dividend Reinvestment and Share Purchase
Plan (the "Plan"). Under the Plan, current shareholders and holders of Units
("unitholders") are permitted to elect to reinvest all, a portion or none of
their cash dividends into more shares of common stock through the Dividend
Reinvestment Program of the Plan. The Plan also provides both new investors and
existing shareholders and unitholders with a method to purchase shares of common
stock under the Share Purchase Program of the Plan. The Plan permits current
shareholders, unitholders and new investors to invest a minimum of $500 up to a
maximum of $10,000 in common shares per month. With
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respect to reinvested dividends and direct purchases of common shares up to
$10,000, shares of common stock will be purchased at a discount ranging from 0%
to 5% (currently 3%) from market price, as more fully described in the
Prospectus relating to the Plan. The Plan also allows us to raise additional
capital by waiving the limitations on the $10,000 maximum per month, as more
fully described in the Prospectus relating to the Plan.
Common shares may be purchased directly from the Company or in open market or
privately negotiated transactions, as determined from time to time by the
Company, to fulfill the requirements for the Plan. At present, the Company
anticipates that all common shares purchased will be purchased directly from the
Company. For the three months ended September 30, 2000, we issued 104,986 common
shares under the Plan and received approximately $1.5 million in proceeds. For
the nine months ended September 30, 2000, we issued a total of 126,273 common
shares under the Plan and received approximately $1.8 million in proceeds.
10. SUBSEQUENT EVENTS
Declaration of Dividend
On October 18, 2000, we declared a dividend of $0.3775 per share, which will be
paid on November 21, 2000 to shareholders of record as of November 10, 2000.
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CAPITAL AUTOMOTIVE REIT
ITEM II - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - THREE MONTHS AND NINE MONTHS
ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
The following discussion should be read in conjunction with the accompanying
unaudited consolidated financial statements and notes thereto.
Certain statements in this Form 10-Q are "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Also, documents that we subsequently file with the Securities
and Exchange Commission and that are incorporated by reference herein will
contain forward-looking statements. When we refer to forward-looking statements
or information, sometimes we use words such as "may," "will," "could," "should,"
"plans," "intends," "expects," "believes," "estimates," "anticipates" and
"continues." In particular, Item II and Item III of Part I of this Form 10-Q
describe forward-looking information. The statements made therein are not all
inclusive, particularly with respect to possible future events, and should be
read together with other filings made by the Company under the Securities Act
and the Exchange Act, including the risks and other risk factors contained in
the Company's Form 8-K/A filed on January 19, 2000. Other parts of this Form
10-Q may also describe forward-looking information. Many things can happen that
can cause our actual results to be very different than those described. These
factors include:
- risks that our tenants will not pay rent or that our operating
costs will be higher than expected;
- risks of interest rate fluctuations impacting future acquisitions;
- risks that additional acquisitions may not be consummated; and
- environmental and other risks associated with the acquisition and
leasing of automotive properties.
Given these uncertainties, readers are cautioned not to place undue reliance on
these forward-looking statements. We also make no promise to update any of the
forward-looking statements, or to publicly release the results if we revise any
of them.
OVERVIEW
Our primary business purpose is to own and lease real estate properties (land,
buildings and other improvements) to operators of franchised automobile
dealerships, motor vehicle service, repair or parts businesses and related
businesses. As of September 30, 2000, our portfolio included 239 dealership
properties, in which 355 automotive franchises reside, with a total investment
of approximately $984.2 million. These properties total approximately 8.4
million square feet of buildings and improvements on 1,401 acres of land and are
located in 27 states.
Substantially all of our properties are leased pursuant to long-term triple-net
leases, under which the tenants typically pay substantially all operating
expenses of a property, including, but not limited to, taxes, assessments and
other government charges, insurance, utilities, service, repairs, maintenance
and other expenses. The initial lease terms generally range from ten to 20
years, with a weighted average initial lease term of approximately 13.4 years,
and have options to renew upon the same terms and conditions for one or more
additional periods of five to ten years (ranging from a total of ten to 40
years). The renewal options are exercisable at the option of the tenant.
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Substantially all of our revenues are derived from (1) rents received or accrued
under long-term, triple-net leases; and (2) interest earned from the temporary
investment of funds in short-term investments.
