ITEM 1. BUSINESS
COMPANY OVERVIEW
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. The Company completed its initial public offering of common shares and began generating rental income in February 1998. Unless the context otherwise requires, the term "Capital Automotive Group" refers to the Company and the Operating Partnership and their subsidiaries. In this Annual Report on Form 10-K, the term "subsidiary" of the Company or the Operating Partnership means a corporation, partnership, limited liability company or similar entity if the Company or the Operating Partnership, alone or together, directly or indirectly, own at least a majority of the equity interests of the entity.
Capital Automotive Group's 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. In this Annual Report on Form 10-K, Capital Automotive Group uses the term "dealerships" to refer to these types of businesses that are operated on its properties.
As of February 1, 1999, Capital Automotive Group owned 131 properties located in 18 states, making up approximately 760 acres of land and containing approximately 4.8 million square feet of buildings and improvements. Capital Automotive Group's lessees operate 203 motor vehicle franchises on these properties, representing 36 brands of motor vehicles, including Acura, Audi, BMW, Buick, Cadillac, Chevrolet, Chrysler, Dodge, Dodge Trucks, Ford, Freightliner, GMC, Honda, Hyundai, Infiniti, Isuzu, Jaguar, Jeep, Kia, Land Rover, Lexus, Lincoln-Mercury, Mazda, Mercedes-Benz, Mitsubishi, Nissan, Oldsmobile, Plymouth, Pontiac, Porsche, Saab, Saturn, Subaru, Toyota, Volkswagen and Volvo.
Capital Automotive Group focuses on buying properties from third parties that have a long history of operating multi-site, multi-franchised dealerships. In this Annual Report on Form 10-K, Capital Automotive Group uses the term "dealer group" to refer to a group of related persons and companies who sell properties to Capital Automotive Group. Capital Automotive Group also uses the term "dealer group" or the term "lessee" to refer to the related persons and companies that lease properties owned by Capital Automotive Group.
As of February 1, 1999, Capital Automotive Group had invested approximately $565 million in properties. Most of the properties have been leased to lessees who are related to the sellers of such properties. In certain cases, Capital Automotive Group may lease property to, or assume an existing lease with, a lessee that is not related to the seller from whom the property was purchased.
Capital Automotive Group purchases properties in exchange for cash, units of limited partnership interest in the Operating Partnership ("Units"), the assumption of debt, or a combination of all three. Capital Automotive Group usually pays off any assumed debt in full at closing. In certain cases, Capital Automotive Group assumes and does not pay off a dealer group's loan under an existing mortgage as part of the purchase of real estate. At times, Capital Automotive Group has agreed in advance to purchase property in the future only after the dealership buildings have been constructed by the seller.
Capital Automotive Group generally leases properties to established, creditworthy lessees, for a period of ten to 20 years, with options to renew upon the same terms and conditions for one or more additional periods of five to ten years each exercisable at the option of the lessee. The lessee typically is required to pay all operating expenses of the property, including all real estate taxes and assessments, utilities, insurance, repairs, maintenance and other expenses. This type of lease is commonly known as a "triple-net" lease.
In evaluating dealer groups and potential properties for purchase, Capital Automotive Group considers such factors as:
. the management and operating experience of the dealer group;
. the adequacy of a dealer group's historical, current and forecasted cash flow to meet the operating needs of the business, expenses and lease payments or debt service obligations;
. the type of franchises operated by the dealer group;
. the value of the land, buildings and other improvements as determined by Capital Automotive Group and its consultants, but not by an independent MAI appraisal;
. the construction quality, condition and design of the dealership buildings and other improvements located on the property;
. the geographic area in which the property is located; and
. the environmental condition of the real estate.
Capital Automotive Group intends to acquire more properties. Those transactions may be structured in ways that are similar or dissimilar to those described above.
Capital Automotive Group has and will continue to borrow funds to buy properties. As of February 20, 1999, Capital Automotive Group had mortgage indebtedness totaling $162 million secured by 64 properties owned by subsidiaries of the Operating Partnership. In February 1999, Capital Automotive Group secured approval from a financial institution for a $50.0 million revolving credit facility. The Company intends to increase the capacity under this revolving facility through the inclusion
of additional financial institutions. Capital Automotive Group may also issue debt securities, including senior or subordinated notes. These notes may be secured by properties or leases. Capital Automotive Group has adopted a policy to limit debt to approximately 50% of assets. This policy may be changed by the Company's Board of Trustees at any time without shareholder approval.
As a real estate investment trust, the Company acquires properties through its direct and indirect subsidiaries, including the Operating Partnership, and manages its business in a manner that is intended to be consistent with the requirements of the Internal Revenue Code (the "Code") and the regulations of the Internal Revenue Service (the "IRS") that govern taxation of real estate investment trusts. The Company has and expects to continue to pay regular cash dividends to its shareholders; to provide its shareholders the opportunity for increased dividends from increasing annual rental income; to preserve and protect the investments of its shareholders; and to provide its shareholders with the opportunity to increase the value of their investments.
The Company is self-administered and self-managed, meaning that its trustees, officers and employees manage and administer Capital Automotive Group's business. The Company's executive officers are Thomas D. Eckert, President and Chief Executive Officer; Scott M. Stahr, Executive Vice President and Chief Operating Officer; Donald L. Keithley, Executive Vice President of Business Development; David S. Kay, Vice President and Chief Financial Officer; John M. Weaver, Vice President, Secretary and General Counsel; and Peter C. Staaf, Vice President and Treasurer.
STRATEGY
Capital Automotive Group's primary business strategy is to acquire a diversified portfolio of real property and improvements throughout the United States used by the operators of franchised automobile dealerships, motor vehicle service, repair or parts businesses and related businesses. In addition, Capital Automotive Group intends to commit to purchase properties under construction, renovation or expansion upon completion of such construction, renovation or expansion. Capital Automotive Group believes that its acquisition strategy will provide dealer groups with an opportunity (1) to acquire liquidity, while maintaining ownership and control of the operations of the dealerships, (2) to diversify their investments, (3) to obtain funds to expand operations or remodel the facilities of their dealerships, (4) to facilitate their estate planning, and (5) to provide attractive tax deferral opportunities.
Capital Automotive Group believes that because the improvements used by dealerships are usually single purpose structures, such properties are a major and discrete sector of the national retail real estate industry. Industry sources estimate that the real property and improvements associated with franchised auto dealers represent in excess of $40 billion of real estate. Capital Automotive Group believes that those properties present attractive acquisition and financing opportunities because they have locations, with frontage on, and visibility from, major thoroughfares, and zoning, which permits a wide range of alternative uses. In the event that such properties can no longer be leased to dealerships, Capital Automotive Group believes that they can be redeveloped for other commercial uses.
Capital Automotive Group's primary objective is to own and lease properties used by dealerships throughout the United States for the primary purpose of generating rental income in order to provide Capital Automotive Group with long- term, predictable streams of cash flow to maximize shareholder value. To achieve these objectives, Capital Automotive Group is:
. Implementing an aggressive and disciplined acquisition program by purchasing properties used by dealer groups that operate multi-site, multi-franchised dealerships that have demonstrated historic growth, are well managed, have been maintained in good condition, and whose location and characteristics will be suitable for alternative use;
. Diversifying geographically by acquiring properties located predominately in major metropolitan areas in order to minimize the potential adverse impact of economic downturns in certain markets;
. Diversifying by franchise to minimize the potential adverse impact of changes in consumer preferences and manufacturer fortunes;
. Leveraging the contacts and experience of Capital Automotive Group's management to build and maintain long-term relationships with dealer groups;
. Maintaining long-term working relationships with dealer groups, by providing capital for multiple acquisitions of properties on a market- by-market basis, thereby enhancing efficiency and value;
. Using the Company's "UPREIT" structure to acquire properties in exchange for cash, Units, the assumption of debt, or a combination of all three forms of consideration, thereby deferring some or all of a seller's potential taxable gain. This structure enhances the ability of Capital Automotive Group to consummate transactions and to structure more competitive acquisitions than other real estate companies in the market that lack Capital Automotive Group's access to capital and the ability to acquire properties with Units;
. Leasing back properties to dealer groups on a triple-net basis, thereby eliminating brokerage, re-leasing and similar costs, and the risk of high lessee turnover due to the general historic long-term operation of dealerships at property locations;
. Negotiating lease covenants designed to minimize the likelihood of loss to Capital Automotive Group, by permitting Capital Automotive Group to continually monitor the ability of the lessees to pay rent by periodic submissions and review of financial data; and
. Utilizing a variety of financing sources, such as the issuance of Units, or other equity securities or debt securities, or a combination thereof.
