Item 1. Business.
Registrant is engaged in the business of investing in commercial and industrial real estate properties which are not leased to commercial and industrial entities. Registrant was organized as a Maryland corporation on February 15, 1991 and qualified as a real estate investment trust ("REIT") for Federal income tax purposes for the year ended December 31, 1996. Registrant's day to day operations are managed by Carey Property Advisors (the "Advisor"), a Pennsylvania limited partnership, in accordance with an advisory agreement between Registrant and the Advisor. The sole general partner of the Advisor is Carey Fiduciary Advisors, Inc., a Pennsylvania corporation ("CFA"). Affiliates of the Advisor and CFA are the general partners of Corporate Property Associates ("CPA(R):1"), Corporate Property Associates 2 ("CPA(R):2"), Corporate Property Associates 3 ("CPA(R):3"), Corporate Property Associates 4, a California limited partnership ("CPA(R):4"), Corporate Property Associates 5 ("CPA(R):5"), Corporate Property Associates 6 - a California limited partnership ("CPA(R):6"), Corporate Property Associates 7 - a California limited partnership ("CPA(R):7"), Corporate Property Associates 8, L.P., a Delaware limited partnership ("CPA(R):8") and Corporate Property Associates 9, L.P., a Delaware limited partnership ("CPA(R):9"). The Advisor is also the advisor of Corporate Property Associates 10 Incorporated ("CPA(R):10") and Corporate Property Associates 12 Incorporated ("CPA(R):12"). Registrant has an advisory agreement with the Advisor. According to the terms pursuant to which the Advisor performs a variety of management services for Registrant. Reference is made to the Prospectus of Registrant dated January 21, 1993 (the "Prospectus") filed pursuant to Rule 424(b) under the Securities Act of 1933, which updates the initial Prospectus dated August 1, 1991 as supplemented by supplements dated November 22, 1991, February 6, 1992, June 17, 1992, September 16, 1992 and October 26, 1992, and to Supplement No. 1 to such Prospectus dated March 17, 1993, Supplement No. 2 dated June 15, 1993 and Supplement No. 3 dated August 11, 1993.
A minimum of 1,500,000 and a maximum of 20,000,000 Shares were offered to the public on a "best efforts" basis by Carey Financial Corporation ("Carey Financial") and other selected dealers at a price of $10 per Share. The Offering concluded in August 1993, at which time an aggregate 14,147,581 Shares had been issued. Additionally, the Advisor purchased 20,000 Shares for $200,000 prior to the commencement of the Offering. Registrant filed a post-effective amendment on November 5, 1993 withdrawing from registration the balance of the unsold Shares. In 1995, Registrant established a dividend reinvestment plan. As of December 31, 1995, 12,956 shares had been issued pursuant to the dividend reinvestment plan.
In 1995, Registrant's Board of Directors authorized an offering of 10,000,000 Shares through a private placement offering to a limited number of institutional investors. As of December 31, 1996, Registrant had issued 2,430,436 Shares ($26,000,000) pursuant to this private placement.
Registrant has only one industry segment which consists of the investment in and the leasing of industrial and commercial real estate. See Management's Discussion and Analysis in Item 7 for a summary of Registrant's operations. Also see the material contained in the Prospectus under the heading INVESTMENT OBJECTIVES AND POLICIES. The properties owned by Registrant are described in Properties in Item 2.
Item 2. Properties.
Registrant's properties are as follows:
(1) These properties are encumbered by mortgage notes payable. (2) Ownership of buildings with ground leases of land for one property in Little Rock, Arkansas and properties in Hot Springs, North Little Rock and Jonesboro, Arkansas.
The material terms of Registrant's leases with its significant tenants are summarized in the following table:
- 10 -
(1) Represents rate per square foot when combined with rents applicable to tenants-in-common.
(2) Net of increases or decreases to net investment on direct financing leases.
- 11 - The material terms of Registrant's mortgage debt on properties with its significant tenants are summarized in the following table:
- 12 -
- 13 -
(1) Variable rate based on lender's prime rate.
(2) Estimate based on current interest rates.
(3) Variable rate based on London Interbank Offered Rate.
(4) Holders of the notes may require Registrant to pay the notes in whole, but not in part, on September 10, 2005.
(5) Loan is in default and subject to acceleration.
- 14 - Item 3.
Item 3. Legal Proceedings.
As of the date here of, Registrant is not a party of to any material pending legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter of the year ended December 31, 1996 to a vote of security holders, through the solicitation of proxies or otherwise.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Information with respect to Registrant's common equity is hereby incorporated by reference to page 26 of Registrant's Annual Report contained in Appendix A.
Item 6.
Item 6. Selected Financial Data.
Selected Financial Data are hereby incorporated by reference to page 1 of Registrant's Annual Report contained in Appendix A.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Management's Discussion and Analysis are hereby incorporated by reference to pages 2 to 5 of Registrant's Annual Report contained in Appendix A.
Item 8.
Item 8. Consolidated Financial Statements and Supplementary Data.
The following consolidated financial statements and supplementary data are hereby incorporated by reference to pages 6 to 22 of Registrant's Annual Report contained in Appendix A:
(i) Report of Independent Accountants. (ii) Consolidated Balance Sheets as of December 31, 1994, 1995 and 1996. (iii) Consolidated Statements of Income for the years ended December 31, 1994, 1995 and 1996. (iv) Consolidated Statements of Shareholders' Equity for the years ended December 31, 1994, 1995 and 1996. (v) Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996. (vi) Notes to Consolidated Financial Statements.
Item 9.
Item 9. Disagreements on Accounting and Financial Disclosure.
NONE
- 15 - PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
The directors and executive officers of Registrant and members of the Investment Committee of the Board of Directors of the Advisor are as follows:
(1) Independent Director of Registrant.
William Polk Carey and Francis J. Carey are brothers and Raymond S. Clark is their brother-in-law. H. Augustus Carey is the nephew of William Polk Carey and Raymond S. Clark and the son of Francis J. Carey.
A description of the business experience of each director of Registrant is set forth below:
William Polk Carey, Chairman and Chief Executive Officer, has been active in lease financing since 1959 and a specialist in net leasing of corporate real estate property since 1964. Before founding W.P. Carey & Co., Inc. ("W.P. Carey") in 1973, he served as Chairman of the Executive Committee of Hubbard, Westervelt & Mottelay (now Merrill Lynch Hubbard), head of Real Estate and Equipment Financing at Loeb Rhoades & Co. (now Lehman Brothers), head of Real Estate and Private Placements, Director of Corporate Finance and Vice Chairman of the Investment Banking Board of duPont Glore Forgan Inc. A graduate of the University of Pennsylvania's Wharton School of Finance and Commerce, Mr. Carey is a Governor of the
- 16 - National Association of Real Estate Investment Trusts (NAREIT). He also serves on the boards of The Johns Hopkins University, The James A. Baker III Institute for Public Policy at Rice University, Templeton College of Oxford University and other educational and philanthropic institutions. He founded the Visiting Committee to the Economics Department of the University of Pennsylvania and co-founded with Dr. Lawrence R. Klein the Economics Research Institute at that University. Mr. Carey is also a Director of CPA(R):10 and CPA(R):12.
