Attached files
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EX-32 - EXHIBIT 32 - CORPORATE PROPERTY ASSOCIATES 16 GLOBAL INC | c98272exv32.htm |
EX-23.1 - EXHIBIT 23.1 - CORPORATE PROPERTY ASSOCIATES 16 GLOBAL INC | c98272exv23w1.htm |
EX-31.1 - EXHIBIT 31.1 - CORPORATE PROPERTY ASSOCIATES 16 GLOBAL INC | c98272exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - CORPORATE PROPERTY ASSOCIATES 16 GLOBAL INC | c98272exv31w2.htm |
EX-21.1 - EXHIBIT 21.1 - CORPORATE PROPERTY ASSOCIATES 16 GLOBAL INC | c98272exv21w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number: 001-32162
CORPORATE PROPERTY ASSOCIATES 16 GLOBAL INCORPORATED
(Exact name of registrant as specified in its charter)
Maryland | 80-0067704 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
50 Rockefeller Plaza | ||
New York, New York | 10020 | |
(Address of principal executive offices) | (Zip code) |
Registrants telephone numbers, including area code:
Investor Relations (212) 492-8920
Investor Relations (212) 492-8920
(212) 492-1100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.001 Per Share
Common Stock, Par Value $0.001 Per Share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
Registrant has no active market for its common stock. Non-affiliates held 116,978,146 shares of
common stock at June 30, 2009.
At March 18, 2010, there were 124,007,528 shares of common stock of registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant incorporates by reference its definitive Proxy Statement with respect to its 2010
Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120
days following the end of its fiscal year, into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
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Exhibit 32 |
Forward-Looking Statements
This Annual Report on Form 10-K, including Managements Discussion and Analysis of Financial
Condition and Results of Operations in Item 7 of Part II of this Report, contains forward-looking
statements within the meaning of the federal securities laws. These forward-looking statements
generally are identified by the words believe, project, expect, anticipate, estimate,
intend, strategy, plan, may, should, will, would, will be, will continue, will
likely result, and similar expressions.
It is important to note that our actual results could be materially different from those projected
in such forward-looking statements. You should exercise caution in relying on forward-looking
statements as they involve known and unknown risks, uncertainties and other factors that may
materially affect our future results, performance, achievements or transactions. Information on
factors which could impact actual results and cause them to differ from what is anticipated in the
forward-looking statements contained herein is included in this report as well as in our other
filings with the Securities and Exchange Commission (the SEC), including but not limited to those
described below in Item 1A. Risk Factors of this Report. We do not undertake to revise or update
any forward-looking statements. Additionally, a description of our critical accounting estimates is
included in the Managements Discussion and Analysis of Financial Condition and Results of
Operations section of this Report.
CPA®:16 Global 2009 10-K 1
Table of Contents
PART I
Item 1. | Business. |
(a) General Development of Business
Overview:
Corporate Property Associates 16 Global Incorporated (together with its consolidated subsidiaries
and predecessors, we, us or our) is a publicly owned, non-actively traded real estate
investment trust (REIT) that primarily invests in commercial properties leased to companies
domestically and internationally. As a REIT, we are required, among other things, to distribute at
least 90% of our REIT net taxable income to our shareholders and meet certain tests regarding the
nature of our income and assets, and we are not subject to United States (U.S.) federal income
tax with respect to the portion of our income that meets certain criteria and is distributed
annually to shareholders.
Our core investment strategy is to own and manage a portfolio of properties leased to a diversified
group of companies on a single tenant net lease basis. Our net leases generally require the tenant
to pay substantially all of the costs associated with operating and maintaining the property, such
as maintenance, insurance, taxes, structural repairs and other operating expenses. Leases of this
type are referred to as triple-net leases. We generally seek to include in our leases:
| clauses providing for mandated rent increases or periodic rent increases over the term of the lease tied to increases in the Consumer Price Index (CPI) or other similar indices for the jurisdiction in which the property is located or, when appropriate, increases tied to the volume of sales at the property; | ||
| indemnification for environmental and other liabilities; | ||
| operational or financial covenants of the tenant; and | ||
| guarantees of lease obligations from parent companies or letters of credit. |
We have in the past and may in the future invest in mortgage loans that are collateralized by real
estate.
We are managed by W. P. Carey & Co. LLC (WPC) through certain of its wholly-owned subsidiaries
(collectively, the advisor). WPC is a publicly traded company listed on the New York Stock
Exchange under the symbol WPC.
The advisor provides both strategic and day-to-day management services for us, including capital
funding services, investment research and analysis, investment financing and other investment
related services, asset management, disposition of assets, investor relations and administrative
services. The advisor also provides office space and other facilities for us. We pay asset
management fees and certain transactional fees to the advisor and also reimburse the advisor for
certain expenses. The advisor also serves in this capacity currently for other REITs that it formed
under the Corporate Property Associates brand: Corporate Property Associates 14 Incorporated
(CPA®:14), Corporate Property Associates 15 Incorporated (CPA®:15) and
Corporate Property Associates 17 Global Incorporated (CPA®:17), collectively,
including us, the CPA® REITs.
We were formed as a Maryland corporation in June 2003. We commenced our initial public offering in
December 2003. Through two public offerings we sold a total of 110,331,881 shares of our common
stock for a total of $1.1 billion in gross offering proceeds. We completed our second public
offering in December 2006. Through December 31, 2009, we have also issued 13,795,464 shares ($137.4
million) through our distribution reinvestment and stock purchase plan. These proceeds were used
along with non-recourse mortgage debt to purchase our property portfolio. We have repurchased
7,134,071 shares ($65.6 million) of our common stock under a redemption plan from inception through
December 31, 2009.
Our principal executive offices are located at 50 Rockefeller Plaza, New York, NY 10020 and our
telephone number is (212) 492-1100. We have no employees. The advisor employs 156 individuals who
are available to perform services for us.
Significant Developments during 2009:
Acquisition/Disposition Activity During 2009, we completed three acquisition transactions. With
one of our affiliates, we acquired a property in Hungary for $93.6 million, inclusive of
noncontrolling interest of $45.9 million. We contributed $64.2 million to a venture in which we,
our advisor and another affiliate completed a net lease financing transaction with The New York
Times Company. We account for our interest in this venture under the equity method of accounting.
In addition, we entered into a domestic build-to-suit expansion project for $4.5 million that we
completed in July 2009. Upon completion, we sold
the expansion together with the pre-existing property
for $50.6 million.
Amounts above are based on the exchange rate of the Euro at the dates of acquisition/financing
where appropriate. Our portion of financing obtained in connection with this 2009 investment
activity totaled $57.8 million.
CPA®:16 Global 2009 10-K 2
Table of Contents
Impairment Charges During 2009, we incurred impairment charges totaling $59.6 million, inclusive
of noncontrolling interests totaling $12.8 million. Included in this total are impairment charges
totaling $5.1 million related to discontinued operations and $3.6 million related to two
unconsolidated joint ventures. Of the total impairment charges incurred during 2009, $53.7 million,
inclusive of noncontrolling interests totaling $12.7 million, related to six tenants that
experienced financial difficulties and/or filed for bankruptcy.