THE PROPERTIES, LEASES, TYPICAL LEASE TERMS AND DEALERSHIPS
PROPERTIES
As of December 31, 1998, Capital Automotive Group owned 120 properties in 18 states. These properties are leased to 30 dealer groups which operate 196 motor vehicle franchises on the properties. See Item 2
ITEM 2. PROPERTIES
PROPERTIES
As of December 31, 1998, Capital Automotive Group owned 120 properties leased to 30 dealer groups, which operate 196 motor vehicle franchises on the properties. Investments in individual properties ranged from $308,000 to $23.8 million with a total investment (excluding accumulated depreciation) of approximately $511.1 million. These properties are located in 18 states, and total 4.3 million square feet of buildings and improvements on 708.8 acres of land.
The properties are subject to leases with initial terms that range generally from ten to 20 years, with the average initial term of approximately 13 years. The leases typically have options to renew upon the same terms and conditions for one or more additional periods of five to ten years each exercisable at the option of the lessee. The average remaining lease term (excluding renewals) is approximately 12 years. As of December 31, 1998, Capital Automotive Group's current lease expirations are as follows: one in 2003, one in 2006, two in 2007, 30 in 2008, six in 2009, seven in 2010, three in 2011, 54 in 2013, one in 2014, two in 2016, and one in 2018. With expected continued investment activity, the Company anticipates that its exposure to annual lease expirations will become more diversified. As of December 31, 1998, all 120 properties were subject to leases which were performing.
All of the properties are owned on a fee simple basis, except that a small portion of one property is occupied pursuant to a ground lease from the owner of the property. As of December 31, 1998, 100 of the properties owned by Capital Automotive Group were operated by franchised automobile dealerships. Properties
that are not dealerships, such as body shops or used vehicle lots, generally are not subject to any franchise agreement. As of December 31, 1998, Capital Automotive Group leased 15 properties that are operated as non-franchised dealerships or for other motor vehicle uses. The remaining five properties of raw land are leased by various dealer groups.
All the properties are leased under triple-net leases, under which the lessees typically pay all operating expenses of a property, including, but not limited to, all taxes, assessments and other government charges, insurance, utilities, service, repairs and maintenance. The Company believes that its properties are covered by adequate commercial general, fire, flood and extended loss insurance provided by reputable companies, with commercially reasonable deductibles and limits.
The following table sets forth certain information concerning the properties as of December 31, 1998:
GENERAL DESCRIPTION OF PROPERTIES
As of December 31, 1998, Capital Automotive Group's properties conform generally to the following specifications for size, cost and type of land, buildings and other improvements.
Land sizes typically range from less than one acre to over 50 acres. The improvements on the properties generally consist of one or more retail showrooms, office space (which may or may not be contained in a separate building), adjacent full service and repair facilities, parts and accessories departments, and in many cases, acreage set aside for used car sales, body shops and parking for inventory. The properties generally are zoned for a wide range of commercial uses and typically have frontage on major transportation arteries with high traffic patterns, high visibility, bright signage and ease of entrance and exit.
PROPERTY AND LEASE CONCENTRATIONS
Capital Automotive Group invests in properties throughout the United States. As of December 31, 1998, the properties were diversified across 18 states with a maximum "geographic concentration" in Texas equal to 26.7% of Capital Automotive Group's total property investment. Properties located in Virginia represented a concentration of 18.5%, with no other geographic concentrations exceeding 10%.
As of December 31, 1998, the properties were leased to 30 different dealer groups. Rosenthal accounted for approximately 17.7% of Capital Automotive Group's total revenue for the fiscal year ended December 31, 1998. Rosenthal accounted for 22.9% of Capital
Automotive Group's total rental revenue for the fiscal year ended December 31, 1998 and 13.5% of Capital Automotive Group's annualized rental revenue as of December 31, 1998. The Rosenthal properties were acquired in February 1998. As Capital Automotive Group's portfolio continues to grow and total rental revenue increases, the percent of total rental revenue relating to Rosenthal will decrease. For the fiscal year ended December 31, 1998, no other dealer group or single property contributed more than 10% of Capital Automotive Group's total revenue.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Capital Automotive Group is not a party to any legal proceedings. Under the leases, the lessees are obligated to indemnify Capital Automotive Group from and against all liabilities, costs and expenses imposed upon or asserted against Capital Automotive Group (1) as owner of the properties on account of certain matters relating to the operation of the properties by the lessee, and (2) where appropriate, on account of certain matters relating to the ownership of the properties prior to their acquisition by Capital Automotive Group. See "Item 1 - Business--The Properties, Leases, Typical Lease Terms and Dealerships--Leases and Typical Lease Terms--Indemnification."
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth quarter of the fiscal year ended December 31, 1998.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
(a) On December 7, 1998, the Operating Partnership issued 264,294 Units to Security Holdings, Inc. as partial consideration for the acquisition of two parcels of real property and improvements located in McAlester and Ada, Oklahoma. The Units are redeemable beginning on January 31, 2000 by the Partnership for cash, or at the option of the Company, common shares of the Company, on a one-for-one basis, or cash. The offering and sale of the Units was exempt from registration as a private placement under Section 4(2) of the Securities Act.
As of December 30, 1998, the Company exchanged the warrant for 707,079 Units held by John J. Pohanka for the warrant exercisable for 707,079 common shares at the same exercise price of $15.00 per share and on identical terms as the warrant for Units. The warrant for Units has been cancelled. The offering and exchange of the warrant was exempt from registration as a private placement under Section 4(2) of the Securities Act.
As of December 31, 1998, the Company exchanged the warrant exercisable for 50,000 Units held by Robert M. Rosenthal for the warrant exercisable for 50,000 common shares. As of December 31, 1998, the Company exchanged the warrant exercisable for 657,079 Units held by Rosenthal & Daughters L.L.C. for the warrant exercisable for 657,079 common shares. The warrants for common shares are exercisable at the same exercise price of $15.00 per share and have identical terms as the warrants for Units. The warrants for Units have been cancelled. The offering and exchange of the warrants was exempt from registration as a private placement under Section 4(2) of the Securities Act.
On September 8, 1998, the Company announced that its Board of Trustees authorized the repurchase of up to 3.0 million common shares. On October 21, 1998, the Company announced that its Board of Trustees authorized the repurchase of up to 3.0 million additional common shares, bringing the total common share repurchase program to 6.0 million. Purchases have been and will be made from time to time in open market transactions at prevailing prices or in negotiated private transactions at the discretion of the Company's management. The Company repurchased 2,241,700 common shares at an average price of $10.04 per common share, during the three-month period ended December 31, 1998. During the same time period, the Operating Partnership redeemed an equivalent number of Units from the Company for equivalent purchase prices.
(b) The common shares have been trading on the Nasdaq National Market under the symbol "CARS" since February 13, 1998. The Company has listed below the high and low sales prices of the common shares as reported on the Nasdaq National Market and the distributions declared by the Company for the periods indicated.
On March 17, 1999, the reported closing sales price on the Nasdaq National Market was $12.75 per share and there were approximately 34 holders of record of the common shares of the Company. The Company believes the total number of beneficial shareholders of the Company to be approximately 2,200 since certain common shares are held by depositories, brokers and other nominees.
ITEM 6.
ITEM 6. SELECTED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of Capital Automotive REIT (the "Company") should be read in conjunction with the consolidated financial statements and the notes thereto which appear elsewhere in this annual report.
OVERVIEW
The Company was formed as a Maryland real estate investment trust on October 20, 1997 and was initially capitalized on such date through the sale of ten common shares of beneficial interest, par value $.01 per share. The Company's mission is to purchase and lease back, pursuant to long-term triple-net leases, the real property and improvements used by multi-site, multi-franchised automotive dealerships and related businesses located predominately in major metropolitan areas throughout the United States, through its ownership interest in Capital Automotive L.P. (the "Operating Partnership"). The Company is the first publicly-traded real estate investment trust formed primarily to acquire and lease back the real estate used by automotive dealers and automotive-related businesses.