Francis J. Carey was elected President and a Managing Director of W.P. Carey in April 1987, having served as a Director since its founding in 1973. Prior to joining the firm full-time, he was a senior partner in Philadelphia, head of the Real Estate Department nationally and a member of the executive committee of the Pittsburgh based firm of Reed Smith Shaw & McClay, counsel for Registrant, the General Partners, the CPA(R) Partnerships, W.P. Carey and some of its affiliates. He served as a member of the Executive Committee and Board of Managers of the Western Savings Bank of Philadelphia from 1972 until its takeover by another bank in 1982 and is former chairman of the Real Property, Probate and Trust Section of the Pennsylvania Bar Association. Mr. Carey served as a member of the Board of Overseers of the School of Arts and Sciences of the University of Pennsylvania from 1983 through 1990. He has also served as a member of the Board of Trustees of the Investment Program Association since 1990 and on the Business Advisory Council of the Business Council for the United Nations since 1994. He holds A.B. and J.D. degrees from the University of Pennsylvania. Mr. Carey is also a Director of CPA(R):10.
Charles C. Townsend, Jr., Independent Director of CPA(R):10 and CIP(TM), was formerly Managing Director in charge of the Corporate Finance Department at Morgan Stanley & Co. and Chairman of Morgan Stanley Realty Corporation. Mr. Townsend holds a B.S.E.E. from Princeton University and an MBA from Harvard University.
Ralph G. Coburn, Rear Admiral USNR (Ret.), is former President and Chief Executive Officer of Hubbard Real Estate Investments (now HRE Properties), a $100,000,000 NYSE equity REIT, sponsored by Merrill Lynch. Admiral Coburn had been engaged in a variety of real estate activities for over 30 years. A graduate of Harvard College, Harvard Law School and the Naval War College, Admiral Coburn previously served as Chief Executive Officer of the National Association of Real Estate Investment Trusts (NAREIT), representing the multi-billion dollar REIT industry.
H. Cabot Lodge III, Director, is the Chairman of Superconducting Core Technologies, a position he has held since March, 1995. Mr. Lodge joined W.P. Carey as Assistant to the Chairman in August 1983 and served as Executive Vice President and Managing Director through September 1995. Mr. Lodge received his B.A. degree from Harvard University in 1978 and his M.B.A. from Harvard Business School in 1983. Prior to attending business school he served as a research consultant and regional director of Harbridge House Inc. from June 1978 to July 1981. Mr. Lodge is also a Director of CPA(R):12,
Donald E. Nickelson, Independent Director of CIP(TM), is currently Chairman of the Board and Director of Greenfield Industries, Inc. and Vice Chairman and Director of Harbour Group, a leveraged buy-out firm. He is also a Director of Sugen Corporation, D.T. Industries, Inc. and Allied Healthcare Products, Inc. and a Trustee of Mainstay Mutual Fund Group. He is currently a member of the Advisory Panel of Sedgwick James of New York, Inc. From 1986 to 1987 Mr. Nickelson was President of PaineWebber, Inc., from 1988 to 1990 he was President of the PaineWebber Group and Director from 1980 to 1993. Prior to 1986, Mr. Nickelson served in various capacities with affiliates of PaineWebber Inc. and its predecessor firm. From 1988 to 1989, Mr. Nickelson was a Director of a diverse group of corporations in the manufacturing, service and retail sectors including Wyndon Foods, Hoover Group, Inc., Peebles, Inc. and Motor Wheel Corporation. He is a former Chairman of National Car Rentals, Inc. Mr. Nickelson is also a former Director of the Chicago Board Options Exchange and is a former Chairman of the Pacific Stock Exchange.
- 17 - William Ruder, Independent Director of CPA(R):10 and CPA(R):12, is Chairman of the Board of William Ruder Incorporated, a consulting firm founded in 1981. From 1948 to 1981, Mr. Ruder was in chairman of Ruder & Finn, an international public relations company which he co-founded. He is a former Assistant Secretary of Commerce of the United States and is on the Board of Directors of the United Nations Association of the United States of America, Junior Achievement and the Council on Economic Priorities. A member of the Board of Overseers of the Wharton School at the University of Pennsylvania for a number years, he has also served as a consultant to the Communications Advisory Board to the White House Press Secretary, the Committee for Economic Development and the Office of Overseas Schools for the U.S. State Department. Mr. Ruder is a lecturer at Harvard Graduate School of Business and is associated with several other business, civic and cultural organizations.
George E. Stoddard, Chief Investment Officer, was until 1979 head of the bond department of The Equitable Life Assurance Society of the United States, with responsibility for all activities related to Equitable's portfolio of corporate investments acquired through direct negotiation. Mr. Stoddard was associated with Equitable for over 30 years. He holds an A.B. degree from Brigham Young University, an M.B.A. from Harvard Business School and an LL.B. from Fordham University Law School.
Warren G. Wintrub, Independent Director of CPA(R):10 and CPA(R):12, became a partner at Coopers & Lybrand in 1963, specializing in taxation. He served on Coopers & Lybrand's Executive Committee from 1976 to 1988 and as Chairman of the Retirement Committee from 1979 until his retirement from the firm in 1992. Mr. Wintrub serves as a director of Chromcraft Revington, Inc. and Getty Petroleum Corp. He received a B.S. degree from Ohio State University and an LL.B. degree from Harvard Law School.
Barclay G. Jones III, Executive Vice President, Managing Director, and head of the Investment Department. Mr. Jones joined W.P. Carey as Assistant to the President in July 1982 after his graduation from the Wharton School of the University of Pennsylvania, where he majored in Finance and Economics. He was elected to the Board of Directors of W.P. Carey in April 1992. Mr. Jones is also a Director of the Wharton Business School Club of New York.
Claude Fernandez, Chief Administrative Officer, Managing Director, and Executive Vice President, joined W.P. Carey in 1983. Previously associated with Coldwell Banker, Inc. for two years and with Arthur Andersen & Co., he is a Certified Public Accountant. Mr. Fernandez received his B.S. degree in accounting from New York University in 1975 and his M.B.A. in finance from Columbia University Graduate School of Business in 1981.
H. Augustus Carey, Senior Vice President, returned to W.P. Carey in 1988 and is President of W.P. Carey's broker-dealer subsidiary. Mr. Carey previously worked for W.P. Carey from 1979 to 1981 as Assistant to the President. Prior to rejoining W.P. Carey, Mr. Carey served as a loan officer of the North American Department of Kleinwort Benson Limited in London, England. He received an A.B. from Amherst College in 1979 and an M.Phil. in Management Studies from Oxford University in 1984. Mr. Carey is a trustee of the Oxford Management Centre Associates Council.
Anthony S. Mohl, Senior Vice President and Director of Portfolio Management, joined W.P. Carey & Co., in 1987 as Assistant to the President after receiving his M.B.A. from the Columbia University Graduate School of Business. Mr. Mohl was employed as an analyst in the strategic planning group at Kurt Salmon Associates after receiving an undergraduate degree from Wesleyan University.
John J. Park, Senior Vice President, Treasurer and Director of Research, joined W.P. Carey as an Investment Analyst in December 1987. Mr. Park received his undergraduate degree from Massachusetts Institute of Technology and his M.B.A. in Finance from New York University.
Michael D. Roberts joined W. P. Carey as a Second Vice President and Assistant Controller in April 1989 and is currently First Vice President and Controller. Prior to joining W.P. Carey, Mr. Roberts was employed by Coopers & Lybrand for over 8 years, where he attained the title of audit manager. A certified public accountant, Mr. Roberts received a B.A. in sociology from Brandeis University and an M.B.A. from Northeastern University.
- 18 - Item 11.
Item 11. Executive Compensation.