We incur general and administrative expenses including, principally,
compensation expense for our executive officers and other employees,
professional fees and various expenses incurred in the process of identifying
and acquiring additional properties. We are self-administered and managed by our
trustees, executive officers and staff. Our primary non-cash expense is the
depreciation of our properties. We depreciate buildings and improvements on our
properties over a 40-year period for tax purposes and a 20-year to 30-year
period for financial reporting purposes. We do not own or lease any significant
personal property, furniture or equipment at any property we currently own.
THIRD QUARTER ACQUISITIONS
During the three months ended September 30, 2000, we closed on approximately
$32.5 million in real estate, which included the acquisition of eight dealership
properties and several facility improvement projects. The property acquisitions
included one wholesale vehicle auction property from Auction Broadcasting
Company valued at $9.5 million and located in Indianapolis, Indiana. The
remaining acquisitions were leased to existing tenants. Consideration for the
properties consisted of approximately $1.9 million in operating partnership
units (at an average price of $14.41 per unit), $1.6 million in permanent
financing and the remainder from a combination of funds drawn down on our
short-term credit facilities and cash on hand. The properties acquired total
approximately 296,000 square feet of buildings and improvements on approximately
96.6 acres of land and are located in six states (Alabama, Florida, Illinois,
Indiana, North Carolina and Texas). The average initial lease term for these
properties was 16.2 years, with multiple renewal options.
During the third quarter, we introduced a program for our tenants that, in
certain circumstances, provides funding for certain facility improvements and
expansions on properties that we own. Under this program, we follow a policy
that resets the lease period back to the original lease term, thereby ensuring
that our returns on the improvements will be generated over the same period as
our original lease term. Rental payments are increased by applying current cap
rates to the amount advanced, thereby creating a new blended rate on the
property lease. We have structured certain of our underlying debt to allow for
the flexibility to complete these types of transactions and achieve maximum
leverage as well as fixed investment spreads. During the third quarter, we
funded approximately $2.7 million in facility improvement projects.
Of the approximately $32.5 million of real estate acquisitions closed during the
third quarter, approximately $19.2 million of the acquisitions, including the
acquisition of six properties and all the facility improvement projects,
utilized our variable cap rate program. Under this program, which was introduced
during the first quarter of 2000, lease rates change monthly based upon a spread
over an applicable index, generally LIBOR. Such leases generally are or will be
financed with long-term, floating rate debt thereby fixing our investment
spread.
RESULTS OF OPERATIONS
Rental revenue for the three months ended September 30, 2000 increased 27% to
$25.6 million, as compared to $20.2 million for the same quarter in 1999. Rental
revenue for the nine months ended September 30, 2000 increased 50% to $75.4
million, as compared to $50.4 million for the same period in 1999. The increase
was primarily attributable to the growth of our real estate portfolio and the
timing of our property acquisitions, from which we generate our rental income.
We owned 239 properties as of September 30, 2000, versus 216 properties as of
September 30, 1999 (63 of which were acquired during the third quarter of 1999).
In addition, included in rental revenue for the three months and nine months
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<PAGE> 14
ended September 30, 2000 were straight-lined rents totaling $588,000 and $1.6
million, respectively, as compared to straight-lined rents of $404,000 for the
three months and nine months ending September 30,1999. During the third quarter
of 1999, we began, on a prospective basis, straight-lining our rents for leases
with fixed minimum escalators. The effect on prior years was not material.
Interest and other income for the three months ended September 30, 2000
decreased 73% to $156,000 from $574,000 for the same quarter in 1999. The
decrease for the three months ended September 30, 2000 was the result of no
property dispositions in the third quarter of 2000 versus total gain on the sale
of properties of $81,000 in the same period of 1999, as well as a decrease in
interest earned on temporary investments. Interest and other income for the nine
months ended September 30, 2000 decreased 22% to $830,000 from $1.1 million in
the same period of 1999. The decrease for the nine months ended September 30,
2000 is primarily attributable to a decrease in interest earned on temporary
investments. The decrease in interest earned on temporary investments during the
three months and nine months ended September 30, 2000 is due to the utilization
of cash received from a debt issuance during the third quarter of 1999. There
was a timing difference between when the funds were received on debt issued
during the third quarter of 1999 and the closing of acquisitions in which the
funds were utilized, thereby causing excess cash on hand during that time
period.