In February 1998, the Company completed an Initial Public Offering ("IPO") of its common shares of beneficial interest, par value $.01 per share ("Common Shares") whereby 20.0 million Common Shares were issued at $15 per Common Share, resulting in net proceeds of approximately $275.4 million, after underwriting discounts and commissions and other expenses of the IPO. In addition, FBR Asset Investment Corporation, an affiliate of Friedman, Billings, Ramsey & Co., Inc. ("FBR"), the representative of the underwriters in the IPO, purchased 1,792,115 Common Shares of the Company at the IPO price in a private placement offering, resulting in net proceeds of $25.0 million, net of underwriting discounts (the "FBR Offering"). In March 1998, 3.0 million Common Shares subject to the underwriters' over-allotment option were issued at $15 per Common Share, resulting in net proceeds of approximately $41.9 million, after underwriting discounts and commissions. The Company contributed the net proceeds of the IPO, over-allotment option and the FBR Offering to the Operating Partnership in exchange for 24,792,115 units of limited partnership interests ("Units") in the Operating Partnership.
Typically the Operating Partnership forms a subsidiary limited liability company or limited partnership to own properties acquired from a given dealership group. This structure is intended to facilitate financings and transfers involving such properties. As of December 31, 1998, the Company held a 76.7% general partnership interest in the Operating Partnership. The Operating Partnership and its subsidiaries collectively owned 120 properties as of December 31, 1998.
Substantially all of the Company's revenues are derived from (1) rents received under long-term triple-net leases; and (2) interest earned from the temporary investment of funds in short-term investments.
The Company incurs operating and administrative expenses including principally, compensation expense for its executive officers and other employees, professional fees and various expenses incurred in the process of acquiring additional properties. The Company is self-administered and managed by its executive officers and staff, and does not engage a separate
advisor or pay advisory fees for services, although the Company will engage legal, accounting, tax and financial advisors from time to time. The primary non-cash expense of the Company is the depreciation of its properties. The Company depreciates buildings and improvements on the properties currently owned by it over a 40-year and 20-year period for tax and financial reporting purposes, respectively. The Company does not own or lease any significant personal property, furniture or equipment at any property currently owned by it.
ACQUISITIONS
As of December 31, 1998, the Company, through the Operating Partnership and its subsidiaries, owned 120 dealership properties used by 30 motor vehicle dealer groups ("Dealer Groups") with a total investment of approximately $511.1 million, consisting of $218.8 million in cash (including estimated closing costs through December 31, 1998), $12.0 million in the assumption of mortgage debt, $181.5 million in the assumption and repayment of mortgage debt and approximately 6.6 million Units (valued at $98.8 million). These properties total 708.8 acres of land, 4.3 million square feet of buildings and improvements and are located in 18 states including, Alabama, Arizona, California, Colorado, Connecticut, Florida, Georgia, Idaho, Indiana, Louisiana, Maryland, Missouri, Nevada, Ohio, Oklahoma, Pennsylvania, Texas, and Virginia. The Company's properties have initial lease terms generally ranging from ten to 20 years and are operated by 196 automotive franchisees. The Company's portfolio weighted average initial cap rate was 10.6%, which is calculated as the percentage of the 1998 initial annual base rent over the purchase price paid to the sellers for the related properties.
Subsequent to December 31, 1998, the Company closed on the acquisition of 11 dealership properties and renovations having an aggregate purchase price of approximately $54.0 million, for substantially all cash. These properties total approximately 51 acres, are located in three states and are operated by seven automotive franchisees.
RESULTS OF OPERATIONS
The Company had no operations prior to October 20, 1997 (the date of organization). Although the Company was formed prior to January 1, 1998, it did not complete its IPO until February 19, 1998, at which time it began generating rental income.
Rental revenue was $27.0 million for the year ended December 31, 1998. The rental revenue was generated from the immediate lease back of 120 properties purchased during the year ended December 31, 1998. Of the 120 properties, 35 of the properties closed during the first quarter of 1998, 29 properties closed during the second quarter of 1998, 31 properties closed during the third quarter of 1998 and 25 closed during the fourth quarter of 1998.
Interest income was $7.9 million for the year ended December 31, 1998. Interest income was primarily generated from the investment of the excess of the net proceeds of the IPO, the FBR Offering, exercise of the underwriters' over- allotment option and debt issued during the year over the amount invested in properties.
Depreciation and amortization was $6.3 million for the year ended December 31, 1998 and consisted primarily of depreciation on the properties purchased during the year.
General and administrative expenses were $5.5 million for the year ended December 31, 1998 and consisted primarily of payroll and related benefits, professional services and other administrative costs.
Interest expense was $2.3 million for the year ended December 31, 1998 and consisted of interest charged on the Company's outstanding debt during the year.
LIQUIDITY AND CAPITAL RESOURCES
Upon the completion of the IPO, the FBR Offering and the underwriters' over-allotment option, the Company received net proceeds of approximately $342.3 million, after underwriting discounts and commissions and other expenses of the IPO.
In February 1999, the Company, through the Operating Partnership and its subsidiaries, secured approval from a financial institution for a $50.0 million revolving credit facility. Final terms and conditions are subject to further negotiations. The credit facility will provide short-term funds for the acquisition of automotive dealership properties and for general corporate purposes. The current term is for three years, extendable annually at the lender's discretion, and borrowings will bear interest at a rate equal to the one month LIBOR plus 175 basis points. The borrowings will require quarterly interest only payments in arrears. The Company intends to increase the capacity under this revolving facility through the inclusion of additional financial institutions.
On November 18, 1998, four newly-formed subsidiaries of the Company and Operating Partnership closed on a $150.0 million, non-recourse loan (the "Permanent Loan") with Global Alliance Finance Company, L.L.C. (the "Lender"). The Permanent Loan requires consecutive monthly payments of interest only for two years. Thereafter, monthly payments of principal and interest will be required in an amount sufficient to amortize the Permanent Loan over a 25-year term. The term of the Permanent Loan is ten years and it bears interest at a rate equal to 7.67% per annum until maturity on December 1, 2008. The weighted average interest rate for 1998 for the Permanent Loan was approximately 8.06%. The Permanent Loan is secured by mortgages on the properties financed. The Operating Partnership has provided a limited $35 million guaranty of the Permanent Loan, which guaranty is contingent upon the occurrence of certain circumstances. A portion of the loan proceeds was used to pay off existing debt and the balance used to finance acquisitions, working capital and for other corporate purposes.
Subsequent to December 31, 1998, the Company and the Lender modified the terms on approximately $38.0 million of the Permanent Loan in order for the Lender to have more flexibility in structuring a commercial mortgage backed security execution. The interest rate on this portion of the Permanent Loan was reduced to 7.59% per annum, the monthly interest only payments were reduced to one year and the amortization period was reduced to approximately 17 years.
On November 5, 1998 the Company assumed a mortgage note payable to a financial institution in the principal amount of approximately $12.0 million. The note was assumed as partial consideration for the acquisition of four dealership properties. The note is secured by the properties acquired. The mortgage note bears interest at a rate equal to 7.50% per annum until maturity on January 20, 2003. The weighted average interest rate for 1998 for the mortgage note
was approximately 7.61%. Principal and interest are payable monthly. Any outstanding principal and interest shall be due and payable upon maturity.
On October 16, 1998, the Company, through the Operating Partnership, entered into a $50.0 million bridge loan with the Lender to finance acquisitions, working capital and for other corporate purposes ("Bridge Loan"). The Bridge Loan required monthly payments of interest only and incurred interest at the rate equal to the one month LIBOR plus 200 basis points. The Bridge Loan was repaid with a portion of the proceeds of the Permanent Loan on November 20, 1998.