This information will be contained in Registrant's definitive Proxy Statement with respect to the Company's 1997 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year, and is hereby incorporated by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
This information will be contained in Registrant's definitive Proxy Statement with respect to the Company's 1997 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year, and is hereby incorporated by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions.
This information will be contained in Registrant's definitive Proxy Statement with respect to the Company's 1997 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year, and is hereby incorporated by reference.
- 19 - PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Consolidated Financial Statements:
The following consolidated financial statements are filed as a part of this Report:
Report of Independent Accountants.
Consolidated Balance Sheets, December 31, 1994, 1995 and 1996.
Consolidated Statements of Income for the years ended December 31, 1994, 1995 and 1996.
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1994, 1995 and 1996.
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996.
Notes to Consolidated Financial Statements.
The consolidated financial statements are hereby incorporated by reference to pages 6 to 22 of Registrant's Annual Report contained in Appendix A.
(a) 2. Financial Statement Schedule:
The following schedule is filed as a part of this Report:
Report of Independent Accountants.
Schedule III -Real Estate and Accumulated Depreciation as of December 31, 1996.
Notes to Schedule III.
Schedule III and notes thereto are contained herein on pages 42 to 46 of this Form 10-K.
Financial Statement Schedules other than those listed above are omitted because the required information is given in the Consolidated Financial Statements, including the Notes thereto, or because the conditions requiring their filing do not exist.
- 20 - (a) 3. Exhibits:
The following exhibits are filed as part of this Report. Documents other than those designated as being filed herewith are incorporated herein by reference.
- 21 -
- 22 -
- 23 -
- 24 -
- 25 -
- 26 -
- 27 -
- 28 -
- 29 -
- 30 -
- 31 -
- 32 -
- 33 -
- 34 -
- 35 -
- 36 -
- 37 -
- 38 -
- 39 -
(b) Reports on Form 8-K
During the quarter ended December 31, 1996 the Registrant was not required to file any reports on Form 8-K.
- 40 - SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CAREY INSTITUTIONAL PROPERTIES INCORPORATED a Maryland corporation
4/3/97 /s/ Claude Fernandez - -------------- ----------------------------------- Date Claude Fernandez Executive Vice President and Chief Administrative Officer (Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
William P. Carey Chairman of the Board and Director (Principal Executive Officer)
Francis J. Carey President and Director
BY: /s/ George E. Stoddard ----------------------- Ralph G. Coburn George E. Stoddard Director Attorney in fact April 3, 1997
Charles C. Townsend, Jr. Director
William Ruder Director
Warren G. Wintrub Director
4/3/97 /s/ Claude Fernandez - -------------- ----------------------------------- Date Claude Fernandez Executive Vice President and Chief Administrative Officer (Principal Financial Officer)
4/3/97 /s/ Michael D. Roberts - -------------- ----------------------------------- Date Michael D. Roberts First Vice President and Controller (Principal Accounting Officer)
- 41 - REPORT of INDEPENDENT ACCOUNTANTS
To the Board of Directors of CAREY INSTITUTIONAL PROPERTIES Incorporated and Subsidiaries:
Our report on the consolidated financial statements of CAREY INSTITUTIONAL PROPERTIES Incorporated and Subsidiaries has been incorporated by reference in this Form 10-K from page 5 of the 1996 Annual Report to Shareholders of CAREY INSTITUTIONAL PROPERTIES Incorporated and Subsidiaries. In connection with our audits of such financial statements, we have also audited the related financial statement schedule on pages 43 to 46 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
/s/Coopers & Lybrand L.L.P. New York, New York March 24, 1997
- 42 - CAREY INSTITUTIONAL PROPERTIES INCORPORATED
and SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
as of December 31, 1996
- 43 - CAREY INSTITUTIONAL PROPERTIES INCORPORATED and SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
as of December 31, 1996
See accompanying notes to Schedule.
- 44 - CAREY INSTITUTIONAL PROPERTIES INCORPORATED and SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
as of December 31, 1996
See accompanying notes to Schedule.
- 45 - CAREY INSTITUTIONAL PROPERTIES INCORPORATED and SUBSIDIARIES
NOTES to SCHEDULE SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
(a) Consists of the costs of improvements subsequent to purchase and acquisition costs including legal fees, appraisal fees, title costs and other related professional fees.
(b) At December 31, 1996, the aggregate cost of real estate owned by Registrant and its subsidiaries for Federal income tax purposes is $235,467,712.
(c) The increase (decrease) in net investment is due to the amortization of unearned income producing a constant periodic rate of return on the net investment which is more (less) than lease payments received, the sale of a tenancy-in-common interest to an affiliate in a prior year and a writedown to net realizable value.
(d) Reconciliation of Real Estate Accounted for Under the Operating Method
Reconciliation of Accumulated Depreciation
- 46 - APPENDIX A TO FORM 10-K
CAREY INSTITUTIONAL PROPERTIES INCORPORATED
AND SUBSIDIARIES
1996 ANNUAL REPORT SELECTED FINANCIAL DATA
(In thousands except per share amounts)
- ---------- (1) Includes distributions attributable to the fourth quarter paid in the following fiscal year less distributions in the first fiscal quarter attributable to the prior year.
(2) Represents scheduled mortgage principal amortization paid.
(3) Represents limited recourse mortgage and note payable obligations due after more than one year.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
The Company's primary objectives are to provide rising cash flow and property values, protecting its investors from the effects of inflation through rent escalation provisions, property appreciation, tenant credit improvement and regular paydown of limited recourse mortgage debt. In addition, the Company has successfully negotiated grants of common stock warrants from selected tenants and expects to realize the benefits of appreciation from those grants. While the Company cannot guarantee that its objectives will be ultimately realized, cash flow from operations has increased each year since inception and the first independent valuation of its assets (as of December 31, 1995) reflected significant appreciation in property values.
Net income for the year ended December 31, 1996 increased by $918,000 as compared with the prior year. Excluding the effect of gains from the sale of assets in both 1995 and 1996, extraordinary charges of $401,000 and $275,000 in 1995 and 1996, respectively and a noncash charge of $1,753,000 on the writedown of properties to net realizable value, income, as adjusted, would have reflected an increase of $2,516,000. Such increase was due to increases in lease revenues and income from equity investments and were partially offset by increases in interest, depreciation and property expenses.
Lease revenues increased as the result of the completion of construction on build-to-suit projects in 1995 and 1996 and the acquisitions of additional properties in 1996. Build-to-suit projects under leases with Custom Food Products, Inc. ("Custom Food"), Childtime Childcare, Inc. ("Childtime") and Garden Ridge Corporation ("Garden Ridge") were completed in 1995 and the Del Monte Corporation ("Del Monte") build-to-suit project was completed in 1996. The Company also acquired properties leased to Q Clubs, Inc. ("Q Clubs"), Hibbett Sporting Goods, Inc. ("Hibbett") and Detroit Diesel Corporation ("Detroit Diesel") and funded an expansion of the Custom Food facility. The increase in income from equity investments was due to the purchase, in January 1996, of an interest in a limited liability company which entered into a net lease with The Upper Deck Company ("Upper Deck"). Equity income from the Company's investment in a real estate investment trust which net leases 13 Courtyard by Marriott hotels to Marriott International, Inc. ("Marriott") increased due to increasing amortization of principal on a limited recourse mortgage loan which is amortizing over 16 3/4 years and an increase in rentals received pursuant to a sales override provision in the Marriott lease. Interest expense increased as a result of the Company's obtaining limited recourse mortgage financing on previously unleveraged and newly acquired properties. Depreciation expense increased as a result of the increase in real estate assets. The increase in property expenses was due to higher asset management and subordinated incentive fees directly attributable to the growth in real estate assets under management. Net income was also impacted by a $275,000 extraordinary charge related to a settlement of a dispute relating to the prepayment of a mortgage loan in 1995.