Net Asset Values As a result of the overall continued weakness in the economy during 2009, our
estimated net asset value per share as of December 31, 2009 decreased to $9.20, a 6.1% decline from
our December 31, 2008 estimated net asset value per share of $9.80.
(b) Financial Information About Segments
We operate in one industry segment, real estate ownership, with domestic and foreign investments.
Refer to the Segment Information footnote in the consolidated financial statements for financial
information about this segment.
(c) Narrative Description of Business
Business Objectives and Strategy
We invest primarily in income-producing commercial real estate properties that are, upon
acquisition, improved or developed or that will be developed within a reasonable time after
acquisition.
Our objectives are to:
| own a diversified portfolio of triple-net leased real estate and other real estate related investments; | ||
| fund distributions to shareholders; and | ||
| increase our equity in our real estate by making regular principal payments on mortgage loans for our properties. |
We seek to achieve these objectives by investing in and holding commercial properties that are
generally triple-net leased to a single corporate tenant. We intend our portfolio to be diversified
by tenant, facility type, geographic location and tenant industry.
CPA®:16 Global 2009 10-K 3
Table of Contents
Our Portfolio
At December 31, 2009, our portfolio was comprised of our full or partial ownership interests in 386
properties, substantially all of which were triple-net leased to 79 tenants, and totaled
approximately 27 million square feet (on a pro rata basis) with an occupancy rate of approximately
99%. Our portfolio had the following property and lease characteristics:
Geographic Diversification
Information regarding the geographic diversification of our properties at December 31, 2009 is set
forth below (dollars in thousands):
Consolidated Investments | Equity Investments in Real Estate (b) | |||||||||||||||
Annualized | % of Annualized | Annualized | % of Annualized | |||||||||||||
Contractual Lease | Contractual | Contractual Lease | Contractual | |||||||||||||
Region | Revenue (a) | Lease Revenue | Revenue (a) | Lease Revenue | ||||||||||||
United States |
||||||||||||||||
East |
$ | 31,845 | 17 | % | $ | 10,637 | 23 | % | ||||||||
Midwest |
27,354 | 14 | 1,414 | 3 | ||||||||||||
South |
26,266 | 14 | 4,672 | 10 | ||||||||||||
West |
20,109 | 11 | 2,332 | 5 | ||||||||||||
Total U.S. |
105,574 | 56 | 19,055 | 41 | ||||||||||||
International |
||||||||||||||||
Europe (c) |
77,982 | 41 | 26,732 | 59 | ||||||||||||
Asia |
3,844 | 2 | | | ||||||||||||
Canada |
2,510 | 1 | | | ||||||||||||
Mexico |
377 | | | | ||||||||||||
Total Non-U.S. |
84,713 | 44 | 26,732 | 59 | ||||||||||||
Total |
$ | 190,287 | 100 | % | $ | 45,787 | 100 | % | ||||||||
(a) | Reflects annualized contractual minimum base rent for the fourth quarter of 2009. | |
(b) | Reflects our pro rata share of annualized contractual minimum base rent for the fourth quarter of 2009 from equity investments in real estate. | |
(c) | Reflects investments in Finland, France, Germany, Hungary, Poland, Sweden, and the United Kingdom. |
Property Diversification
Information regarding our property diversification at December 31, 2009 is set forth below (dollars
in thousands):
Consolidated Investments | Equity Investments in Real Estate (b) | |||||||||||||||
Annualized | % of Annualized | Annualized | % of Annualized | |||||||||||||
Contractual Lease | Contractual | Contractual Lease | Contractual | |||||||||||||
Property Type | Revenue (a) | Lease Revenue | Revenue (a) | Lease Revenue | ||||||||||||
Industrial |
$ | 85,589 | 46 | % | $ | 6,250 | 14 | % | ||||||||
Warehouse/distribution |
36,633 | 19 | 636 | 1 | ||||||||||||
Retail |
36,069 | 19 | 8,132 | 18 | ||||||||||||
Office |
23,744 | 12 | 20,765 | 45 | ||||||||||||
Other Properties (c) |
8,252 | 4 | 10,004 | 22 | ||||||||||||
Total |
$ | 190,287 | 100 | % | $ | 45,787 | 100 | % | ||||||||
(a) | Reflects annualized contractual minimum base rent for the fourth quarter of 2009. | |
(b) | Reflects our pro rata share of annualized contractual minimum base rent for the fourth quarter of 2009 from equity investments in real estate. | |
(c) | Other properties include hospitality and educational properties, residential, self-storage facilities as well as undeveloped land. |
CPA®:16 Global 2009 10-K 4
Table of Contents
Tenant Diversification
Information regarding our tenant diversification at December 31, 2009 is set forth below (dollars
in thousands):
Consolidated Investments | Equity Investments in Real Estate (c) | |||||||||||||||
Annualized | % of Annualized | Annualized | % of Annualized | |||||||||||||
Contractual Lease | Contractual | Contractual Lease | Contractual | |||||||||||||
Tenant Industry (a) | Revenue (b) | Lease Revenue | Revenue (b) | Lease Revenue | ||||||||||||
Retail trade |
$ | 55,001 | 29 | % | $ | 8,177 | 18 | % | ||||||||
Chemicals, plastics, rubber, and
glass |
19,749 | 10 | | | ||||||||||||
Automotive |
18,229 | 10 | 423 | 1 | ||||||||||||
Healthcare, education and childcare |
12,053 | 6 | | | ||||||||||||
Transportation cargo |
10,322 | 5 | | | ||||||||||||
Telecommunications |
10,058 | 5 | | | ||||||||||||
Construction and building |
9,373 | 5 | | | ||||||||||||
Consumer and non-durable goods |
9,255 | 5 | | | ||||||||||||
Beverages, food, and tobacco |
8,424 | 4 | | | ||||||||||||
Electronics |
8,207 | 4 | 5,992 | 13 | ||||||||||||
Business and commercial services |
6,916 | 4 | | | ||||||||||||
Machinery |
4,177 | 2 | 2,433 | 6 | ||||||||||||
Grocery |
3,450 | 2 | | | ||||||||||||
Hotels and gaming |
3,000 | 2 | | | ||||||||||||
Media: printing and publishing |
2,126 | 1 | 6,591 | 14 | ||||||||||||
Textiles, leather, and apparel |
1,992 | 1 | 1,836 | 4 | ||||||||||||
Aerospace and defense |
1,389 | 1 | 1,573 | 4 | ||||||||||||
Insurance |
1,313 | 1 | 3,786 | 8 | ||||||||||||
Buildings and real estate |
| | 6,497 | 14 | ||||||||||||
Federal, state and local government |
| | 4,348 | 9 | ||||||||||||
Transportation personal |
| | 3,499 | 8 | ||||||||||||
Other (d) |
5,253 | 3 | 632 | 1 | ||||||||||||
Total |
$ | 190,287 | 100 | % | $ | 45,787 | 100 | % | ||||||||
(a) | Based on the Moodys Investors Service, Inc. classification system and information provided by the tenant. | |
(b) | Reflects annualized contractual minimum base rent for the fourth quarter of 2009. | |
(c) | Reflects our pro rata share of annualized contractual minimum base rent for the fourth quarter of 2009 from equity investments in real estate. | |
(d) | Includes revenue from tenants in our consolidated investments in the following industries: consumer services (1%), mining, metals and primary metal (1%) and utilities (1%). For our equity investments in real estate, Other consists of revenue from tenants in mining, metals and primary metal. |
CPA®:16 Global 2009 10-K 5
Table of Contents
Lease Expirations
At December 31, 2009, lease expirations of our properties were as follows (dollars in thousands):
Consolidated Investments | Equity Investments in Real Estate (b) | |||||||||||||||
Annualized | % of Annualized | Annualized | % of Annualized | |||||||||||||
Contractual Lease | Contractual | Contractual Lease | Contractual | |||||||||||||
Year of Lease Expiration | Revenue (a) | Lease Revenue | Revenue (a) | Lease Revenue | ||||||||||||