In February 1998, the Company, through the Operating Partnership, entered into a secured revolving line of credit from NationsBank, N.A. (the "Bank") providing for a borrowing capacity of $10.0 million. Borrowings incurred interest at a fluctuating rate equal to the one month LIBOR plus 150 basis points. On August 14, 1998, the Company and the Bank amended and restated the line of credit to increase the borrowing capacity to $13.5 million and extended the expiration date to November 19, 1998. On September 8, 1998, the Company and the Bank again amended and restated the line of credit to increase the borrowing capacity to $19.1 million and on November 6, 1998 extended the expiration date to December 19, 1998. The outstanding balance of $13.0 million was repaid on November 20, 1998 with a portion of the proceeds of the Permanent Loan.
On September 8, 1998, the Company announced that its Board of Trustees had authorized the repurchase of up to 3.0 million Common Shares. On October 21, 1998, the Company announced that its Board of Trustees had authorized the repurchase of up to 3.0 million additional Common Shares, bringing the total Common Share repurchase program to 6.0 million. Purchases have been and will be made from time-to-time in open market transactions at prevailing prices or in negotiated private transactions at the discretion of the Company's management. During 1998, the Company repurchased 3,184,700 Common Shares at an average price of $10.51 per Common Share. During the same time period, the Operating Partnership redeemed an equivalent number of Units from the Company for equivalent purchase prices.
The Company anticipates that cash from operations and existing and future short-term and long-term debt will provide adequate liquidity to acquire additional properties, conduct its operations, fund administrative and operating costs and interest payments, and allow distributions to shareholders in accordance with the Internal Revenue Code of 1986, as amended (the "Code") requirements for qualification as a real estate investment trust and to avoid any corporate level federal income or excise tax for at least the next twelve months.
In order to qualify as a real estate investment trust for federal income tax purposes, the Company will be required to make substantial distributions to its shareholders. The following factors, among others, will influence the decisions of the Board of Trustees regarding distributions: (1) annual base rent under the leases; and (2) returns from short-term investments. Although the Company will receive most of its rental payments on a monthly basis, it intends to make distributions quarterly. Amounts accumulated for distribution are expected to be invested by the Company in short-term investments.
The Company also intends to borrow additional amounts in connection with the acquisition of additional properties, the renovation or expansion of properties, or, as necessary, to
meet certain distribution requirements imposed on a real estate investment trust under the Code. The Company may raise additional long-term capital by issuing, in public or private transactions, debt or other equity securities, but the availability and terms of any such issuance will depend upon the market and other conditions.
On October 20, 1998, the Board of Trustees approved a resolution providing that the policy of the Company shall be to operate with a debt-to-asset ratio of not more than approximately 50%. Prior to that date, the Company's policy on the use of leverage was not more than 50% of total market capitalization. Management believes that the revised policy is more in line with the Company's overall business strategy.
The Company anticipates that as a result of its initially low ratio of debt-to-assets and its policy to maintain such ratio at no more than approximately 50%, it will be able to obtain additional financing for its long- term capital needs.
Acquisitions will be made subject to the investment objectives and policies of the Company to maximize both current income and long-term growth in income. The Company's liquidity requirements with respect to future acquisitions may be reduced to the extent the Company uses Units as consideration for such purchases.
YEAR 2000 COMPLIANCE
Management of the Company has adopted a plan to confront year 2000 issues. Under the plan, management is conducting an assessment of the potential material effect of year 2000 issues on the Company's business, results of operations, and financial condition and is determining ways to mitigate the issues.
The year 2000 issue exists because many date-sensitive computer systems and applications use a two-digit number to recognize the year. When the year 2000 arrives, the computer system may recognize the year as 1900 or not at all. Information technology and embedded technology that is not year 2000 compliant may cause computer systems to process critical financial and operational information incorrectly, which could lead to disruptions in the Company's operations.
The Company's year 2000 plan has three focal points including: (1) the Company's internal financial data and operating systems, (2) the Company's property tenants' financial data and operating systems, and (3) significant third parties with whom the Company or the Company's tenants have material relationships. The plan is organized to assess the potential risk of year 2000 issues and provide ways to mitigate those risks.
The Company's Internal Financial Data and Operating Systems
The Company has completed an assessment of both its information technology and the embedded technology of its computer systems and software applications that could materially affect the Company's business and believes that they are year 2000 compliant. The Company came to this conclusion after receiving assurance of compliance from the manufacturers of the Company's network, hardware and material software applications, as well as by running tests using year 2000 data on the Company's accounting software applications. Although the
Company believes the computer systems and software applications are year 2000 compliant, there can be no assurance that coding errors or other defects will not be discovered in the future.
The Company's Property Tenants' Financial Data and Operating Systems
The Company has had discussions with the management of several of the Company's tenants regarding their year 2000 compliance. In addition, the Company's tenants were sent questionnaires regarding the year 2000 compliance of their financial data and operating systems. The questionnaire specifically addresses areas which the Company believes may pose a material risk and requests that each tenant characterize their year 2000 readiness. Tenants have been asked to describe the steps they have taken to ensure year 2000 readiness and when non-ready systems will be in compliance. The Company is currently waiting for the tenants' responses and will, upon receipt, assess the risk and the need of a contingency plan. The Company is currently not aware of any tenants who are not year 2000 compliant.
Material Third Parties
There are significant third parties on which the Company's and the tenants' operations are dependent. Included in the tenants' questionnaires are questions relating to the tenants' significant third party dependencies. In addition, the Company has requested and received written confirmation from its significant third parties of their year 2000 compliance.
Overall, the Company believes that it will not incur significant costs in modifying its existing software applications, replacing hardware or hiring consultants in resolving year 2000 issues. Although the Company has not incurred any material expenditures relating to year 2000 issues as of December 31, 1998, there can be no assurance as to the magnitude of future costs until the Company's assessment is complete.
Failure to correct material year 2000 issues may result in the interruption, or failure of, certain normal business activities or operations and may adversely affect the Company's results of operations, liquidity and financial condition. Management of the Company believes that continued progress in implementing the year 2000 plan will significantly reduce the Company's potential of a year 2000 operational interruption. As of December 31, 1998, management of the Company had no knowledge of a year 2000 event or uncertainty that is likely to materially affect the Company.
FUNDS FROM OPERATIONS
Funds From Operations ("FFO") is defined under the revised definition adopted by the National Association of Real Estate Investment Trusts (NAREIT) as net income (loss) (computed in accordance with generally accepted accounting principles) excluding gains (or losses) from debt restructuring plus depreciation/amortization of assets unique to the real estate industry. Depreciation/amortization of assets not unique to the industry, such as amortization of deferred financing costs and non-real estate assets, is not added back. FFO does not represent cash flows from operating activities in accordance with generally accepted accounting principles (which, unlike FFO, generally reflects all cash effects of transactions and other events in the determination of net income) and should not be considered an alternative to net income as an indication of the Company's performance or to cash flow as a measure of liquidity or ability to make distributions. The Company considers FFO a meaningful, additional measure of operating
performance because it primarily excludes the assumption that the value of the real estate assets diminishes predictably over time, and because industry analysts have accepted it as a performance measure. Comparison of the Company's presentation of FFO, using the NAREIT definition, to similarly titled measures for other REITs may not necessarily be meaningful due to possible differences in the application of the NAREIT definition used by such REITs.
FFO of the Operating Partnership for the year ended December 31, 1998 is computed as follows (in thousands):
Net Income before Minority Interest $20,886
Real Estate Depreciation and Amortization 6,161 ------- Funds From Operations $27,047 =======
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain financial market risks, the most predominant being fluctuations in interest rates. Interest rate fluctuations are monitored by the Company's management as an integral part of the Company's overall risk management program, which recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effect on the Company's results of operations.
Interest rate fluctuations will effect the fair value of the Company's fixed rate debt instruments. If interest rates on the Company's fixed rate debt instruments at December 31, 1998 had been one percent higher, the fair value of those debt instruments on that date would have decreased by approximately $9.7 million. As of December 31, 1998, the Company does not have any variable rate debt instruments, and therefore interest rate fluctuations would not have effected the Company's annual interest costs for the year ended December 31, 1998.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page No. --------
Report of Independent Accountants - Arthur Andersen LLP ............. 27
Consolidated Balance Sheets ......................................... 28
Consolidated Statements of Operations ............................... 29
Consolidated Statements of Changes in Shareholders' Equity (Deficit) ................................................. 30
Consolidated Statements of Cash Flows ............................... 31
Notes to Consolidated Financial Statements .......................... 32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Capital Automotive REIT:
We have audited the accompanying consolidated balance sheets of Capital Automotive REIT (a Maryland real estate investment trust, the "Company") and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in shareholders' equity (deficit) and cash flows for the year ended December 31, 1998 and the period from October 20, 1997 (date of organization) through December 31, 1997. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit 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 management, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Capital Automotive REIT and subsidiaries as of December 31, 1998 and 1997 and the results of their operations and their cash flows for the year ended December 31, 1998 and the period from October 20, 1997 (date of organization) through December 31, 1997 in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedule of Real Estate and Accumulated Depreciation is presented for purposes of complying with the rules of the Securities and Exchange Commission and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Washington, D.C. January 29, 1999
CAPITAL AUTOMOTIVE REIT CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
See accompanying Notes to Consolidated Financial Statements.