Net income for 1995 and 1996 includes gains from the sale of securities related to common stock warrants granted by Garden Ridge. An extraordinary charge on extinguishment of debt of $401,000 was incurred in 1995 in connection with refinancing two mortgage loans. The loans which had annual interest rates of 9.25% and 10% were replaced with a mortgage loan with an annual interest rate of 7.65%.
Net income for the year ended December 31, 1995 decreased by $2,387,000 as compared with net income for the year ended December 31, 1994. The results for 1994 included the benefit of a gain of $1,536,000 from the sale of properties and $160,000 from the sale of easement rights. Although the Company realized a gain of $628,000 on the sale of Garden Ridge stock warrants in 1995, the Company also incurred the aforementioned $401,000 extraordinary charge on the extinguishment of debt. Net of these nonrecurring items, income for the year ended December 31, 1995 would have reflected a decrease of
$918,000. The decrease in income was the result of increases in depreciation, amortization, interest and property expenses and was partially offset by an increase in lease revenues. Depreciation and amortization, which are noncash charges, increased by $1,126,000 as a result of an increase in real estate assets and deferred charges related to the placement of limited recourse mortgage financing. The increase in property expenses was primarily due to an increase in asset based fees which resulted from the increase in the Company's real estate assets and costs incurred in connection with the initial independent appraisal of the Company's real estate portfolio. Interest expense increased by $2,485,000 as the result of higher mortgage balances and, to a lesser extent, increases in interest rates on variable rate mortgages. In most instances, the impact of changes on variable rate obligations are passed through as a rent adjustment to lessees so that there is no significant effect on net income. The increase in lease revenues of $3,684,000 was primarily due to the commencement of new leases throughout 1994 and 1995. Such increases in lease revenues more than offset the loss of revenues which resulted from the 1994 sale of the Data Documents Inc. properties. As the result of higher cash balances, other interest income increased; however, consistent with the Company's objectives, such cash was ultimately used to invest in real estate rather than held as cash reserves. The Company reflected an increase in cash flow from operations due to increased lease revenues and the increase in the Company's asset base.
Leasing revenues and cash flow for 1997 will benefit from the recognition of a full year's rent on the Del Monte lease which went into effect in July 1996 and on properties acquired in 1996. Cash flow will also benefit from rent increases scheduled over the next several years. Rent increases on the Company's leases with Bell Sports, Inc., Lincoln Technical Institute of Arizona, Inc., Calcomp Technology, Inc., Childtime, Petsmart, Inc., Waban, Inc. and Custom Food are scheduled for 1997. Increases on leases with Michigan Mutual Insurance Company, Detroit Diesel, Oshman Sporting Goods, Inc., Omnicom Group, Inc., Best Buy Co., Inc., Garden Ridge, Big V Holding and Barnes & Noble, Inc. are scheduled in 1998. Future operating cash flow will be affected by the outcome of the Harvest Foods, Inc. ("Harvest") bankruptcy. The Bankruptcy Court agreed to Harvest's plan to terminate the lease in March 1997. Annual cash flow from the Harvest lease was $607,000. There are no assurances that future cash flow from the Harvest property will reach pre-bankruptcy levels. Accordingly, based on Management's assessment of future cash flows, the Harvest properties were written down by $1,753,000 in 1996. A portion of the cash flow will be replaced as the Company has agreements-in-principle to sell one of the properties and lease two others. The Company is actively remarketing all the properties.
Cash flow will also be affected by increases in limited recourse mortgage loan financing. In 1996, the Company placed limited recourse financing on the Del Monte, Hibbett, Childtime and Detroit Diesel properties. The Company intends to use or has used a portion of the proceeds from these financings to purchase additional investments to further diversify the Company's portfolio.
Because of the long-term nature of the Company's net leases, inflation and changing prices should not unfavorably affect the Company's revenues and net income or have an adverse impact on the continuing operation of the Company's properties. The Company's net leases have rent increases based on the Consumer Price Index ("CPI") or the Producer Price Index, rents based on percentage of sales in excess of a specified level, or other periodic increases which should increase operating revenues in the future. Future rent increases may be affected by changes in the method of how the CPI is calculated. Although there are indications that there may be legislation which considers changes to the methods of calculating the CPI methodology, the Company cannot predict the outcome of any proposal relating to the CPI formula.
Financial Condition
Except for the properties formerly leased to Harvest, the Company's properties are leased to corporate tenants under long-term net leases which generally require tenants to pay all operating expenses relating to the leased properties. The Company's objective is to use the cash flow from net leases to meet operating expenses, service its debt, maintain adequate cash reserves and fund an increasing rate of dividends to shareholders. A significant portion of the cash provided from operations is distributed to the shareholders in keeping with the Company's objectives. The Company generally structures leases so that they will provide increases in cash flow over their initial terms with such terms generally ranging from 10 to 25 years.
Cash provided from operations of $15,071,000, reflecting an increase of 16% from 1995, was sufficient to fund dividend payments of $12,488,000 and $2,583,000 of $3,353,000 of scheduled mortgage principal installments. Future cash flow will benefit from additional purchases of real estate and rent increases. Realization of the full effect of these benefits will depend on the ability to re-lease the properties vacated by Harvest.
The Company's investing activities included the use of funds to purchase $19,261,000 of properties and fund $10,134,000 to complete build-to-suit projects. In addition, the Company used $5,410,000 to purchase an interest in a limited liability company which leases property to Upper Deck. The Company received proceeds of $2,044,000 from the sale of two Safeway Stores, Inc. supermarkets and $835,000 from the sale of Garden Ridge stock warrants.
The Company's financing activities primarily consisted of using funds provided from operating activities to pay quarterly dividends and scheduled debt service requirements. During 1996, the Company received $11,650,000 of proceeds from the placement of debt on previously unleveraged properties and, $8,000,000 from the refinancing of mortgage debt on the Garden Ridge properties. The Company purchased the Garden Ridge properties in 1994 and 1995 at an aggregate cost of $12,050,000 (including a portion of such cost allocated to stock warrants). The Company was able to use the enhancement to Garden Ridge's credit quality after completion of public stock offering in 1995 to obtain the new financing. The Company received $14,098,000 in 1996 from the issuance of stock, including $13,000,000 raised from institutional investors. The Company repaid an advance of $3,472,000 from the Company's line of credit and prepaid $4,670,000 of mortgage debt.
In order to increase the asset base of the Company and to further diversify its real estate portfolio, the Company's Board of Directors authorized an offering of 10,000,000 Shares in a private placement to a limited number of institutional investors. The Company is actively engaged in a marketing effort to raise additional capital from institutional investors. There can be no assurance that the offering will be fully subscribed although Management believes that institutional investors are a promising market for raising additional equity capital. The Company issued 1,300,000 shares at $10 per Share ($13,000,000) in 1995 and 1,130,436 shares at $11.50 per Share ($13,000,000) in 1996. The increase in price per share reflects the increase in real estate values since acquisition based on an independent valuation.