2010 2013 |
$ | | | % | $ | 1,573 | 3 | % | ||||||||
2014 |
| | 3,499 | 8 | ||||||||||||
2015 |
596 | | 3,786 | 8 | ||||||||||||
2016 |
3,279 | 2 | 3,575 | 8 | ||||||||||||
2017 |
2,000 | 1 | | | ||||||||||||
2018 2019 |
4,773 | 3 | 4,348 | 9 | ||||||||||||
2020 2024 |
60,077 | 32 | 19,515 | 43 | ||||||||||||
2025 2029 |
74,995 | 39 | 5,535 | 12 | ||||||||||||
2030 and thereafter |
44,567 | 23 | 3,956 | 9 | ||||||||||||
Total |
$ | 190,287 | 100 | % | $ | 45,787 | 100 | % | ||||||||
(a) | Reflects annualized contractual minimum base rent for the fourth quarter of 2009. | |
(b) | Reflects our pro rata share of annualized contractual minimum base rent for the fourth quarter of 2009 from equity investments in real estate. |
Asset Management
We believe that effective management of our assets is essential to maintain and enhance property
values. Important aspects of asset management include restructuring transactions to meet the
evolving needs of current tenants, re-leasing properties, refinancing debt, selling assets and
knowledge of the bankruptcy process.
The advisor monitors, on an ongoing basis, compliance by tenants with their lease obligations and
other factors that could affect the financial performance of any of our properties. Monitoring
involves receiving assurances that each tenant has paid real estate taxes, assessments and other
expenses relating to the properties it occupies and confirming that appropriate insurance coverage
is being maintained by the tenant. For international compliance, the advisor also utilizes third
party asset managers for certain investments. The advisor reviews financial statements of our
tenants and undertakes regular physical inspections of the condition and maintenance of our
properties. Additionally, the advisor periodically analyzes each tenants financial condition, the
industry in which each tenant operates and each tenants relative strength in its industry.
Holding Period
We intend to hold each property we invest in for an extended period. The determination of whether a
particular property should be sold or otherwise disposed of will be made after consideration of
relevant factors, including prevailing economic conditions, with a view to achieving maximum
capital appreciation for our shareholders or avoiding increases in risk. No assurance can be given
that this objective will be realized.
Our intention is to consider alternatives for providing liquidity for our shareholders generally
commencing eight years following the investment of substantially all of the net proceeds from our
initial public offering. We completed the investment of substantially all of the net proceeds of
our initial public offering during 2006. While we have substantially invested the proceeds of our
offerings, we expect to continue to participate in future investments with our affiliates to the
extent we have funds available for investment. We may provide liquidity for our shareholders
through sales of assets, either on a portfolio basis or individually, a listing of our shares on a
stock exchange, a merger (which may include a merger with one or more of our affiliated
CPA® REITs and/or with the advisor) or another transaction approved by our board of
directors. We are under no obligation to liquidate our portfolio within any particular period since
the precise timing will depend on real estate and financial markets, economic conditions of the
areas in which the properties are located and tax effects on shareholders that
may prevail in the future. Furthermore, there can be no assurance that we will be able to
consummate a liquidity event. In the most recent instances in which CPA® REIT
shareholders were provided with liquidity, the liquidating entity merged with another, later-formed
CPA® REIT. In each of these transactions, shareholders of the liquidating entity were
offered the opportunity to exchange their shares for shares of the merged entity, cash or a
short-term note.
CPA®:16 Global 2009 10-K 6
Table of Contents
Financing Strategies
Consistent with our investment policies, we use leverage when available on favorable terms. We
generally borrow in the same currency that is used to pay rent on the property. This enables us to
mitigate a portion of our currency risk on international investments. Substantially all of our
mortgage loans are non-recourse and provide for monthly or quarterly installments, which include
scheduled payments of principal. At December 31, 2009, 96% of our mortgage financing bore interest
at fixed rates. Approximately 46% of our variable rate debt currently bears interest at fixed rates
but will reset in the future, pursuant to the terms of the mortgage
contracts. Accordingly, our near term cash flow should not be adversely affected by increases in
interest rates. The advisor may refinance properties or defease a loan when a decline in interest
rates makes it profitable to prepay an existing mortgage loan, when an existing mortgage loan
matures or if an attractive investment becomes available and the proceeds from the refinancing can
be used to purchase the investment. There is no assurance that existing debt will be refinanced at
lower rates of interest as the debt matures. The benefits of the refinancing may include an
increased cash flow resulting from reduced debt service requirements, an increase in distributions
from proceeds of the refinancing, if any, and/or an increase in property ownership if some
refinancing proceeds are reinvested in real estate. The prepayment of loans may require us to pay a
yield maintenance premium to the lender in order to pay off a loan prior to its maturity.
A lender on non-recourse mortgage debt generally has recourse only to the property collateralizing
such debt and not to any of our other assets, while unsecured financing would give a lender
recourse to all of our assets. The use of non-recourse debt, therefore, helps us to limit the
exposure of our assets to any one debt obligation. Lenders may, however, have recourse to our other
assets in limited circumstances not related to the repayment of the indebtedness, such as under an
environmental indemnity or in the case of fraud. Lenders may also seek to include in the terms of
mortgage loans provisions making the termination or replacement of the advisor an event of default
or an event requiring the immediate repayment of the full outstanding balance of the loan. We will
attempt to negotiate loan terms allowing us to replace or terminate the advisor. Even if we are
successful in negotiating such provisions, the replacement or termination of the advisor may
require the prior consent of the mortgage lenders.
A majority of our financing requires us to make a lump-sum or balloon payment at maturity.
At December 31, 2009, scheduled balloon payments for the next five years were as
follows (in thousands):
2010 |
$ | | ||
2011 |
| (a) | ||
2012 |
29,000 | (b) | ||
2013 |
| |||
2014 |
73,900 | (a) |
(a) | Excludes our pro rata share of mortgage obligations of equity investments in real estate totaling $8.4 million in 2011 and $104.8 million in 2014. | |
(b) | Inclusive of amounts attributable to noncontrolling interests totaling $14.5 million. |
Investment Strategies
We invest primarily in income-producing properties that are, upon acquisition, improved or being
developed or that are to be developed within a reasonable period after acquisition.