Depreciation and amortization for the three months ended September 30, 2000
increased 26% to $4.4 million from $3.5 million for the same quarter in 1999.
Depreciation and amortization for the nine months ended September 30, 2000
increased 17% to $13.1 million from $11.2 million for the same period in 1999.
Depreciation and amortization consisted primarily of depreciation on buildings
and improvements owned during those periods. The increase is attributable to the
growth of our real estate portfolio, resulting in an increase in our depreciable
assets. Partially offsetting the increase for the nine months ended September
30, 2000 was a change in the depreciable life on the majority of our buildings
and improvements that were acquired prior to 1999 and that were being
depreciated over 20 years. During the third quarter of 1999, we reviewed the age
and estimated remaining useful life of each of our properties in our real estate
portfolio that we acquired prior to 1999. Based on the average age of these
assets, we changed the depreciable life on the majority of our buildings and
improvements that were currently being depreciated over a 20-year life to a
30-year life in order to properly reflect the estimated remaining useful lives.
The change in depreciable life is considered a change in an accounting estimate
and has been recorded on a prospective basis beginning in the third quarter of
1999. The impact of this change decreased depreciation expense on the assets
acquired prior to 1999 by approximately $2.2 million for the nine months ended
September 30, 2000 as compared to the same period in 1999. There was no impact
on the depreciation expense for the three months ended September 30, 2000 as
compared to the same quarter in 1999.
General and administrative expenses for the three months ended September 30,
2000 increased 3% to $1.65 million, as compared to $1.60 million for the same
quarter in 1999. General and administrative expenses for the nine months ended
September 30, 2000 decreased 5% to $5.0 million, as compared to $5.2 million for
the same period in 1999. During 2000, we wrote off our $300,000 investment in
BBCN, a start-up, on-line procurement company for the automotive retail
industry, of which $150,000 was written off in the third quarter. We wrote off
our investment in BBCN because they have been unable to secure the necessary
capital to fund their business, which has caused BBCN to cease substantially all
of their operations. Therefore, we believe our investment has been impaired. The
increase in general and administrative expense for the third quarter of 2000 is
primarily attributable to the $150,000 BBCN write-off during such quarter and
the decrease in general and administrative expenses for the nine months ended
September 30, 2000 was limited by the $300,000 BBCN write-off during such
period. Without the write-off of our BBCN investment, general and administrative
expenses would have decreased by approximately $107,000, or 7%, and $560,000, or
11%, for the three months and nine months ended September 30, 2000,
respectively. Excluding the BBCN write-off, the decreases in general and
administrative expenses during these periods are primarily due to decreased
payroll and related benefits attributable to staffing reductions throughout 1999
and the reduction in marketing and advertising
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<PAGE> 15
expenses.
Interest expense for the three months ended September 30, 2000 increased to
$10.6 million from $7.4 million for the same quarter in 1999. Interest expense
for the nine months ended September 30, 2000 increased to $31.2 million from
$14.4 million for the same period in 1999. The increase was due to an increase
in debt outstanding during that time period (including mortgage debt and
borrowings under our credit facilities) which was obtained to finance the
acquisition of properties and the repurchase of our common shares. Debt
outstanding as of September 30, 2000 was approximately $540.3 million
(consisting of approximately $507.5 million of mortgage debt and approximately
$32.8 million of borrowings under our credit facilities) compared to
approximately $493.2 million (consisting of approximately $493.2 million of
mortgage debt and no borrowings under our credit facilities) as of September 30,
1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $4.1 million and $49.3 million at September 30,
2000 and September 30, 1999, respectively. The changes in cash and cash
equivalents during the nine months ended September 30, 2000 and 1999 were
attributable to operating, investing and financing activities, as described
below.