At December 31, 1996, the Company held cash and cash equivalents of $15,741,000. Although the Company holds a portion of such cash for working capital purposes, the Company intends to use a substantial portion of the cash for the acquisition of properties. The Company has $11,750,000 available from its line of credit for the purchase or construction of real estate, funding of capital improvements or refinancing of mortgage loans. During the year, a portion of the amounts available under the line of credit, which had been used to fund construction of build-to-suit projects in 1995, was repaid. The Company is in compliance with the terms of its line of credit agreement. The line of credit agreement expires in November 1997.
Except for advances drawn under its line of credit, all of the Company's debt is limited recourse mortgage financing collateralized by specific properties. Mortgage loans with combined balances of $5,782,000 and collateralizing the Harvest properties are in default. The loans are subject to acceleration; however notice of acceleration has not been received from the lenders. To the extent that the Company is able to re-lease some or all of the properties, the Company will attempt to restructure the loans with the existing lenders. In the case of mortgage financing that does not fully amortize over its term or is currently due, the Company is responsible for the balloon payment only to the extent of its interest in the encumbered property because the holder of each such obligation has recourse only to the collateral as described above. In the event that balloon payments come due, the Company will seek to refinance the loans, restructure the debt with the existing lenders, evaluate its ability to satisfy the obligation from its existing resources or sell the property and use the sale proceeds to satisfy the mortgage debt. To the extent the remaining initial lease term on any property remains in place for a number of years beyond the balloon payment date, the Company believes that the ability to refinance balloon payment obligations is enhanced. The Company also evaluates all its outstanding loans for refinancing opportunities which may occur as the result of changing interest rates or improvements in the credit rating of tenants which may enable the Company to lower the interest rate on the debt. No balloon payments on the Company's mortgages are scheduled until 1998, at which time two limited
recourse loans with an aggregate balance of $6,000,000 will be due. As the properties collateralizing the two loans are subject to long-term leases, the Company believes that the prospects for refinancing the loans are good.
In connection with the purchase of its properties, the Company requires sellers of such properties to perform environmental reviews. Management believes, based on the results of such reviews, that the Company's properties were in substantial compliance with Federal and state environmental statutes at the time the properties were acquired. However, portions of certain properties have been subject to some degree of contamination, principally in connection with leakage from underground storage tanks, surface spills or historical on-site activities. In most instances where contamination has been identified, tenants are actively engaged in the remediation process and addressing identified conditions. Tenants are generally subject to environmental statutes and regulations regarding the discharge of hazardous materials and any related remediation obligations. In addition, the Company's leases generally require tenants to indemnify the Company from all liabilities and losses related to the leased properties with provisions of such indemnification specifically addressing environmental matters. The leases generally include provisions which allow for periodic environmental assessments, paid for by the tenant, and allow the Company to extend leases until such time as a tenant has satisfied its environmental obligations. Certain of the leases allow the Company to require financial assurances from tenants such as performance bonds or letters of credit if the costs of remediating environmental conditions, in the estimation of the Company, are in excess of specified amounts. Accordingly, Management believes that the ultimate resolution of environmental matters will not have a material adverse effect on the Company's financial condition, liquidity or results of operations.
In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS No. 128"), which establishes standards for computing and presenting earnings per share. SFAS No. 128 will be effective for financial statements issued for periods ending after December 15, 1997. The impact of the adoption of this statement is not expected to be material to the Company's Consolidated Financial Statements.
REPORT of INDEPENDENT ACCOUNTANTS
To the Board of Directors of CAREY INSTITUTIONAL PROPERTIES Incorporated and Subsidiaries:
We have audited the accompanying consolidated balance sheets of CAREY INSTITUTIONAL PROPERTIES Incorporated and Subsidiaries as of December 31, 1994, 1995 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years ended December 31, 1994, 1995 and 1996. These financial statements are the responsibility of Carey Property Advisors, a Pennsylvania limited partnership (the "Advisor"). Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Advisor, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CAREY INSTITUTIONAL PROPERTIES Incorporated and Subsidiaries as of December 31, 1994, 1995 and 1996, and the consolidated results of their operations and their cash flows for the years ended December 31, 1994, 1995 and 1996, in conformity with generally accepted accounting principles.
/s/Coopers & Lybrand L.L.P. New York, New York March 24, 1997
CAREY INSTITUTIONAL PROPERTIES INCORPORATED and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1994, 1995 and 1996
CAREY INSTITUTIONAL PROPERTIES INCORPORATED and SUBSIDIARIES
CONSOLIDATED STATEMENTS of INCOME
For the years ended December 31, 1994, 1995 and 1996
The accompanying notes are an integral part of the consolidated financial statements.
CAREY INSTITUTIONAL PROPERTIES INCORPORATED and SUBSIDIARIES
CONSOLIDATED STATEMENTS of SHAREHOLDERS' EQUITY
For the years ended December 31, 1994, 1995 and 1996
The accompanying notes are an integral part of the consolidated financial statements.
CAREY INSTITUTIONAL PROPERTIES INCORPORATED and SUBSIDIARIES
CONSOLIDATED STATEMENTS of CASH FLOWS
For the years ended December 31, 1994, 1995 and 1996
(Continued)
CAREY INSTITUTIONAL PROPERTIES INCORPORATED and SUBSIDIARIES
CONSOLIDATED STATEMENTS of CASH FLOWS, CONTINUED
For the years ended December 31, 1994, 1995 and 1996
Supplemental schedule of noncash investing and financing activities:
In connection with the sale of an interest in real estate in 1994, the Company assigned a $3,334,416 interest in a mortgage loan obligation to the purchaser, an affiliate.
The accompanying notes are an integral part of the consolidated financial statements.
CAREY INSTITUTIONAL PROPERTIES INCORPORATED and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Basis of Consolidation:
The consolidated financial statements include the accounts of Carey Institutional Properties Incorporated, its wholly-owned subsidiaries and majority-owned general partnership interests (collectively, the "Company").
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.
Real Estate Leased to Others:
Real estate is leased to others on a net lease basis, whereby the tenant is generally responsible for all operating expenses relating to the property, including property taxes, insurance, maintenance, repairs, renewals and improvements.
The Company diversifies its real estate investments among various corporate tenants engaged in different industries and by property type throughout the United States.
The leases are accounted for under either the direct financing or the operating methods. Such methods are described below:
Direct financing method - Leases accounted for under the direct financing method are recorded at their net investment (Note 5). Unearned income is deferred and amortized to income over the lease terms so as to produce a constant periodic rate of return on the Company's net investment in the lease.
Operating method - Real estate is recorded at cost, revenue is recognized as rentals are earned and expenses (including depreciation) are charged to operations as incurred. When scheduled rentals vary during the lease term, income is recognized on a straight-line basis so as to produce a constant periodic rent.
The Company assesses the recoverability of its real estate assets, including residual interests, based on projections of undiscounted cash flows over the life of such assets. In the event that such cash flows are insufficient, the assets are adjusted to their estimated net realizable value.
For properties under construction, interest on mortgages is capitalized rather than expensed and rentals received are recorded as a reduction of capitalized project (i.e., construction) costs in accordance with Statement of Financial Accounting Standards No. 67.
Substantially all of the Company's leases provide for either scheduled rent increases, periodic rent increases based on formulas indexed to increases in the Consumer Price Index ("CPI") or Producer Price Index or sales overrides.
Continued
CAREY INSTITUTIONAL PROPERTIES INCORPORATED and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Depreciation:
Depreciation is computed using the straight-line method over the estimated useful lives of the properties - 40 years.