Most of our properties are subject to long-term net leases and were acquired through sale-leaseback
transactions in which we acquire properties from companies that simultaneously lease the properties
back from us. These sale-leaseback transactions provide the lessee company with a source of capital
that is an alternative to other financing sources such as corporate borrowing, mortgaging real
property, or selling shares of its stock.
Our sale-leaseback transactions may occur in conjunction with acquisitions, recapitalizations or
other corporate transactions. We may act as one of several sources of financing for these
transactions by purchasing real property from the seller and net leasing it back to the seller or
its successor in interest (the lessee).
CPA®:16 Global 2009 10-K 7
Table of Contents
In analyzing potential net lease investment opportunities, the advisor reviews all aspects of a
transaction, including the creditworthiness of the tenant or borrower and the underlying real
estate fundamentals, to determine whether a potential acquisition satisfies our investment
criteria. The advisor generally considers, among other things, the following aspects of each
transaction:
Tenant/Borrower Evaluation The advisor evaluates each potential tenant or borrower for their
creditworthiness, typically considering factors such as management experience, industry position
and fundamentals, operating history, and capital structure, as well as other factors that may be
relevant to a particular investment. The advisor seeks opportunities in which it believes the
tenant may have a stable or improving credit profile or the credit profile has not been recognized
by the market. In evaluating a possible investment, the creditworthiness of a tenant or borrower
will often be a more significant factor than the value of the underlying real estate, particularly
if the underlying property is specifically suited to the needs of the tenant; however, in certain
circumstances where
the real estate is attractively valued, the creditworthiness of the tenant may be a secondary
consideration. Whether a prospective tenant or borrower is creditworthy will be determined by the
advisors investment department and its investment committee, as described below. However,
creditworthy does not mean investment grade.
Properties Important to Tenant/Borrower Operations The advisor generally focuses on properties
that it believes are essential or important to the ongoing operations of the tenant. The advisor
believes that these properties provide better protection generally as well as in the event of a
bankruptcy, since a tenant/borrower is less likely to risk the loss of a critically important lease
or property in a bankruptcy proceeding or otherwise.
Diversification The advisor attempts to diversify our portfolio to avoid dependence on any one
particular tenant, borrower, collateral type, geographic location or tenant/borrower industry. By
diversifying our portfolio, the advisor seeks to reduce the adverse effect of a single
under-performing investment or a downturn in any particular industry or geographic region.
Lease Terms Generally, the net leased properties in which we invest will be leased on a full
recourse basis to our tenants or their affiliates. In addition, the advisor generally seeks to
include a clause in each lease that provides for increases in rent over the term of the lease.
These increases are fixed or tied to increases in indices such as the CPI, or other similar indices
in the jurisdiction in which the property is located, but may contain caps or other limitations,
either on an annual or overall basis. Further, in some jurisdictions (notably Germany), these
clauses must provide for rent adjustments based on increases or decreases in the relevant index. In
the case of retail stores and hotels, the lease may provide for participation in gross revenues
above a stated level. Alternatively, a lease may provide for mandated rental increases on specific
dates or other methods.
Collateral Evaluation The advisor reviews the physical condition of the property and conducts a
market evaluation to determine the likelihood of replacing the rental stream if the tenant defaults
or of a sale of the property in such circumstances. The advisor will also generally engage third
parties to conduct, or require the seller to conduct, Phase I or similar environmental site
assessments (including a visual inspection for the potential presence of asbestos) in an attempt to
identify potential environmental liabilities associated with a property prior to its acquisition.
If potential environmental liabilities are identified, the advisor generally requires that
identified environmental issues be resolved by the seller prior to property acquisition or, where
such issues cannot be resolved prior to acquisition, requires tenants contractually to assume
responsibility for resolving identified environmental issues post-closing and provide
indemnification protections against any potential claims, losses or expenses arising from such
matters. Although the advisor generally relies on its own analysis in determining whether to make
an investment, each real property to be purchased by us will be appraised by an independent
appraiser. The contractual purchase price (plus acquisition fees, but excluding acquisition
expenses, payable to the advisor) for a real property we acquire will not exceed its appraised
value, unless approved by our independent directors. The appraisals may take into consideration,
among other things, the terms and conditions of the particular lease transaction, the quality of
the lessees credit and the conditions of the credit markets at the time the lease transaction is
negotiated. The appraised value may be greater than the construction cost or the replacement cost
of a property, and the actual sale price of a property if sold by us may be greater or less than
the appraised value. In cases of special purpose real estate, a property is examined in light of
the prospects for the tenant/borrowers enterprise and the financial strength and the role of that
asset in the context of the tenant/borrowers overall viability. Operating results of properties
and other collateral may be examined to determine whether or not projected income levels are likely
to be met. The advisor also considers factors particular to the laws of foreign countries, in
addition to the risks normally associated with real property investments, when considering an
investment outside the U.S.
Transaction Provisions to Enhance and Protect Value The advisor attempts to include provisions in
our leases it believes may help protect our investment from changes in the operating and financial
characteristics of a tenant that may affect its ability to satisfy its obligations to us or reduce
the value of our investment, such as requiring our consent to specified tenant activity, requiring
the tenant to provide indemnification protections, and requiring the tenant to satisfy specific
operating tests. The advisor may also seek to enhance the likelihood of a tenants lease
obligations being satisfied through a guaranty of obligations from the tenants corporate parent or
other entity or a letter of credit. This credit enhancement, if obtained, provides us with
additional financial security. However, in markets where competition for net lease transactions is
strong, some or all of these provisions may be difficult to negotiate. In addition, in some
circumstances, tenants may retain the right to repurchase the property leased by the tenant. The
option purchase price is generally the greater of the contract purchase price or the fair market
value of the property at the time the option is exercised.
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Other Equity Enhancements The advisor may attempt to obtain equity enhancements in connection
with transactions. These equity enhancements may involve warrants exercisable at a future time to
purchase stock of the tenant or borrower or their parent. If warrants are obtained, and become
exercisable, and if the value of the stock subsequently exceeds the exercise price of the warrant,
equity enhancements can help us to achieve our goal of increasing investor returns.
Investment Decisions The advisors investment department, under the oversight of its chief
investment officer, is primarily responsible for evaluating, negotiating and structuring potential
investment opportunities for the CPA® REITs and WPC. Before an investment is made, the
transaction is reviewed by the advisors investment committee. The investment committee is not
directly involved in originating or negotiating potential investments but instead functions as a
separate and final step in the acquisition process. The advisor places special emphasis on having
experienced individuals serve on its investment committee. The advisor generally will not invest in
a transaction on our behalf unless it is approved by the investment committee, except that
investments with a total purchase price of $10 million or less may be approved by either the
chairman of the investment committee or the advisors chief investment officer (up to, in the case
of investments other than long-term net leases, a cap of $30 million or 5% of our estimated net
asset value, whichever is greater, provided that such investments may not have a credit rating of
less than BBB-). For transactions that meet the investment criteria of more than one
CPA® REIT, the chief investment officer has discretion to allocate the investment to or
among the CPA® REITs. In cases where two or more CPA® REITs (or one or more
of the CPA® REITs and the advisor) will hold the investment, a majority of the
independent directors of each CPA® REIT investing in the property must also approve the
transaction.