Cash provided by operating activities for the nine months ended September 30,
2000 and 1999 was $37.5 million and $17.2 million, respectively, and represents,
in both years, cash received from rents under long-term triple-net leases, plus
interest and other income, less normal recurring general and administrative
expenses and interest payments on debt outstanding. Cash used in investing
activities for the nine months ended September 30, 2000 and 1999 was $43.9
million and $343.0 million, respectively, and primarily reflects the acquisition
of dealership properties and facility improvements and expansions, net of sales,
during those periods. Cash used in financing activities for the nine months
ended September 30, 2000 was $1.4 million and primarily reflects the repurchase
of common shares totaling $9.9 million, the payment of mortgage principal
payments totaling $7.9 million, the repayment of bank borrowings totaling $11.7
million and the distributions made to shareholders and limited partners during
the period totaling $32.3 million. This was partially offset by $14.0 million of
proceeds received from mortgage loans that closed during the period, $44.5
million of proceeds received from bank borrowings and $2.0 million of proceeds
received from the issuance of common shares through the Plan and the exercise of
employee stock options. Cash provided by financing activities for the nine
months ended September 30, 1999 was $303.0 million and primarily reflects
proceeds from mortgage loans that closed during the period totaling $335.0
million. This was partially offset by the payment of mortgage principal payments
totaling $3.8 million and the distributions made to shareholders and limited
partners during the period totaling $28.1 million.
Mortgage Indebtedness and Credit Facilities
As of September 30, 2000, we had total debt outstanding of $540.3 million. Of
this debt, approximately $507.5 million was mortgage indebtedness secured by
approximately 200 of our dealership properties. In addition, we had $32.8
million outstanding on our revolving credit facilities.
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<PAGE> 16
The following is a summary of our total debt outstanding as of September 30,
2000 and December 31, 1999:
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL
ORIGINAL DEBT BALANCE AS OF BALANCE AS OF EFFECTIVE TERM/
ISSUED SEPTEMBER 30, DECEMBER 31, INTEREST AMORTIZATION
DESCRIPTION OF DEBT 2000 1999 RATE* SCHEDULE
<S> <C> <C> <C> <C> <C>
7.59% mortgage fixed rate debt due 12/1/08 $38,050 $37,395 $38,050 7.99% 10 yr/17 yr
7.635% mortgage fixed rate debt due 10/1/14 111,950 104,770 107,675 7.93% 15 yr/15 yr
8.05% mortgage fixed rate debt due 10/1/14 85,000 82,334 84,528 8.32% 15 yr/15 yr
7.54% mortgage fixed rate debt due 7/6/11 100,000 98,093 99,527 7.71% 12 yr/25 yr
8.03% mortgage fixed rate debt due 9/29/11 150,000 150,000 150,000 8.08% 12 yr/25 yr (4)
7.50% mortgage fixed rate debt due 1/20/03 12,000 11,494 11,730 7.75% 4.25 yr/20 yr
-------------- --------------- --------------
Total Mortgage Fixed $497,000 $484,086 $491,510
10 to 10.75 yr/25
Various floating rate debt (1) 23,962 23,454 10,000 8.81% yr, level principal
-------------- --------------- --------------
TOTAL MORTGAGE DEBT $520,962 $507,540 $501,510 8.03%
$50 million revolving partially secured facility (2) 15,390 - 9.01% 3 yr
$100 million revolving secured facility (3) 17,410 - 8.96% 1 yr
--------------- --------------
TOTAL CREDIT FACILITIES $32,800 -
--------------- --------------
TOTAL DEBT OUTSTANDING $540,340 $501,510 8.08%
========= ========= =====
</TABLE>
(1) These loans bear interest at variable rates ranging from 200 to 340 basis
points per annum above the A1-P1 Commercial Paper Rate and have maturity
dates ranging from December 22, 2009 to September 29, 2011.
(2) This facility bears interest equal to the 30-day LIBOR rate plus 175
basis points and requires the payment of secured borrowings within 12
months and unsecured borrowings within 150 days. The facility matures on
March 3, 2002.
(3) This facility bears interest equal to the 30-day LIBOR rate plus 225
basis points and requires the repayment of principal within 150 days. The
facility has a one-year term, which terminates on March 21, 2001 and is
renewable annually.
(4) Payments are interest only until January 2002.
* Includes deferred loan fees amortized over the life of the loans.
As of September 30, 2000, we were in compliance with all of the loan covenants
related to our mortgage indebtedness and credit facilities.