Real Estate Held for Sale:
Real estate held for sale is stated at the lower of cost or fair value less costs to dispose.
Equity Investments:
The Company's interests in a real estate investment trust ("REIT"), a general partnership and a limited liability company, which ownership interests are 50% or less, are accounted for under the equity method; i.e. at cost, increased or decreased by the Company's share of earnings or losses, less distributions.
Other Assets:
Included in other assets are deferred charges, deferred rental income, organization charges, marketable equity securities and other investments, primarily stock warrants. Deferred charges are costs incurred in connection with mortgage note financings and interest rate cap agreements and are deferred and amortized on a straight-line basis over the terms of the mortgages or agreements, respectively. Deferred rental income is the aggregate difference between scheduled rents which vary during the lease term and income recognized on a straight-line basis. Organization costs incurred in connection with the formation of the Company are deferred and amortized on a straight-line basis over five years from the date of inception.
The Company's marketable equity securities, which consist of 14,400 shares of the Garden Ridge Corporation, are classified as available-for-sale securities and are reported at fair market value with the Company's interest in unrealized gains and losses on these securities reported as a separate component of shareholders' equity until realized.
Cash Equivalents:
The Company considers all short-term, highly liquid investments that are both readily convertible to cash and have a maturity of generally three months or less at the time of purchase to be cash equivalents. Items classified as cash equivalents include commercial paper and money market funds. Substantially all of the Company's cash and cash equivalents at December 31, 1994, 1995 and 1996 were held in the custody of four financial institutions.
Funds in Escrow:
Funds in escrow consist of funds used to complete property improvements on specific properties and a mortgage security deposit which were deposited into restricted accounts. The escrow funds used to fund improvements at certain of the Company's properties are capitalized when the improvements are substantially complete and placed in service.
Treasury Stock:
Treasury stock is recorded at cost.
Offering Costs:
Costs incurred in connection with the raising of capital through the sale of common stock are deferred and charged to shareholders' equity upon the issuance of Shares to shareholders.
Continued
CAREY INSTITUTIONAL PROPERTIES INCORPORATED and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Federal Income Taxes:
The Company is qualified as a REIT under the Internal Revenue Code of 1986 and accordingly, is not subject to Federal income taxes on amounts distributed to shareholders provided it distributes at least 95% of its REIT taxable income to its shareholders and meets other conditions necessary to retain its REIT status.
Reclassifications:
Certain 1994 and 1995 amounts have been reclassified to conform to the 1996 financial statement presentation.
2. Organization and Offering:
The Company was formed on February 15, 1991 under the General Corporation Law of Maryland for the purpose of engaging in the business of investing in and owning industrial and commercial real estate. Subject to certain restrictions and limitations, the business of the Company is managed by Carey Property Advisors (the "Advisor").
Shares were offered to the public on a "best efforts" basis by Carey Financial Corporation ("Carey Financial") and other selected dealers at $10 per Share. The offering concluded in August 1993 at which time an aggregate 14,167,581 Shares ($141,675,810) had been issued. In 1995, the Company established a dividend reinvestment plan. As of December 31, 1996, 126,925 Shares had been issued pursuant to the dividend reinvestment plan.
In 1995, the Company's Board of Directors authorized the offering of 10,000,000 Shares in a private placement to a limited number of institutional investors. As of December 31, 1996, the Company had issued 2,430,435 Shares ($26,000,000) under this private placement offering.
The Advisor may be entitled to receive a subordinated preferred return, measured based upon the cumulative proceeds arising from the sale of the Company assets. Pursuant to the subordination provisions of the advisory agreement, the preferred return may be paid only after the shareholders receive 100% of their initial investment from the proceeds of assets sales and a cumulative annual return of 6% since the inception of the Company. The Advisor's interest in such preferred return amounts to $449,094 based upon the cumulative proceeds from the sale of assets since the inception of the Company through December 31, 1996. The Company's ability to satisfy the subordination provisions of the advisory agreement may not be determinable until liquidation of a substantial portion of the Company's assets has been made.
In connection with services performed relating to the identification, evaluation, structuring and development of the Company's investments in real estate, affiliates of the Company received structuring and development fees of $274,506, $223,333 and $1,077,948 in 1994, 1995 and 1996, respectively. Fees are paid only in connection with completed transactions.
3. Transactions with Related Parties:
Pursuant to an advisory agreement, the Advisor performs certain services for the Company including the identification, evaluation, negotiation, purchase and disposition of property, the day-to-day management of the Company and the performance of certain administrative services. If in any year the operating expenses exceed the 2%/25% Guidelines (the greater of 2% of Average Invested Assets or 25% of net income) as defined in the Prospectus, the Advisor will have an obligation to reimburse the Company for such excess.
The Advisor performs multiple services including providing the management and administration of the Company for which it is entitled to receive management and incentive fees. Pursuant to the Advisory Agreement, asset management fees currently due to the Advisor are equal to .5% of
Continued
CAREY INSTITUTIONAL PROPERTIES INCORPORATED and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Average Invested Assets, as defined. When Shareholders have received a cumulative dividend return of 8%, which threshold has not yet been met, the Advisor will also be entitled to receive an incentive fee of .5% of Average Invested Assets. Based upon portfolio projections, Management believes it is likely that this incentive fee will be earned; therefore, although such incentive fee will not be paid until the threshold is reached, it has been accrued and included in accounts payable to affiliates and property expense in the accompanying consolidated financial statements. Asset management fees paid were $1,341,740 in 1994, $1,477,054 in 1995 and $1,583,958 in 1996. Subordinated incentive fees, which have not been paid, were in like amount. General and administrative expense reimbursement consists primarily of the actual cost of personnel needed in providing administrative services necessary to the operations of the Company. Such reimbursements incurred were $484,139, $632,657 and $698,823 in 1994, 1995 and 1996, respectively.
The Company's ownership interests in certain properties are jointly held with affiliated entities with such interests held as tenants-in-common and through ownership interests in a real estate investment trust and two general partnerships. The Company's interests in jointly held properties range from 23.7% to 80%. As described below, the Company has purchased additional interests from affiliates, and has sold interests in three investments to an affiliate. In the future, real property may be acquired by entities formed by the Company and affiliates of the Advisor and, accordingly, transactions with related parties may arise between the Company and affiliated entities.
During 1994, the Company sold a portion of its interests to Corporate Property Associates 12 Incorporated ("CPA(R):12"), an affiliate, in two general partnerships one of which net leases property to Best Buy Co., Inc.("Best Buy") and one of which net leases property to Gensia, Inc. ("Gensia") and in directly owned properties leased to Big V Holding Corp. ("Big V"). CPA(R):12 purchased a 37% interest in the Best Buy general partnership in May 1994, exercised its option to increase its interest in the Gensia general partnership from .01% to 50% in October 1994 and purchased a 45% interest as a tenant-in-common in the Company's Big V properties in Ellenville and Warwick, New York in July 1994. CPA(R):12 paid the Company $12,008,853 for the purchase of these interests pursuant to formulas based on the initial cost for the properties and approved by the Board of Directors.
For the years ended December 31, 1994, 1995 and 1996, fees and expenses of $122,018, $116,508 and $102,896, respectively, were incurred for legal services provided by a firm in which the Secretary of the Company, the Corporate General Partner of the Advisor, W.P. Carey and other affiliates is a partner.