The following people currently serve on the investment committee:
| Nathaniel S. Coolidge, Chairman Former senior vice president and head of the bond and corporate finance department of John Hancock Mutual Life Insurance (currently known as John Hancock Life Insurance Company). Mr. Coolidges responsibilities included overseeing its entire portfolio of fixed income investments. |
| Trevor P. Bond Co-founder of Credit Suisses real estate equity group. Currently managing member of private investment vehicle, Maidstone Investment Co., LLC. |
| Axel K.A. Hansing Currently serving as a senior partner at Coller Capital, Ltd., a global leader in the private equity secondary market, and responsible for investment activity in parts of Europe, Turkey and South Africa. |
| Frank J. Hoenemeyer Former vice chairman and chief investment officer of the Prudential Insurance Company of America. As chief investment officer, he was responsible for all of Prudential Insurance Company of Americas investments including stocks, bonds and real estate. |
| Dr. Lawrence R. Klein Currently serving as professor emeritus of economics and finance at the University of Pennsylvania and its Wharton School. Recipient of the 1980 Nobel Prize in economic sciences and former consultant to both the Federal Reserve Board and the Presidents Council of Economic Advisors. |
| Nick J.M. van Ommen Former chief executive officer of the European Public Real Estate Association promoting, developing and representing the European public real estate sector, with over twenty years of financial industry experience. |
| Dr. Karsten von Köller Currently chairman of Lone Star Germany GmbH, deputy chairman of the Supervisory Board of Corealcredit Bank AG, deputy chairman of the Supervisory Board of MHB Bank AG, and vice chairman of the Supervisory Board of IKB Deutsche Industriebank AG. Former chief executive officer of Eurohypo AG. |
The advisor is required to use its best efforts to present a continuing and suitable investment
program to us but is not required to present to us any particular investment opportunity, even if
it is of a character that, if presented, could be taken by us.
Segments
We operate in one industry segment, real estate ownership with domestic and foreign investments.
For 2009, Hellweg Die Profi-Baumarkte GmbH & Co. KG (Hellweg 2) represented 20% of our total
lease revenues, inclusive of noncontrolling interest.
Competition
While historically we faced active competition from many sources for investment opportunities in
commercial properties net leased to major corporations both domestically and internationally, there
was a decrease in such competition as a result of the recent deterioration in the credit and real
estate financing markets. In general, we believe the advisors experience in real estate, credit
underwriting and transaction structuring should allow us to compete effectively for commercial
properties. However, competitors may be willing to accept
rates of returns, lease terms, other transaction terms or levels of risk that we may find
unacceptable.
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Environmental Matters
Our properties generally are or have been used for commercial purposes, including industrial and
manufacturing properties. Under various federal, state and local environmental laws and
regulations, current and former owners and operators of property may have liability for the cost of
investigating, cleaning-up or disposing of hazardous materials released at, on, under, in or from
the property. These laws typically impose responsibility and liability without regard to whether
the owner or operator knew of or was responsible for the presence of hazardous materials or
contamination, and liability under these laws is often joint and several. Third parties may also
make claims against owners or operators of properties for personal injuries and property damage
associated with releases of hazardous materials. As part of our efforts to mitigate these risks, we
typically engage third parties to perform assessments of potential
environmental risks when evaluating a new acquisition of property, and we frequently obtain
contractual protection (indemnities, cash reserves, letters of credit or other instruments) from
property sellers, tenants, a tenants parent company or another third party to address known or
potential environmental issues.
Transactions with Affiliates
We enter into transactions with our affiliates, including the other CPA® REITs and our
advisor or its affiliates, if we believe that doing so is consistent with our investment objectives
and we comply with our investment policies and procedures. These transactions typically take the
form of jointly owned ventures, direct purchases of assets, mergers or another type of transaction.
Types of Investments
Substantially all of our investments to date are and will continue to be income-producing
properties which are, upon acquisition, improved or being developed or which will be developed
within a reasonable period of time after their acquisition. These investments have primarily been
through sale-leaseback transactions, in which we invest in properties from companies that
simultaneously lease the properties back from us subject to long-term leases. We have also invested
in domestic hotel properties. Investments are not restricted as to geographical areas.
Other Investments We may invest up to 10% of our net equity in unimproved or non-income-producing
real property and in equity interests. Investment in equity interests in the aggregate will not
exceed five percent of our net equity. Such equity interests are defined generally to mean stock,
warrants or other rights to purchase the stock of, or other interests in, a tenant of a property,
an entity to which we lend money or a parent or controlling person of a borrower or tenant. We may
invest in unimproved or non-income-producing property that the advisor believes will appreciate in
value or increase the value of adjoining or neighboring properties we own. There can be no
assurance that these expectations will be realized. Often, equity interests will be restricted
securities, as defined in Rule 144 under the Securities Act of 1933 (the Securities Act), which
means that the securities have not been registered with the SEC and are subject to restrictions on
sale or transfer. Under this rule, we may be prohibited from reselling the equity securities until
we have fully paid for and held the securities for a period between six months to one year. It is
possible that the issuer of equity interests in which we invest may never register the interests
under the Securities Act. Whether an issuer registers its securities under the Securities Act may
depend on many factors, including the success of its operations.
We will exercise warrants or other rights to purchase stock generally if the value of the stock at
the time the rights are exercised exceeds the exercise price. Payment of the exercise price will
not be deemed an investment subject to the above described limitations. We may borrow funds to pay
the exercise price on warrants or other rights or may pay the exercise price from funds held for
working capital and then repay the loan or replenish the working capital upon the sale of the
securities or interests purchased. We will not consider paying distributions out of the proceeds of
the sale of these interests until any funds borrowed to purchase the interest have been fully
repaid.
We will not invest in real estate contracts of sale unless the contracts are in recordable form and
are appropriately recorded in the applicable chain of title.
Cash resources will be invested in permitted temporary investments, which include short-term U.S.
Government securities, bank certificates of deposit and other short-term liquid investments. To
maintain our REIT qualification, we also may invest in securities that qualify as real estate
assets and produce qualifying income under the REIT provisions of the Internal Revenue Code (the
Code). Any investments in other REITs in which the advisor or any director is an affiliate must
be approved as being fair and reasonable by a majority of the directors (which must include a majority of
the independent directors) who are not otherwise interested in the transaction.
If at any time the character of our investments would cause us to be deemed an investment company
for purposes of the Investment Company Act of 1940, we will take the necessary action to ensure
that we are not deemed to be an investment company. The advisor will continually review our
investment activity, including monitoring the proportion of our portfolio that is placed in various
investments, to attempt to ensure that we do not come within the application of the Investment
Company Act.
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Our reserves, if any, will be invested in permitted temporary investments. The advisor will
evaluate the relative risks and rate of return, our cash needs and other appropriate considerations
when making short-term investments on our behalf. The rate of return of permitted temporary
investments may be less than would be obtainable from real estate investments.