CAPITAL AUTOMOTIVE REIT CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
See accompanying Notes to Consolidated Financial Statements.
See accompanying Notes to Consolidated Financial Statements.
See accompanying Notes to Consolidated Financial Statements.
CAPITAL AUTOMOTIVE REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Capital Automotive REIT (the "Company") was formed as a Maryland real estate investment trust on October 20, 1997 and was initially capitalized on such date through the sale of ten common shares of beneficial interest, par value $.01 per share. The Company's mission is to purchase and lease back, pursuant to long-term triple net leases, the real property and improvements used by multi-site, multi-franchised automotive dealerships and related businesses located predominately in major metropolitan areas throughout the United States, through its ownership interest in Capital Automotive L.P. (the "Operating Partnership").
In February 1998, the Company completed an Initial Public Offering ("IPO") of its common shares of beneficial interest, par value $.01 per share (the "Common Shares"), whereby 20.0 million Common Shares were issued at $15 per Common Share, resulting in net proceeds of approximately $275.4 million, after underwriting discounts and commissions and other expenses of the IPO. In addition, FBR Asset Investment Corporation, an affiliate of Friedman, Billings, Ramsey & Co., Inc. ("FBR"), the representative of the underwriters in the IPO, purchased 1,792,115 Common Shares of the Company at the IPO price in a private placement offering, resulting in net proceeds of $25 million, net of underwriting discounts (the "FBR Offering"). In March 1998, 3.0 million Common Shares subject to the underwriters' over-allotment option were issued at $15 per Common Share, resulting in net proceeds of approximately $41.9 million, after underwriting discounts and commissions. The Company contributed the net proceeds of the IPO, over-allotment option and the FBR Offering to the Operating Partnership in exchange for 24,792,115 units of limited partnership interest ("Units") in the Operating Partnership.
Typically the Operating Partnership forms a subsidiary limited liability company or limited partnership to own properties acquired from a given dealership group. This structure is intended to facilitate financings and transfers involving such properties. As of December 31, 1998, the Company held a 76.7% general partnership interest in the Operating Partnership. The Operating Partnership and its subsidiaries collectively owned 120 properties as of December 31, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") and include the accounts of the Company, the Operating Partnership and the Company's and Operating Partnership's wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
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 years for the buildings and improvements.
The Company periodically assesses its real estate assets for possible permanent impairment when certain events or changes in circumstances indicate that the carrying amount of real estate may not be recoverable. A significant decrease in the real estate's fair market value, an accumulation of costs significantly exceeding amounts originally expected to acquire the asset or a tenant's inability to perform its duties and pay rent under the terms of the lease, may all effect the ability of the Company to recover the carrying amount of the real property. Management considers current market conditions, tenant credit analysis and third party valuations in determining the net realizable value of the Company's rental properties. After completing this assessment, management believes no impairment has occurred in its net property carrying values as of December 31, 1998.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are recorded at cost. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, ranging from three to five years.
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 the issuance of mortgage notes during 1998, which costs are amortized over the terms of the notes on a straight-line basis (which approximates the effective interest method).
Capitalized Leasing Costs
Certain initial direct costs incurred by the Company in negotiating and consummating a successful lease are capitalized and generally amortized over the initial base 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 lessee's financial condition, evaluating and recording guarantees, collateral and other security arrangements, negotiating contract terms, preparing lease documents and closing the transaction.
Income Taxes
The Company is qualified as a real estate investment trust under the provisions of the Internal Revenue Code of 1986, as amended. As a real estate investment trust, the Company is generally not subject to federal income tax to the extent that it distributes annually at least 95% of its taxable income to its shareholders and complies with certain other requirements.
Rental Revenue Recognition
The Company leases its real estate under long-term triple net leases which require the lessees to pay substantially all expenses associated with the operations, including taxes, utilities, insurance, repairs, maintenance and other expenses. All leases are accounted for as operating leases.
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.
Fair Value of Financial Instruments
The Company compares the carrying value and the estimated fair value of its financial instruments. Due to the highly liquid and short-term nature of the Company's investments, the carrying value approximates the fair value. After determining fair value of long-term debt instruments by discounting future cash flows using current market rates, management believes there were no material differences in the carrying value and the fair value of the Company's debt instruments as of December 31, 1998 and 1997.
3. 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 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999 and 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. The Company believes that the adoption of SFAS 133 will not have a significant impact on the Company's consolidated financial position, results of operations or cash flows.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure about Pensions and Other Post Retirement Benefits." This statement is effective for fiscal years beginning after December 15, 1997 and requires restatement of disclosures for earlier periods for comparative purposes. SFAS No. 132 standardizes the disclosure requirements for pensions and other post retirement benefits, requires additional information on changes in the benefit obligations and fair values of plan assets and eliminates certain disclosures previously required by SFAS No. 87. The adoption of SFAS No. 132 had no significant impact on the Company's consolidated financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for the reporting and display of comprehensive income in the Company's financial statements. This statement is effective for fiscal years beginning after December 15, 1997. The adoption of SFAS No. 130 had no significant impact on the Company's consolidated financial statements.
4. ACQUISITIONS OF PROPERTIES
As of December 31, 1998, the Company, through the Operating Partnership and its subsidiaries, owned 120 dealership properties used by 30 motor vehicle dealer groups ("Dealer Groups"), located in 18 states, operated by 196 automotive franchisees, totaling 4.3 million square feet of buildings and improvements on 708.8 acres of land. The Company acquired the properties for an aggregate purchase price of approximately $511.1 million, consisting of $218.8 million in cash (including estimated closing costs through December 31, 1998), $12.0 million in the assumption of mortgage debt, $181.5 million in the assumption and repayment of mortgage debt and approximately 6.6 million Units (valued at $98.8 million). The following is a summary of acquisitions for 1998 (total purchase price includes estimated closing costs through December 31, 1998):
As of December 31, 1998, the Company had entered into definitive agreements to acquire 18 properties from three Dealer Groups, located in three states, for an aggregate purchase price of approximately $57.7 million. Definitive agreements as of December 31, 1998 consisted of the following:
Definitive agreement to acquire three properties from McCluskey Chevrolet, located in Cincinnati, Ohio, for a purchase price of approximately $5.5 million. These properties were acquired subsequent to December 31, 1998.
Definitive agreement to acquire nine additional properties from Group 1 Automotive, Inc. and its affiliates, located in Round Rock, Houston, Austin, and Elgin, Texas for a purchase price of approximately $34.2 million. Of these properties, six were acquired subsequent to December 31, 1998 for a purchase price of approximately $24.0 million.
Definitive agreement to acquire six properties from Lithia Properties, L.L.C., an affiliate of Lithia Motors, Inc., located in Medford and Grants Pass, Oregon, for a purchase price of approximately $18.0 million.
Automotive Realty Trust of America ("ARTA")
On July 23, 1998, the Company announced the execution of a definitive agreement that would permit the Company to purchase certain properties then under contract with ARTA. ARTA had contracted with 17 automotive dealer groups to acquire 67 properties for an aggregate purchase price of $334.5 million. ARTA had filed a registration statement on April 20, 1998 with the Securities and Exchange Commission to pursue an initial public offering as a self- administered, self-managed real estate investment trust. Under the terms of the agreement with the Company, ARTA agreed to assign its purchase contracts to the Company, subject to the approval of the respective selling Dealer Groups. Closings on individual properties were subject to the revision of certain purchase and lease terms and the satisfactory completion by the Company of property level and financial due diligence. The Company agreed to compensate ARTA on a pro rata basis upon the acquisition of the assets, as well as upon the acquisition of ARTA's existing marketing network and its acquisition pipeline.