The Company is a participant in an agreement with W.P. Carey & Co., Inc. ("W.P. Carey") and certain affiliates for the purpose of leasing office space used for the administration of real estate entities and W.P. Carey and for sharing the associated costs. Pursuant to the terms of the agreement, the Company's share of rental, occupancy and leasehold improvement costs is based on adjusted gross revenues, as defined. Net expenses incurred in 1994, 1995 and 1996 were $71,032, $301,895 and $219,199, respectively. The increase in 1995 was due, in part, to certain nonrecurring costs incurred in connection with the relocation of the Company's offices.
4. Real Estate Leased to Others Accounted for Under the Operating Method:
Scheduled future minimum rents, exclusive of renewals, under noncancellable operating leases amount to approximately $21,246,000 in 1997; $21,227,000 in 1998; $21,231,000 in 1999; $21,247,000 in 2000; $21,369,000 in 2001; and aggregate approximately $341,232,000 through 2020.
Continued
CAREY INSTITUTIONAL PROPERTIES INCORPORATED and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Contingent rents were approximately $290,000 in 1994, $334,000 in 1995 and $403,000 in 1996.
5. Net Investment in Direct Financing Leases:
Net investment in direct financing leases is summarized as follows:
Scheduled future minimum rents, exclusive of renewals, under noncancellable direct financing leases amount to approximately $11,340,000 in 1997, $11,575,000 in 1998, $11,753,000 in 1999, $11,746,000 in 2000; $11,769,000 in 2001 and aggregate approximately $220,898,000 through 2018.
The Company is committed under long-term ground leases for certain properties formerly occupied by Harvest Foods, Inc. ("Harvest") through 2011. Future ground lease rental commitments aggregate $1,751,000.
Contingent rents were approximately $23,000 in 1994, $192,000 in 1995 and $277,000 in 1996.
6. Mortgage Notes Payable and Revolving Credit Facility:
Mortgage notes payable, all of which are limited recourse obligations, are collateralized by the assignment of various leases and by real property with a carrying amount of approximately $270,463,000 before accumulated depreciation. As of December 31, 1996, mortgage notes payable have interest rates varying from 7.45% to 10.5% per annum and mature from 1998 to 2020.
Scheduled principal payments, including mortgage notes subject to acceleration, during each of the next five years following December 31, 1996 and thereafter are as follows:
The Company's revolving credit agreement provides a line of credit of $11,750,000 as of December 31, 1996 for the purpose of financing additional investments in real estate including financing of construction improvements and other purposes. Any advances under the facility are evidenced by a promissory note which bears an annual interest rate equivalent to short-term London Inter-Bank Offered Rates plus 2.25%. Unused amounts are subject to a nonutilization fee of 0.2% per annum. The amount available under the credit facility decreases by $250,000 each month until November 15, 1997, at which time the credit facility is scheduled to terminate.
Continued
CAREY INSTITUTIONAL PROPERTIES INCORPORATED and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
The revolving credit agreement places the following restrictions on the Company: (i) funds advanced may only be used to purchase real estate, fund capital improvements or to pay down mortgage indebtedness; (ii) the lender has the option to apply all net proceeds from sales of real estate to pay any outstanding amounts advanced from the credit facility; (iii) the amount of additional mortgage indebtedness the Company may incur is limited and (iv) the Company is required to meet certain financial covenants, including maintaining a minimum tangible net worth of $97,000,000 and a debt service coverage ratio as defined of 2 to 1 on advances outstanding. The Company is currently in compliance with such terms. Amounts advanced under the credit facility are recourse obligations of the Company. No amounts were outstanding as of December 31, 1996.
Interest paid on mortgage notes payable and the revolving credit agreement, including capitalized interest, was $11,670,193, $13,709,847 and $14,110,088 in 1994, 1995 and 1996, respectively.
In connection with the placement of mortgages, fees of $194,247, $225,583 and $511,179, were paid to an affiliate of the Company in 1994, 1995 and 1996, respectively.
7. Dividends:
Dividends paid to shareholders consist of ordinary income, capital gains, return of capital or a combination thereof for income tax purposes. For the three years ended December 31, 1996, dividends paid per share were reported as follows for tax purposes:
A dividend of $.2052 per share ($3,411,109) for the quarter ended December 31, 1996 was declared and paid in January 1997.
8. Industry Segment Information:
The Company's operations consist of the investment in and the leasing of industrial and commercial real estate. The financial reporting sources of the leasing revenues are as follows:
Continued
CAREY INSTITUTIONAL PROPERTIES INCORPORATED and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
The Company earned its share of net leasing revenues in 1994, 1995 and 1996 from its direct and indirect ownership of real estate from the following lease obligors:
- ---------- (1) Represents the Company's share of revenues from its equity investment.
(2) Net of rental amount applicable to CPA(R):12's 37% minority interest acquired from the Company in May 1994.
(3) CPA(R): 12 acquired a 45% interest in two of the Big V Holding Corp.'s properties in July 1994
(4) Net of ground lease rental expense of approximately $152,000, $158,000 and $158,000 for 1994, 1995 and 1996, respectively.
Continued
CAREY INSTITUTIONAL PROPERTIES INCORPORATED and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. Equity Investments:
The Company owns a 23.7% interest in Marcourt Investments Incorporated ("Marcourt") which, pursuant to a master lease, net leases 13 hotel properties to a wholly-owned subsidiary of Marriott International, Inc. and 50% equity interests in Gena Property Company ("Gena"), a general partnership, which owns land and buildings in San Diego, California, net leased to Gensia Inc., a general partnership and Cards Limited Liability Company ("Cards LLC"), which net leases two office buildings to The Upper Deck Company. Since October 1994, the Company has held a 50% interest in Gena. The interest in Cards LLC was purchased in January 1996.
The summarized financial information of Marcourt is as follows:
(In thousands)
Summarized financial information of Gena is as follows:
(In thousands)
Summarized financial information of Cards LLC is as follows: (In thousands)
Continued
CAREY INSTITUTIONAL PROPERTIES INCORPORATED and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. Gains and Loss on Sale:
Data Documents, Inc.:
In May 1993, the Company and Corporate Property Associates 10 Incorporated ("CPA(R):10"), an affiliate, purchased land and buildings as tenants-in-common for $13,450,000 with 77.78% and 22.22% interests, respectively, and entered into a net lease with Data Documents, Inc. ("Data Documents"). In 1994, Data Documents notified the Company and CPA(R):10 that it intended to restructure its debt. The Company and CPA(R):10 informed Data Documents that such restructuring would violate the financial covenants of the lease. Data Documents did not remedy the covenant violation and, therefore, was obligated to purchase its leased properties at the higher of the original costs or fair market value as encumbered by the lease. In November 1994, the lease was terminated and title to the properties was transferred. In connection with the transfer, Data Documents deposited funds in an escrow account pending final determination of fair market value. The fair market value was subsequently determined to be $15,775,000. In connection with such final determination, all remaining sales proceeds were received by the Company. The Company recognized a gain on the sale of the properties of $1,535,763 in 1994.
Garden Ridge Corporation:
In December 1993, the Company entered into a net lease with Garden Ridge Pottery Corporation (subsequently renamed Garden Ridge, Inc.) ("Garden Ridge"). In connection with executing the lease transaction, Garden Ridge's parent company, Garden Ridge Corporation ("Garden Ridge Corp."), granted the Company warrants to purchase 97,200 shares of common stock, as adjusted for stock splits, exercisable at $6.67 per common share. On May 9, 1995, Garden Ridge Corp. completed an initial public offering ("IPO") of common stock. In connection with the IPO, the Company exercised its warrants on the 97,200 shares and simultaneously sold 90,000 of such shares at $15 per share realizing a gain, net of selling costs, of $628,099.