(d) Financial Information About Geographic Areas
See Our Portfolio above and the Segment Information footnote of the consolidated financial
statements for financial information pertaining to our geographic operations.
(e) Available Information
All filings we make with the SEC, including our Annual Report on Form 10-K, our quarterly reports
on Form 10-Q, and our current reports on Form 8-K, and any amendments to those reports, are
available for free on our website, http://www.cpa16.com, as soon as reasonably practicable after
they are filed or furnished to the SEC. Our SEC filings are available to be read or copied at the
SECs Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information regarding
the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
Our filings can also be obtained for free on the SECs Internet site at http://www.sec.gov. We are
providing our website address solely for the information of investors. We do not intend our website
to be an active link or to otherwise incorporate the information contained on our website into this
report or other filings with the SEC.
We will supply to any shareholder, upon written request and without charge, a copy of this Annual
Report on Form 10-K for the year ended December 31, 2009 as filed with the SEC.
Item 1A. | Risk Factors. |
Our business, results of operations, financial condition and ability to pay distributions at the
current rate could be materially adversely affected by various risks and uncertainties, including
the conditions below. These risk factors may have affected, and in the future could affect, our
actual operating and financial results and could cause such results to differ materially from our
expectations as expressed in any forward-looking statements. You should not consider this list
exhaustive. New risk factors emerge periodically, and we cannot assure you that the factors
described below list all risks that may become material to us at any later time.
The current financial and economic crisis has adversely affected, and may continue to adversely
affect, our business.
Although we believe we are seeing an easing of the global economic and financial crisis that has
severely curbed liquidity in the credit and real estate financing markets during recent periods,
the full magnitude, effects and duration of the crisis cannot be predicted. To date, its primary
effects on our business have been increased levels of financial distress, and higher levels of
default in the payment of rent, by our tenants; tenant bankruptcies; and impairments in the value
of our investments. Depending on how long and how severe this crisis is, these trends could
continue to worsen, which may negatively affect our earnings, as well as our cash flow and,
consequently, our ability to sustain the payment of distributions at current levels.
We are subject to the risks of real estate ownership, which could reduce the value of our
properties.
Our performance and asset value is subject, in part, to risks incident to the ownership and
operation of real estate, including:
| changes in the general economic climate; | ||
| changes in local conditions such as an oversupply of space or reduction in demand for real estate; | ||
| changes in interest rates and the availability of financing; and | ||
| changes in laws and governmental regulations, including those governing real estate usage, zoning and taxes. |
International investments involve additional risks.
We have invested in and may continue to invest in properties located outside the United States. At
December 31, 2009, our directly owned real estate properties located outside of the U.S.
represented 44% of current annualized lease revenue. These investments may be affected by factors
particular to the laws of the jurisdiction in which the property is located. These investments may
expose us to risks that are different from and in addition to those commonly found in the U.S.,
including:
| Changing governmental rules and policies; | ||
| Enactment of laws relating to the foreign ownership of property and laws relating to the ability of foreign entities to remove invested capital or profits earned from activities within the country to the U.S.; | ||
| Expropriation; |
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| Legal systems under which the ability to enforce contractual rights and remedies may be more limited than would be the case under U.S. law; | ||
| The difficulty in conforming obligations in other countries and the burden of complying with a wide variety of foreign laws, which may be more stringent than U.S. laws, including tax requirements and land use, zoning, and environmental laws, as well as changes in such laws; | ||
| Adverse market conditions caused by changes in national or local economic or political conditions; | ||
| Changes in relative interest rates; | ||
| Changes in the availability, cost and terms of mortgage funds resulting from varying national economic policies; | ||
| Restrictions and/or significant costs in repatriating cash and cash equivalents held in foreign bank accounts; and | ||
| Changes in real estate and other tax rates and other operating expenses in particular countries. |
In addition, the lack of publicly available information in accordance with accounting principles
generally accepted in the United States of America (GAAP) could impair our ability to analyze
transactions and may cause us to forego an investment opportunity. It may also impair our ability
to receive timely and accurate financial information from tenants necessary to meet our reporting
obligations to financial institutions or governmental or regulatory agencies. Certain of these
risks may be greater in emerging markets and less developed countries. The advisors expertise to
date is primarily in the United States and Europe, and the advisor has little or no expertise in
other international markets. The advisor may not be as familiar with the potential risks to our
investments outside the U.S. and Europe and we may incur losses as a result.
Also, we may rely on third-party asset managers in international jurisdictions to monitor
compliance with legal requirements and lending agreements with respect to our properties. Failure
to comply with applicable requirements may expose us or our operating subsidiaries to additional
liabilities.
Moreover, we are subject to foreign currency risk due to potential fluctuations in exchange rates
between foreign currencies and the U.S. dollar. Our principal currency exposure is to the Euro. We are also currently exposed to the British Pound Sterling, the Swedish krona, Canadian
dollar, Thai baht, Malaysian ringgit and Polish zloty. We attempt to mitigate a portion of the risk
of currency fluctuation by financing our properties in the local currency denominations, although
there can be no assurance that this will be effective. Because we generally place both our debt
obligation to the lender and the tenants rental obligation to us in the same currency, our results
of foreign operations benefit from a weaker U.S. dollar and are adversely affected by a stronger
U.S. dollar relative to foreign currencies; that is, a weaker U.S. dollar will tend to increase
both our revenues and our expenses, while a stronger U.S. dollar will tend to reduce both our
revenues and our expenses. To the extent foreign currency exchange rates are in line with 2008 and
2009 levels, they will have a minimal impact on our financial conditions and results of operations.
However, significant shifts in the value of the Euro could have a material impact on our future
results. For example, in the first two months of 2010, the dollar has strengthened significantly
relative to the Euro.
We are not required to meet any diversification standards; therefore, our investments may become
subject to concentration of risk.
Subject to our intention to maintain our qualification as a REIT, there are no limitations on the
number or value of particular types of investments that we may make. Although we attempt to do so,
we are not required to meet any diversification standards, including geographic diversification
standards. Therefore, our investments may become concentrated in type or geographic location, which
could subject us to significant concentration of risk with potentially adverse effects on our
investment objectives.
We may have difficulty selling or re-leasing our properties.
Real estate investments generally lack liquidity compared to other financial assets, and this lack
of liquidity will limit our ability to quickly change our portfolio in response to changes in
economic or other conditions. The triple-net leases we own, enter into, or acquire may be for
properties that are specially suited to the particular needs of the tenant. With these properties,
if the current lease is terminated or not renewed, we may be required to renovate the property or
to make rent concessions in order to lease the property to another tenant. In addition, if we are
forced to sell the property, we may have difficulty selling it to a party other than the tenant due
to the special purpose for which the property may have been designed. These and other limitations
may affect our ability to sell or re-lease properties without adversely affecting returns to our
shareholders. See Item 1 Business Our Portfolio for scheduled lease expirations.
We have recognized, and may in the future recognize, substantial impairment charges on our
properties.