Liquidity Requirements
Short-term liquidity requirements consist primarily of normal recurring
operating expenses, regular debt service requirements (including debt service
relating to additional and replacement debt), recurring corporate expenditures,
distributions to shareholders and unitholders, and amounts required for
additional property acquisitions and facility improvements and expansions. We
expect to meet these requirements (other than amounts required for additional
property acquisitions and facility improvements and expansions) through cash
flow provided by operating activities. We anticipate
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<PAGE> 17
that any additional acquisition of properties or facility improvements and
expansions during the next 12 months will be funded with amounts available under
our existing credit facilities, with future long-term secured and unsecured debt
and the issuance of common or preferred equity or Units. Acquisitions of
property and facility improvements and expansions will be made subject to our
investment objectives and policies with the intention of maximizing both current
income and long-term growth in income.
During the second quarter of 2000, we issued a commitment to Sonic Automotive,
Inc. and affiliates ("Sonic") to purchase, on an as needed basis, a minimum of
$75 million in dealership properties by the end of 2000. These dealership
properties may be recently constructed dealerships or may be associated with
Sonic's future acquisitions of dealership operations. The dealership properties
that may be purchased under this commitment will be leased back to Sonic
utilizing a "variable cap rate program". Under this program, rental payments
are adjusted monthly based upon a spread over the 30 day LIBOR. The cap rate
may be fixed at the option of the tenant for the remainder of the lease term.
As of September 30, 2000, we have purchased approximately $11.9 million of
properties under this commitment.
As of September 30, 2000, long-term liquidity requirements consisted primarily
of maturities under our long-term debt. We anticipate that long-term liquidity
requirements will also include amounts required for acquisition of properties
and facility improvements and expansions. We expect to meet long-term liquidity
requirements through long-term secured and unsecured borrowings and other debt
and equity financing alternatives. The availability and terms of any such
financing will depend upon market and other conditions.
Our liquidity requirements with respect to future acquisitions of properties and
facility improvements and expansions may be reduced to the extent that we use
Units as consideration for such purchases.
We have adopted a policy to limit debt to approximately 65% of our assets (total
assets plus accumulated depreciation). As of September 30, 2000, our debt was
approximately 54% of our assets. This policy may be changed by our Board of
Trustees at any time without shareholder approval. In addition, to minimize
interest rate risk, we currently intend to maintain at least 85% of our total
outstanding debt as long-term fixed rate debt or floating rate debt that is
substantially match-funded with our leases. Approximately 90% of our debt
outstanding as of September 30, 2000 is substantially match-funded, non-recourse
debt.
In light of our current debt to asset ratio, we believe that we are able to
obtain additional financing for our short-term and long-term capital needs
without exceeding our debt to asset ratio policy. However, there can be no
assurance that additional financing or capital will be available, or that the
terms will be acceptable or advantageous to us.
YEAR 2000 UPDATE
In 1999, we discussed the nature and progress of our plans to confront year 2000
issues. In late 1999, we completed our remediation and testing of our software
applications and hardware systems. As a result of those planning and
implementation efforts, we experienced no material information technology or
non-information technology systems problems, and we believe those systems
successfully responded to the year 2000 date change. We did not incur
significant costs in designing and implementing our year 2000 plan, nor did we
incur significant costs in modifying our existing software applications,
replacing hardware or hiring consultants in resolving year 2000 issues. In
addition, we are not aware that any of our tenants or third parties with whom we
conduct business experienced any material systems problems related to year 2000
issues. We will continue to monitor our information technology and
non-information technology systems and those of our tenants and
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<PAGE> 18
third parties with whom we conduct business throughout the year 2000 to ensure
that any latent Year 2000 matters that may arise are addressed promptly.
Although management does not anticipate any additional expenditures relating to
year 2000 issues, there can be no assurance as to the magnitude of any future
costs until significant time has past.
FUNDS FROM OPERATIONS
Funds From Operations ("FFO") is defined under the revised definition adopted in
October 1999 by the National Association of Real Estate Investment Trusts
(NAREIT) as net income (loss) before minority interest (computed in accordance
with generally accepted accounting principles) excluding gains (or losses) from
sales of property plus depreciation and amortization of assets unique to the
real estate industry, and after adjustments for unconsolidated partnerships and
joint ventures. To conform to NAREIT's revised FFO definition adopted in 1999,
we began in the first quarter of 2000 including straight-lined rents in the
calculation of FFO. Prior to the first quarter of 2000, we excluded
straight-lined rents from the FFO calculation. For comparison purposes, we have
included straight-lined rents in the FFO calculation for all periods presented.