In connection with entering into a second lease agreement with Garden Ridge Corp. in 1995, the Company was granted warrants to purchase 67,500 shares of common stock exercisable at $10 per share. On April 30, 1996, the Company exercised warrants for 22,500 shares and simultaneously sold such shares realizing a gain, net of selling costs, of $664,431. Garden Ridge Corp.'s stock subsequently split on a 2-for-1 basis.
Safeway Stores, Inc.:
In December 1991, the Company and CPA(R):10 purchased three supermarkets leased to Safeway Stores Incorporated ("Safeway") as tenants in-common, each with 50% ownership interests. In 1996, the Company and CPA(R):10 sold a property in Glendale, Arizona and a property in Escondido, California.
On January 26, 1996, the Glendale store was sold for $1,950,000. On February 15, 1996, the Escondido property was sold for $3,450,000. A net loss of $7,630 was recognized on the sales. Net of transaction costs, the Company received $2,044,260 in cash a promissory note of $560,750. The final installment on the promissory note, was received in January 1997.
Annual cash flow from the two properties was $252,000.
Continued
CAREY INSTITUTIONAL PROPERTIES INCORPORATED and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. Extraordinary Charge on Extinguishment of Debt:
In October 1995, the Company refinanced two limited recourse mortgage loans with annual interest rates of 9.25% and 10%, and combined balances of $8,910,000, collateralized by the property leased to Omnicom Group, Inc. In connection with the prepayment of one of the loans, the Company incurred a prepayment charge of $401,269 in 1995 as an extraordinary charge on extinguishment of debt.
In December 1995, the lender filed suit against the Company alleging that the prepayment premium paid in connection with the prepayment of one of two loans was understated by approximately $400,000. The Company reached an agreement with the lender in November 1996 to settle the dispute for $275,000. Such payment has been recorded in 1996 as an extraordinary charge on the extinguishment of debt.
12. Purchase of Real Estate:
On December 17, 1996, the Company purchased land and two buildings in Orlando, and Hollywood, Florida for $9,325,000 and entered into a master net lease agreement for both properties with Detroit Diesel Realty, Inc. ("Detroit Diesel"), with Detroit Diesel's parent company, Detroit Diesel Corporation as lease guarantor.
The Detroit Diesel lease provides for an initial lease term of 23 years with two ten-year renewal options. Annual rentals under the lease are $845,000, with rent increases during each of the first five years and every three years thereafter, based on a formula indexed to increases in the Producer Price Index.
In connection with performing services relating to the Company's real estate purchases, affiliates of the Company received fees of $194,247, $89,334 and $431,179 in 1994, 1995 and 1996, respectively.
13. Harvest Foods, Inc.:
In February 1992, the Company and CPA(R):10 purchased as tenants-in-common, each with 50% ownership interests, 13 supermarkets and two office buildings and entered into a master lease with Harvest Foods, Inc. ("Harvest"), as lessee. The total purchase price of the Harvest properties was $20,165,000. The Company and CPA(R):10 each contributed $3,950,000 of equity and each obtained $6,132,500 of limited recourse mortgage financing from two lenders of $4,632,500 and $1,500,000, respectively, to fund the purchase of the Harvest properties.
In June 1996 Harvest filed a voluntary bankruptcy petition under Chapter 11 of the United States Bankruptcy Code. Subsequent to Harvest's filing for Chapter 11 bankruptcy, Harvest filed a motion to sever the master lease into 15 separate leases. The Company and CPA(R):10 vigorously opposed the motion which Harvest subsequently withdrew. In March 1997, the Bankruptcy Court approved Harvest's motion to disaffirm the master lease. The Company has agreements-in-principle to sell one of the properties and lease two of the supermarkets. As final agreements have not been completed for sale or lease of properties, there is no assurance that the proposed sale or lease of properties will occur. The Company's share of annual rent under the Harvest lease was the sum of (i) $607,086 and (ii) an amount equal to debt service on the two loans. Based on the Company's expectation that future cash flow from the properties will be
Continued
CAREY INSTITUTIONAL PROPERTIES INCORPORATED and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
reduced, Management has concluded that there has been an impairment to the value of the properties. Based on a writedown of the properties to their estimated net realizable value of $8,250,000, the Company has incurred a charge of $1,753,455 for the year ended December 31, 1996.
The two limited recourse mortgage loans, of which the Company's share was $5,782,000 at December 31, 1996, are in default and are subject to acceleration by the lenders as a result of the filing of the bankruptcy petition. A portion of the debt service for the period subsequent to December 31, 1996 had not been paid in a timely manner. As the lender's sole recourse is to the Harvest properties, the Company and CPA(R):10 are evaluating their options including proposing a restructuring of the loan.
14. Disclosures About Fair Value of Financial Instruments:
The carrying amounts of cash, receivables, and accounts payable and accrued expenses approximate fair value because of the short maturity of these items.
The Company estimates that the fair value of mortgage notes payable approximates the carrying value of such mortgage notes at December 31, 1996. The fair value of debt instruments was evaluated using a discounted cash flow model with discount rates which take into account the credit of the tenants and interest rate risks.
In conjunction with executing several of its leases, the Company was granted warrants to purchase common stock of the lessee or lease guarantor. To the extent that the lessee is not a publicly traded company, the warrants have been judged at the time of issuance to be speculative in nature and a nominal cost basis has been attributed to them. The Company believes it is not practicable to estimate the fair value of its stock warrants for closely held companies. At December 31, 1996, the Company held stock warrants for 90,000 common shares of Garden Ridge and 155,461 common shares of Merit Medical Systems, Inc., both of which are publicly traded companies. The fair value of the Company's stock warrants in these two companies as of December 31, 1996, based on quoted prices of their common stock, which have a carrying value of $341,623, is approximately $793,000. Such warrants are exercisable currently.
At December 31, 1996, the Company has an interest rate cap agreement on one of its variable rate limited recourse mortgage loans with an aggregate notional amount of $3,200,000. The agreement expires in 1998. The Company has no off-balance sheet risk of accounting loss on such agreements.
15. New Accounting Pronouncement:
In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS No. 128"), which establishes standards for computing and presenting earnings per share. SFAS No. 128 will be effective for Financial Statements issued for periods ending after December 15, 1997. The impact of the adoption of this statement is not expected to be material to the Company's Consolidated Financial Statements.
PROPERTIES - --------------------------------------------------------------------------------
(1) These properties are encumbered by mortgage notes payable.
(2) Ownership of buildings with ground leases of land for one property in Little Rock, Arkansas and properties in Hot Springs, North Little Rock and Jonesboro, Arkansas.
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS - --------------------------------------------------------------------------------
Except for limited or sporadic transactions, there is no established public trading market for the Shares of the Company. As of December 31, 1996, there were 8,934 holders of record of the Shares of the Company.
The Company is required to distribute annually its Distributable REIT Taxable Income, as defined in the Prospectus, to maintain its status as a REIT. Quarterly dividends paid by the Company are as follows:
REPORT ON FORM 10-K - --------------------------------------------------------------------------------
The Advisor will supply to any shareholder, upon written request and without charge, a copy of the Annual Report on Form 10-K for the year ended December 31, 1996 as filed with the Securities and Exchange Commission.
EXHIBIT INDEX