We have incurred, and may in the future incur, substantial impairment charges, which we are
required to recognize whenever we sell a property for less than its carrying value or we determine
that the property has experienced a decline in its carrying value (or, for direct financing leases,
that the unguaranteed residual value of the underlying property has declined). By their nature, the
timing and extent of impairment charges are not predictable. Impairment charges reduce our net
income, although they do not necessarily affect our cash flow from operations.
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The inability of a tenant in a single tenant property to pay rent will reduce our revenues.
Most of our properties are occupied by a single tenant and, therefore, the success of our
investments is materially dependent on the financial stability of these tenants. Our five largest
tenants/guarantors represented approximately 36%, 36% and 33% of total lease revenues in 2009, 2008
and 2007, respectively. Lease payment defaults by tenants could cause us to reduce the amount of
distributions to our shareholders. A default of a tenant on its lease payment to us could cause us
to lose the revenue from the property and cause us to have to find an alternative source of revenue
to meet any mortgage payment and prevent foreclosure if the property is subject to a
mortgage. In the event of a default, we may experience delays in enforcing our rights as landlord
and may incur substantial costs in protecting our investment and re-leasing our property. If a
lease is terminated, there is no assurance that we will be able to re-lease the property for the
rent previously received or sell the property without incurring a loss.
The bankruptcy or insolvency of tenants or borrowers may cause a reduction in revenue.
Bankruptcy or insolvency of a tenant or borrower could cause:
| the loss of lease or interest payments; | ||
| an increase in the costs incurred to carry the property; | ||
| litigation; | ||
| a reduction in the value of our shares; and | ||
| a decrease in distributions to our shareholders. |
Under U.S. bankruptcy law, a tenant who is the subject of bankruptcy proceedings has the option of
assuming or rejecting any unexpired lease. If the tenant rejects the lease, any resulting claim we
have for breach of the lease (excluding collateral securing the claim) will be treated as a general
unsecured claim. The maximum claim will be capped at the amount owed for unpaid rent prior to the
bankruptcy unrelated to the termination, plus the greater of one years lease payments or 15% of
the remaining lease payments payable under the lease (but no more than three years lease
payments). In addition, due to the long-term nature of our leases and, in some cases, terms
providing for the repurchase of a property by the tenant, a bankruptcy court could recharacterize a
net lease transaction as a secured lending transaction. If that were to occur, we would not be
treated as the owner of the property, but we might have rights as a secured creditor. Those rights
would not include a right to compel the tenant to timely perform its obligations under the lease
but may instead entitle us to adequate protection, a bankruptcy concept that applies to protect
against a decrease in the value of the property if the value of the property is less than the
balance owed to us.
Insolvency laws outside of the U.S. may not be as favorable to reorganization or to the protection
of a debtors rights as tenants under a lease as are the laws in the U.S. Our rights to terminate a
lease for default may be more likely to be enforceable in countries other than the U.S., in which a
debtor/ tenant or its insolvency representative may be less likely to have rights to force
continuation of a lease without our consent. Nonetheless, such laws may permit a tenant or an
appointed insolvency representative to terminate a lease if it so chooses.
However, in circumstances where the bankruptcy laws of the U.S. are considered to be more favorable
to debtors and to their reorganization, entities that are not ordinarily perceived as U.S.
entities may seek to take advantage of the U.S. bankruptcy laws if they are eligible. An entity
would be eligible to be a debtor under the U.S. bankruptcy laws if it had a domicile (state of
incorporation or registration), place of business or assets in the U.S. If a tenant became a debtor
under the U.S. bankruptcy laws, then it would have the option of assuming or rejecting any
unexpired lease. As a general matter, after the commencement of bankruptcy proceedings and prior to
assumption or rejection of an expired lease, U.S. bankruptcy laws provide that until an unexpired
lease is assumed or rejected, the tenant (or its trustee if one has been appointed) must timely
perform obligations of the tenant under the lease. However, under certain circumstances, the time
period for performance of such obligations may be extended by an order of the bankruptcy court.
We and the other CPA® REITs managed by the advisor have had tenants file for bankruptcy
protection and are involved in litigation (including several international tenants). Four prior
CPA® REITs reduced the rate of distributions to their investors as a result of adverse
developments involving tenants.
Similarly, if a borrower under one of our loan transactions declares bankruptcy, there may not be
sufficient funds to satisfy its payment obligations to us, which may adversely affect our revenue
and distributions to our shareholders. The mortgage loans in which we may invest and the mortgage
loans underlying the mortgage-backed securities in which we may invest may be subject to
delinquency, foreclosure and loss, which could result in losses to us.
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Our distributions may exceed our adjusted cash flow from operating activities and our earnings in
accordance with GAAP.
Over the life of our company, the regular quarterly cash distributions we pay are expected to be
principally sourced by adjusted cash flow from operating activities. Adjusted cash flow from
operating activities represents GAAP cash flow from operating activities,
adjusted primarily to reflect timing differences between the period an expense is incurred and
paid, to add cash distributions we receive from equity investments in real estate in excess of
equity income and to subtract cash distributions we pay to our noncontrolling partners in real
estate joint ventures that we consolidate. However, there can be no assurance that our adjusted
cash flow from operating activities will be sufficient to cover our future distributions and we may
use other sources of funds, such as proceeds from borrowings and asset sales, to fund portions of
our future distributions. In addition, our distributions in 2009 exceeded, and future
distributions may exceed, our GAAP earnings primarily because our GAAP earnings are affected by
non-cash charges such as depreciation and impairments.
For U.S. federal income tax purposes, portions of the distributions we make may represent return of
capital to our shareholders if they exceed our earnings and profits.
We do not fully control the management for our properties.
The tenants or managers of net lease properties are responsible for maintenance and other
day-to-day management of the properties. If a property is not adequately maintained in accordance
with the terms of the applicable lease, we may incur expenses for deferred maintenance expenditures
or other liabilities once the property becomes free of the lease. While our leases generally
provide for recourse against the tenant in these instances, a bankrupt or financially troubled
tenant may be more likely to defer maintenance and it may be more difficult to enforce remedies
against such a tenant. In addition, to the extent tenants are unable to conduct their operation of
the property on a financially successful basis, their ability to pay rent may be adversely
affected. Although we endeavor to monitor, on an ongoing basis, compliance by tenants with their
lease obligations and other factors that could affect the financial performance of our properties,
such monitoring may not in all circumstances ascertain or forestall deterioration either in the
condition of a property or the financial circumstances of a tenant.
Our leases may permit tenants to purchase a property at a predetermined price, which could limit
our realization of any appreciation or result in a loss.
In some circumstances, we grant tenants a right to repurchase the property they lease from us. The
purchase price may be a fixed price or it may be based on a formula or the market value at the time
of exercise. If a tenant exercises its right to purchase the property and the propertys market
value has increased beyond that price, we could be limited in fully realizing the appreciation on
that property. Additionally, if the price at which the tenant can purchase the property is less
than our purchase price or carrying value (for example, where the purchase price is based on an
appraised value), we may incur a loss.
Our success is dependent on the performance of the advisor.