During the year ended December 31, 1998, the Company completed acquisitions for approximately $96.1 million (including estimated closing costs through December 31, 1998) in conjunction with the ARTA agreement. Consideration for the acquisitions was substantially all cash. The acquisitions included 16 dealership properties from five Dealer Groups used by 27 automotive franchisees, and totaled 79.7 acres. Subsequent to December 31, 1998, the Company completed the acquisition of additional properties and renovations totaling approximately $42.4 million (including estimated closing costs) in conjunction with the ARTA agreement. Consideration for the acquisitions was substantially all cash. On January 5, 1999, the parties to the ARTA agreement released each other from all obligations and liability thereunder.
5. RELATED PARTY TRANSACTIONS
During 1998, the Company, through the Operating Partnership and its subsidiaries, purchased 20 properties for an aggregate purchase price of approximately $110.8 million from three Dealer Groups, three of the principals of which are members of the Company's Board of Trustees. In conjunction with the purchases, the Company entered into long-term triple net lease agreements with two 10-year extensions exercisable at the option of the tenant. The leases in the aggregate provide for initial annual base rental payments to the Company of approximately $12.1 million.
6. OPERATING LEASES
In connection with the acquisitions listed in Note 4 above, the Company, through the Operating Partnership and its subsidiaries, entered into long-term triple net lease agreements (the "Leases") with the operators of the dealerships (the "Lessees"). The Leases have initial terms generally ranging from ten to 20 years and generally include multiple options to renew upon the same terms and conditions, exercisable at the option of the Lessees. Base rent is adjusted upward periodically, usually based on a factor of the consumer price index ("CPI"). In general, the lease terms establish minimum and maximum periodic adjustments. Several of the Company's Leases offer tenant purchase options at various points throughout the Lease terms, generally based on fair market value of the property, or the greater of fair market value of the property or the Company's purchase price as increased by a factor of CPI at the time of the option. Future minimum rental payments will be received as follows (in thousands):
On March 1, 1998, the Company entered into a six-year lease agreement for its current office space, accounted for as an operating lease. Future minimum lease payments at December 31, 1998 are $199,920 per year for the next five years and $33,320 thereafter, totaling approximately $1.0 million.
7. EARNINGS PER SHARE
A reconciliation of net income and weighted average shares used to calculate basic and diluted earnings per share for the twelve months ended December 31, 1998 is as follows (in thousands, except per share data):
- ----------------- (1) Adjustment to weighted average shares reflects exercise of dilutive options for shares assuming treasury stock method.
8. MORTGAGE LOANS
On November 18, 1998, four newly-formed subsidiaries of the Company and Operating Partnership closed on a $150.0 million, non-recourse loan (the "Permanent Loan") with Global Alliance Finance Company, L.L.C. (the "Lender"). The Permanent Loan requires consecutive monthly payments of interest only for two years. Thereafter, monthly payments of principal and interest will be required in an amount sufficient to amortize the Permanent Loan over a 25-year term. The term of the Permanent Loan is ten years and it bears interest at a rate equal to 7.67% per annum until maturity on December 1, 2008. The weighted average interest rate for 1998 for the Permanent Loan was approximately 8.06%. The Permanent Loan is secured by mortgages on the properties financed, which as of December 31, 1998 had an aggregate net book value of approximately $259.3 million. The Operating Partnership has provided a limited $35 million guaranty of the Permanent Loan, which guaranty is contingent upon the occurrence of certain circumstances. A portion of the loan proceeds was used to pay off existing debt and the balance used to finance acquisitions, working capital and for other corporate purposes. Annual principal maturities of the Permanent Loan are as follows (in thousands):
Subsequent to December 31, 1998, the Company and the Lender modified the terms on approximately $38.0 million of the Permanent Loan in order for the Lender to have more flexibility in structuring a commercial mortgage backed security execution. The interest rate on this portion of the Permanent Loan was reduced to 7.59% per annum, the monthly interest only payments were reduced to one year and the amortization period was reduced to approximately 17 years.
On September 23, 1998, the Company, through the Operating Partnership, entered into a forward rate lock agreement with the Lender, to effectively lock in advance the fixed per annum
interest rate on the Permanent Loan. On the date thereof, the Company paid to the Lender a hedge deposit totaling $3.0 million ("Hedge Deposit") to lock the interest rate at 7.67% per annum for a period of sixty days from such date. The Hedge Deposit was refunded to the Company in conjunction with the Permanent Loan closing on November 20, 1998.
On October 16, 1998, the Company, through the Operating Partnership, entered into a $50.0 million bridge loan with the Lender to finance acquisitions, working capital and for other corporate purposes ("Bridge Loan"). The Bridge Loan required monthly payments of interest only and incurred interest at the rate equal to the one month LIBOR plus 200 basis points. The Bridge Loan was repaid with a portion of the proceeds of the Permanent Loan on November 20, 1998.
On November 5, 1998 the Company assumed a mortgage note payable to a financial institution in the principal amount of approximately $12.0 million. The note was assumed as partial consideration for the acquisition of four dealership properties. The note is secured by the properties acquired, which as of December 31, 1998 have an aggregate net book value of approximately $22.0 million. The mortgage note bears interest at a rate equal to 7.50% per annum until maturity on January 20, 2003. The weighted average interest rate for 1998 for the mortgage note was approximately 7.61%. Principal and interest are payable monthly. Any outstanding principal and interest shall be due and payable upon maturity. Annual principal maturities of the mortgage note are as follows (in thousands):
9. BORROWINGS UNDER LINE OF CREDIT
In October 1997, and amended as of January 30, 1998, Friedman, Billings, Ramsey Group, Inc., an affiliate of FBR, issued to the Company a short-term revolving line of credit in the amount of approximately $2.5 million. Draws on the line of credit were used by the Company for organizational costs and offering costs, and were repaid with the proceeds of the IPO.
In February 1998, the Company, through the Operating Partnership, entered into a secured revolving line of credit from NationsBank, N.A. (the "Bank") providing for a borrowing capacity of $10.0 million. Borrowings incurred interest at a fluctuating rate equal to the one month LIBOR plus 150 basis points. On August 14, 1998, the Company and the Bank amended and restated the line of credit to increase the borrowing capacity to $13.5 million and extended the expiration date to November 19, 1998. On September 8, 1998, the Company and the Bank again amended and restated the line of credit to increase the borrowing capacity to $19.1 million
and on November 6, 1998 extended the expiration date to December 19, 1998. The outstanding balance of $13.0 million was repaid on November 20, 1998 with a portion of the proceeds of the Permanent Loan.
10. MINORITY INTEREST
Minority interest is calculated at approximately 23.3 percent of the Operating Partnership's partners' capital and net income. The ownership of the Operating Partnership as of December 31, 1998 is as follows (Units in thousands):
11. STOCK OPTIONS
In February 1998, the Company adopted the Capital Automotive Group 1998 Equity Incentive Plan (the "Plan"). Under the Plan, the Executive Compensation Committee of the Board of Trustees may grant up to approximately 2.8 million options to employees of the Company or the Operating Partnership, outside trustees and certain other service providers, to purchase common shares of beneficial interest of the Company and/or units of limited partnership interest in the Operating Partnership. Options granted under the Plan have exercise prices equal to or greater than the fair market value of a Common Share at the date of the grant and typically become exercisable at a rate of 25% per year over a four-year period, generally commencing on the first anniversary of the date of hire, for employees. For trustees, options become exercisable in stages, one-third beginning six months after date of grant, two-thirds beginning on the first anniversary of the date of grant and 100% beginning on the second anniversary of the date of grant. Options expire no later than the tenth anniversary of the date of grant or, if earlier, within certain time limits for employment termination. As of December 31, 1998 all but approximately 69,000 options were granted under the Plan and 350,000 options were granted outside of the Plan to officers hired during 1998.