We began straight-lining rents on a prospective basis in the third quarter of
1999. The effect of straight-lined rents on prior periods was not material.
NAREIT developed FFO as a relative measure of performance and liquidity of an
equity REIT in order to recognize that income-producing real estate historically
has not depreciated on the basis determined under GAAP. 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 our performance
or to cash flow as a measure of liquidity or ability to make distributions. We
consider 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 our 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.
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<PAGE> 19
FFO for the three months and nine months ended September 30, 2000 and 1999 is
computed as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income before Minority Interest $ 9,106 $ 8,256 $ 26,936 $ 20,636
Real Estate Depreciation and
Amortization 4,395 3,477 13,000 11,105
Gain on Sale of Assets - (81) (311) (245)
Funds From Operations $ 13,501 $ 11,652 $ 39,625 $ 31,496
======== ======== ======== ========
Weighted Average Number of Common
Shares and Units Used to Compute
Basic FFO per Share 29,166 28,808 29,200 28,518
======== ======== ======== ========
Weighted Average Number of Common
Shares and Units Used to Compute
Fully Diluted FFO per Share 29,452 28,840 29,394 28,536
======== ======== ======== ========
</TABLE>
ITEM III. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain financial market risks, the most predominant being
fluctuations in interest rates. Interest rate fluctuations are monitored by our
management as an integral part of our overall risk management program, which
recognizes the unpredictability of financial markets and seeks to reduce the
potentially adverse effect on our results of operations.
Since December 31, 1999, there have been no material changes in the information
regarding market risk that was provided in the Company's Form 10-K for the year
ended December 31, 1999.
During the nine months ended September 30, 2000, our fixed-rate debt decreased
from $491.5 million at December 31, 1999 to $484.1 million as of September 30,
2000. Interest rate fluctuations will affect the fair value of our fixed rate
debt instruments. If interest rates on our fixed rate debt instruments at
September 30, 2000 had been one percent higher, the fair value of those debt
instruments on that date would have decreased by approximately $28.5 million.
During the nine months ended September 30, 2000, our variable-rate debt
increased from $10.0 million as of December 31, 1999 to $56.3 million as of
September 30, 2000. Interest rate fluctuations will effect our annual interest
expense on our variable rate debt. If interest rates on our variable rate debt
instruments outstanding at September 30, 2000, had been one percent higher, our
annual interest expense relating to that debt instrument would have increased by
$563,000 based on balances at September 30, 2000.
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CAPITAL AUTOMOTIVE REIT
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
The Company has not sold any common shares of beneficial interest, par value
$.01 per share ("Common Shares"), during the nine-month period ended September
30, 2000.
On August 24, 2000, the Operating Partnership issued 78,477 Units to Auffenberg
Enterprises of Illinois, Inc., as partial consideration for the acquisition of a
parcel of real property and improvements located thereon in O'Fallon, Illinois.
The Units will be eligible for redemption beginning on July 31, 2002 for cash by
the Operating Partnership, or at the option of the Company, Common Shares on a
one for one basis. The issuance of such Units was effected in reliance on an
exemption from registration under Section 4(2) of the Securities Act.
On September 29, 2000, the Operating Partnership issued 53,165 Units to CIL,
Inc., as partial consideration for the acquisition of a parcel of real property
and improvements located thereon in Indianapolis, Indiana. The Units will be
eligible for redemption beginning on January 31, 2002 for cash by the Operating
Partnership, or at the option of the Company, Common Shares on a one for one
basis. The issuance of such Units was effected in reliance on an exemption from
registration under Section 4(2) of the Securities Act.
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
Not applicable
20
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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
President and Chief Executive Officer
(principal executive officer)
BY: /s/ David S. Kay
---------------------------------------------
David S. Kay
Vice President and Chief Financial Officer
(principal financial and accounting officer)
Dated: November 13, 2000
-----------------
21