The following is a summary of the Company's option activity for the year ended December 31, 1998 (options in thousands):
Options outstanding at December 31, 1998 have exercise prices between $13.75 and $18.69, with a weighted average exercise price of $14.95 and a weighted average remaining contractual life of 9.21 years. At December 31, 1998 there were approximately 668,000 options exercisable at a weighted average exercise price of $15.11 and a weighted average remaining contractual life of 9.14 years.
The Company applies APB Opinion 25 in accounting for its stock-based compensation and accordingly recognized no compensation expense related to the grant of options during the year ended December 31, 1998. Had the Company's compensation cost been determined using the fair value method of accounting prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation", the Company's net income and earnings per share would have been changed to the following pro-forma amounts (in thousands except per share amounts) (unaudited):
The Black-Scholes option pricing model has been used to estimate the value of the options granted on the date granted using a risk-free interest rate of 4.625%, a dividend yield of 10.0%, stock volatility of 21.75% with an expected option life of 4 years.
12. STOCK WARRANTS
Concurrent with the IPO, the Company issued warrants to two affiliates of the Dealer Groups, representing the right to acquire approximately 1.4 million Units in the Operating Partnership. In December 1998 such warrants for Units were cancelled and exchanged for warrants representing the right to acquire Common Shares of the Company on the same terms and conditions as the Unit warrants. In addition, the Company issued warrants to Friedman, Billings, Ramsey & Co., Inc., representing the right to acquire approximately 1.3 million Common Shares of the Company. These warrants are exercisable on the effective date of the IPO and for a period of five years thereafter, with an exercise price equal to the IPO price of $15 per share.
13. 401(K) PLAN
Effective April 1, 1998, the Company adopted the Capital Automotive L.P. Employee 401(K) Plan available to all employees hired prior to April 1, 1998 who are at least 21 years of age. Employees hired subsequent to April 1, 1998 are eligible to participate in the plan after three months of service. Participants may contribute up to 20% of their earnings, on a pre-tax basis, subject to annual limitations imposed by the Internal Revenue Code. The Company may
make matching or discretionary contributions to the plan at the discretion of management. Employer contributions generally vest over five years. As of December 31, 1998 no matching or discretionary contributions had been paid or declared.
14. COMMON SHARE REPURCHASE PROGRAM
On September 8, 1998, the Company announced that its Board of Trustees had authorized the repurchase of up to 3.0 million Common Shares. On October 21, 1998, the Company announced that its Board of Trustees had authorized the repurchase of up to 3.0 million additional Common Shares, bringing the total Common Share repurchase program to 6.0 million. Purchases have been and will be made from time-to-time in open market transactions at prevailing prices or in negotiated private transactions at the discretion of the Company's management. During 1998 the Company repurchased 3,184,700 Common Shares at an average price of $10.51 per Common Share. During the same time period, the Operating Partnership redeemed an equivalent number of Units from the Company for equivalent purchase prices.
15. DIVIDEND DECLARATION
On December 16, 1998 the Company's Board of Trustees declared a cash dividend of $0.32 per share for the fourth quarter ended December 31, 1998, to shareholders of record as of December 31, 1998. The dividend was paid on January 29, 1999. Dividends declared by the Company to its shareholders during 1998 totaled $0.876 per share, of which $0.861 per share is characterized as ordinary income for 1998 tax purposes.
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial data for the year ended December 31, 1998 is as follows (in thousands, except per share amounts):
*Although the Company was formed prior to January 1, 1998, it did not complete its IPO until February 19, 1998, at which time it began generating rental income. This resulted in a difference between the sum of each quarters diluted earnings per share of $0.76 and the actual diluted earnings per share calculation for 1998 of $0.79.
17. SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The new rules establish revised standards for public companies relating to the reporting of financial and descriptive information about their operating segments in financial statements. Operating segments are defined as components of an enterprise for which separate financial information is available and is evaluated regularly by the chief operating decision maker or decision making group, in deciding how to allocate resources and in assessing performance. The Company's management is the Company's chief decision making group.
All of the Company's operations are derived from one operating segment. This operating segment engages in the purchase and lease back, pursuant to long- term triple net leases, of the real property and improvements used by multi- site, multi-franchised automotive dealerships and related businesses. These automotive dealerships and related businesses are located predominately in major metropolitan areas throughout the United States. The purchase and lease back is performed through the Company's ownership interest in the Operating Partnership. The adoption of SFAS No. 131 did not have a material impact on the Company's consolidated financial statements or accompanying notes.
Tenant Concentration
The Rosenthal Automotive Organization ("Rosenthal"), accounted for approximately 22.9% of the Company's total rental revenue for the year ended December 31, 1998 and 13.5% of the Company's annualized rental revenue for the year ended December 31, 1998. The Rosenthal properties were acquired in February 1998. As the Company's portfolio continues to grow and total rental revenue increases, the percent of total rental revenue relating to Rosenthal will decrease.
18. SUBSEQUENT EVENTS
Acquisitions
Subsequent to December 31, 1998, the Company closed on the acquisition of 11 dealership properties and renovations having an aggregate purchase price of approximately $54.0 million, for substantially all cash. These properties total approximately 51 acres, are located in three states and are operated by seven automotive franchisees. Significant acquisitions include the following:
Six additional properties acquired from Group 1 Automotive, Inc. and its affiliates, totaling 34.9 acres, located in Houston and Round Rock, Texas for an aggregate purchase price of approximately $24.0 million (including estimated closing costs). These properties are used by three automotive franchisees, including Toyota, Lexus and Nissan. The lease term for these properties is 30 years with termination options by the tenant at years 15, 20 and 25.
One additional property acquired from Park Place Motor Cars Ltd., totaling 4.6 acres, located in Dallas, Texas for a purchase price of approximately $17.8 million (including estimated closing costs). This property is used by three automotive franchisees, including Mercedes-Benz, Porsche and Audi. The lease term is 15 years with two 10-year extensions exercisable at the option of the tenant.
One property acquired from an unrelated third party and leased to FirstAmerica Automotive, Inc. ("FirstAmerica"), totaling 4.0 acres, located in San Rafael, California for a purchase price of approximately $3.1 million (including estimated closing costs). The lease term is 20 years with two 10-year extensions exercisable at the option of the tenant. The property is currently being developed by FirstAmerica and when completed, FirstAmerica will operate a Dodge franchise on the property.
Three properties acquired from McCluskey Chevrolet, totaling 7.5 acres, located in Cincinnati, Ohio for an aggregate purchase price of approximately $5.5 million. The lease term is ten years with one 10-year and four 5-year extensions exercisable at the option of the tenant.
Commitment
In February 1999, the Company, through the Operating Partnership and its subsidiaries, secured approval from a financial institution for a $50.0 million revolving credit facility. Final terms and conditions are subject to further negotiations. The credit facility will provide short-term funds for the acquisition of automotive dealership properties and for general corporate purposes. The current term is for three years, extendable annually at the lender's discretion, and borrowings will bear interest at a rate equal to the one month LIBOR plus 175 basis points. The borrowings will require quarterly interest only payments in arrears.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required in Part III is omitted from this Report but is incorporated herein by reference from the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders for fiscal year 1999 filed on March 19, 1999 (the "Proxy Statement") pursuant to Regulation 14A with the Securities and Exchange Commission.
ITEM 10.
ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE COMPANY
The information contained in the Proxy Statement under the captions "The Board of Trustees" appearing on pages 11 to 13 and "Executive Officers" appearing on pages 14 to 15 of the Proxy Statement is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement under the captions "Executive Compensation" appearing on pages 15 to 18 and "Executive Compensation Committee Report on Executive Compensation" appearing on pages 18 to 20 of the Proxy Statement is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Proxy Statement under the caption "Share Ownership" appearing on pages 9 to 10 of the Proxy Statement is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Proxy Statement under the caption "Certain Relationships and Related Transactions" appearing on pages 20 to 28 of the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) See Index to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedule III. Schedule of Real Estate and Accumulated Depreciation
(3) Exhibits
(a) Exhibits
Exhibit ------- Number Description ------ -----------
3.1* Amended and Restated Declaration of Trust of Capital Automotive REIT 3.2.. Amended and Restated Bylaws of Capital Automotive REIT 3.3.. Amendment No. 1 to Bylaws of Capital Automotive REIT 3.4.. Form of Share Warrant 4.1* Specimen Common Share certificate 10.1* Form of Agreement of Limited Partnership of Capital Automotive L.P. 10.2* Form of Indemnification Agreement 10.3* Form of 1998 Equity Incentive Plan 10.4* Employment Agreement by and between the Company and Thomas D. Eckert 10.5* Employment Agreement by and between the Company and Scott M.Stahr 10.6* Employment Agreement by and between the Company and Donald L. Keithley 10.7* Employment Agreement by and between the Company and David S. Kay 10.8* Form of Option Agreement 10.9* Form of NationsBank, N.A. Credit Agreement 10.10* FBR Asset Investment Purchase Agreement 10.11* FBR Registration Rights Agreement 10.12* Pohanka Contribution Agreement dated as of November 21, 1997, as amemded 10.13* Rosenthal Contribution Agreement dated as of November 21, 1997, as amended 10.14* Sheehy Contribution Agreement dated as of November 24, 1997, as amended 10.15* Cherner Contribution Agreement dated as of November 24, 1997, as amended 10.16* Cross-Continent Auto Retailers, Inc. Purchase Agreement dated as of December 31, 1997, as amended 10.17* Form of Pohanka Lease Agreement 10.18* Form of Rosenthal Lease Agreement 10.19* Form of Sheehy Lease Agreement 10.20* Form of Cherner Lease Agreement 10.21* Form of Cross-Continent Lease Agreement 10.22* Form of Underwriting Warrant 10.23* Form of Dealers' Warrant
10.24* Form of Guaranty Agreement with Affiliate of John J. Pohanka 10.25* Form of Guaranty Agreement with Affiliate of Robert M. Rosenthal 10.26* Amendment No. 1 to Friedman, Billings, Ramsey Group, Inc. Loan Agreement 10.27* Amendment No. 1 to Friedman, Billings, Ramsey Group, Inc. Security Agreement 10.28* Form of Guaranty Agreement with Cross-Continent Auto Retailers, Inc. 10.29* Meyers Family Limited Partnership L.P. (Good News) Purchase Agreement dated as of January 10, 1998 10.30* Form of Good News Lease 10.31* Form of Guaranty Agreement with Good News Salisbury, Inc. and Warren A. Price 10.32* Kline Purchase Agreement dated as of January 12, 1998 10.33* Form of Kline Lease Agreement 10.34* Form of Guaranty Agreement with Kline Imports Chesapeake, Inc. 10.35* Amended and Restated Employment Agreement by and between Capital Automotive L.P. and Thomas D. Eckert 10.36* Amended and Restated Employment Agreement by and between Capital Automotive L.P. and Scott M. Stahr 10.37* Amended and Restated Employment Agreement by and between Capital Automotive L.P. and Donald L. Keithley 10.38* Amended and Restated Employment Agreement by and between Capital Automotive L.P. and David S. Kay 10.39* Meyers Family Limited Partnership (Good News) Purchase Agreement dated as of January 10, 1998 10.40** First Amended and Restated Credit Agreement dated as of August 14, 1998 to Credit Agreement dated February 19, 1998 between Capital Automotive L.P. and NationsBank, N.A. 10.41** Second Amended and Restated Credit Agreement dated as of September 8, 1998 to Credit Agreement dated February 19, 1998 between Capital Automotive L.P. and NationsBank, N.A. 10.42** Employment Agreement by and between Capital Automotive L.P. and John M. Weaver 10.43.. Second Amended and Restated Partnership Agreement of Capital Automotive L.P. 21.2+ Subsidiaries of Company 23.1+ Consent of Arthur Andersen LLP 25.0+ Power of Attorney (included on signature page) 27.0+ Financial Data Schedule 99.1. Real Property Contribution and Purchase Agreement by and between Capital Automotive L.P., Capital Automotive REIT, Thomas W. Kelley, James E. Kelley and Midwest Auto Realty Co., L.P. dated June 17, 1998
99.2. Amendment to Real Property Contribution and Purchase Agreement by and among Capital Automotive L.P., Capital Automotive REIT, Thomas W. Kelley, James E. Kelley and Midwest Auto Realty Co., L.P. 99.3++ Loan Agreement dated as of November 18, 1998 between CARS - DB1, L.L.C. as Borrower and Global Alliance Finance Company, L.L.C. as Lender 99.4++ Loan Agreement dated as of November 18, 1998 between CARS - DB2, L.L.C. as Borrower and Global Alliance Finance Company, L.L.C. as Lender 99.5++ Loan Agreement dated as of November 18, 1998 between CARS - DB3, L.P. as Borrower and Global Alliance Finance Company, L.L.C. as Lender 99.6++ Loan Agreement dated as of November 18, 1998 between CARS - DB4, L.P. as Borrower and Global Alliance Finance Company, L.L.C. as Lender 99.7++ Text of Press Release dated November 23, 1998
- -------------- + Filed herewith.
* Previously filed as an Exhibit to Registration Statement on Form S-11 (File No. 333-41183) and incorporated herein by reference.
. Previously filed as an Exhibit to Current Report on Form 8-K filed on August 7, 1998 (File No. 000-23733).
** Previously filed as an Exhibit to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 filed on November 12, 1998 (File No. 000-23733).
++ Previously filed as an Exhibit to Current Report on Form 8-K filed on December 3, 1998 (File No. 000-23733)
.. Previously filed as an Exhibit to Registration Statement on Form S-3 (File No. 333-73183) filed on March 2, 1999.
(b) Reports on Form 8-K
Current Report on Form 8-K filed on August 7, 1998 (File No. 000-23733)
Current Report on Form 8-K filed on December 3, 1998 (File No. 000-23733)
Current Report on Form 8-K filed on December 7, 1998 (File No. 000-23733)
Current Report on Form 8-K filed on February 26, 1999 (File No.000-23733)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized this 17th day of March, 1999.
Capital Automotive REIT
By: /s/ Thomas D. Eckert ------------------------------ Thomas D. Eckert President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons in the capacities indicated. Each person whose signature appears below hereby constitutes and appoints each of Thomas D. Eckert and David S. Kay as his attorney-in-fact and agent, with full power of substitution and resubstitution for him in any and all capacities, to sign any or all amendments to this Report and to file same, with exhibits thereto and other documents in connection therewith, granting unto such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary in connection with such matters and hereby ratifying and confirming all that such attorney-in-fact and agent or his substitutes may do or cause to be done by virtue hereof.
SIGNATURE TITLE DATE
/s/ Thomas D. Eckert President and Chief March 17, 1999 - ---------------------- Executive Officer and Thomas D. Eckert Trustee (principal executive officer)
/s/ David S. Kay Vice President and Chief March 17, 1999 - ---------------------- Financial Officer (principal David S. Kay financial and accounting officer)
/s/ Craig L. Fuller Trustee March 17, 1999 - ---------------------- Craig L. Fuller
/s/ William E. Hoglund Trustee March 17, 1999 - ------------------------- William E. Hoglund
/s/ R. Michael McCullough Trustee March 17, 1999 - ---------------------------- R. Michael McCullough
/s/ Lee P. Munder Trustee March 17, 1999 - ---------------------------- Lee P. Munder
/s/ John J. Pohanka Chairman of the Board and March 17, 1999 - ---------------------------- Trustee John J. Pohanka
/s/ John E. Reilly Trustee March 17, 1999 - ---------------------------- John E. Reilly
/s/ Robert M. Rosenthal Trustee March 17, 1999 - ---------------------------- Robert M. Rosenthal
/s/ Vincent A. Sheehy Trustee March 17, 1999 - ---------------------------- Vincent A. Sheehy
/s/ William R. Swanson Trustee March 17, 1999 - ---------------------------- William R. Swanson
SCHEDULE III CAPITAL AUTOMOTIVE REIT SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1998
SCHEDULE III CAPITAL AUTOMOTIVE REIT SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1998
SCHEDULE III CAPITAL AUTOMOTIVE REIT SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1998
Notes: (1) Gross amount is equal to the initial cost to the Company except as noted in Note (2). (2) Total purchase price includes $1,700,000 of renovations subsequent to the acquisition date. (3) Included in the total purchase price are certain acquisition fees and expenses (i.e consulting and attorney fees). (4) Depreciation is computed using the straight-line method over an estimated useful life of 20 years for buildings and improvements.