Our ability to achieve our investment objectives and to pay distributions is largely dependent upon the
performance of the advisor in the acquisition of investments, the selection of tenants, the
determination of any financing arrangements, and the management of our assets. The past performance of partnerships and CPA® REITs managed
by the advisor may not be indicative of the advisors performance with respect to us. We cannot
guarantee that the advisor will be able to successfully manage and achieve liquidity for us to the
same extent that it has done so for prior programs.
The advisor may be subject to conflicts of interest.
The advisor manages our business and selects our investments. The advisor has some conflicts of
interest in its management of us, which arise primarily from the involvement of the advisor in
other activities that may conflict with us and the payment of fees by us to the advisor. Unless the
advisor elects to receive our common stock in lieu of cash compensation, we will pay the advisor
substantial cash fees for the services it provides, which will reduce the amount of cash available
for investment in properties or distribution to our shareholders. Circumstances under which a
conflict could arise between us and the advisor include:
| the receipt of compensation by the advisor for property purchases, leases, sales and financing for us, which may cause the advisor to engage in transactions that generate higher fees, rather than transactions that are more appropriate or beneficial for our business; |
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| agreements between us and the advisor, including agreements regarding compensation, will not be negotiated on an arms- length basis as would occur if the agreements were with unaffiliated third parties; | ||
| acquisitions of single properties or portfolios of properties from affiliates, including the CPA® REITs, subject to our investment policies and procedures, which may take the form of a direct purchase of assets, a merger or another type of transaction; | ||
| competition with certain affiliates for property acquisitions, which may cause the advisor and its affiliates to direct properties suitable for us to other related entities; | ||
| a decision by the advisor (on our behalf) of whether to hold or sell a property could impact the timing and amount of fees payable to the advisor because it receives asset management fees and may decide not to sell a property; | ||
| disposition, incentive and termination fees, which are based on the sale price of properties or the terms of a liquidity transaction, may cause a conflict between the advisors desire to sell a property or engage in a liquidity transaction and our interests; and | ||
| whether a particular entity has been formed by the advisor specifically for the purpose of making particular types of investments (in which case it will generally receive preference in the allocation of those types of investments). |
We delegate our management functions to the advisor.
We delegate our management functions to the advisor, for which it earns fees
pursuant to an advisory agreement. Although at least a
majority of our board of directors must be independent, because the advisor earns fees from us and has an ownership interest in us, we
have limited independence from the advisor.
The termination or replacement of the advisor could trigger a default or repayment event under our
financing arrangements for some of our assets.
Lenders for certain of our assets typically request change of control provisions in the loan
documentation that would make the termination or replacement of WPC or its affiliates as the
advisor an event of default or an event requiring the immediate repayment of the full outstanding
balance of the loan. While we will attempt to negotiate not to include such provisions, lenders may
require such provisions. If an event of default or repayment event occurs with respect to any of
our assets, our revenues and distributions to our shareholders may be adversely affected.
Our estimated annual net asset value is based in part on information that the advisor provides to a
third party.
The asset management and performance compensation paid to the advisor are based principally on an
annual third party valuation of our real estate. Any valuation includes the use of estimates and
our valuation may be influenced by the information provided by the advisor. Because net asset value
is an estimate and can change as interest rate and real estate markets fluctuate, there is no
assurance that a shareholder will realize net asset value in connection with any liquidity event.
Appraisals that we obtain may include leases in place on the property being appraised, and if the
leases terminate, the value of the property may become significantly lower.
The appraisals that we obtain on our properties may be based on the value of the properties when
the properties are leased. If the leases on the properties terminate, the value of the properties
may fall significantly below the appraised value.
We are not required to meet any diversification standards; therefore, our investments may become
subject to concentration of risk.
Subject to our intention to maintain our qualification as a REIT, there are no limitations on the
number or value of particular types of investments that we may make. Although we attempt to do so,
we are not required to meet any diversification standards, including geographic diversification
standards. Therefore, our investments may become concentrated in type or geographic location, which
could subject us to significant concentration of risk with potentially adverse effects on our
investment objectives.
Our use of debt to finance investments could adversely affect our cash flow and distributions to
shareholders.
Most of our investments have been made by borrowing a portion of the purchase price of our
investments and securing the loan with a mortgage on the property. We generally borrow on a
non-recourse basis to limit our exposure on any property to the amount of equity invested in the
property. However, if we are unable to make our debt payments as required, a lender could foreclose
on the property or properties securing its debt. Additionally, lenders for our international
mortgage loan transactions typically incorporate provisions that can cause a loan default and over
which we have no control, including a loan to value ratio, a debt service coverage ratio and a
material adverse change in the borrowers or tenants business, so if real estate values decline or
a tenant defaults, the lender would have the right to foreclose on its security. If any of these
events were to occur, it could cause us to lose part or all of our investment, which in turn could
cause the value of our portfolio, and revenues available for distributions to our shareholders, to
be reduced.
CPA®:16 Global 2009 10-K 15
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A majority of our financing also requires us to make a lump-sum or balloon payment at maturity.
Our ability to make any balloon payments on debt will depend upon our ability either to refinance
the obligation when due, invest additional equity in the property or sell the property. When the
balloon payment is due, we may be unable to refinance the balloon payment on terms as favorable as
the original loan or sell the property at a price sufficient to make the balloon payment. Our
ability to accomplish these goals will be affected by various factors existing at the relevant
time, such as the state of the national and regional economies, local real estate conditions,
available mortgage rates, our equity in the mortgaged properties, our financial condition, the
operating history of the
mortgaged properties and tax laws. A refinancing or sale could affect the rate of return to
shareholders and the projected time of disposition of our assets. Because of the current conditions
in the credit market, refinancing is at present very difficult. See Item 1 Business Our
Portfolio Financing Strategies.
Mortgage loans in which we may invest may be subject to delinquency, foreclosure and loss, which
could result in losses to us.
The ability of a borrower to repay a loan secured by an income-producing property typically is
dependent primarily upon the successful operation of the property rather than upon the existence of
independent income or assets of the borrower. If the net operating income of the property is
reduced, the borrowers ability to repay the loan may be impaired. Net operating income of an
income-producing property can be affected by the risks particular to real property described above,
as well as, among other things:
| tenant mix; | ||
| success of tenant businesses; | ||
| property management decisions; | ||
| property location and condition; | ||
| competition from comparable types of properties; | ||
| changes in specific industry segments; | ||
| declines in regional or local real estate values, or rental or occupancy rates; and | ||
| increases in interest rates, real estate tax rates and other operating expenses. |
In the event of any default under a mortgage loan held directly by us, we will bear a risk of loss
of principal to the extent of any deficiency between the value of the collateral and the principal
and accrued interest of the mortgage loan, which could have a material adverse effect on our
ability to achieve our investment objectives, including, without limitation, diversification of our
commercial real estate properties portfolio by property type and location, moderate financial
leverage, low to moderate operating risk and an attractive level of current income. In the event of
the bankruptcy of a mortgage loan borrower, the mortgage loan to that borrower will be deemed to be
secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as
determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the
avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is
unenforceable under state law. Foreclosure of a mortgage loan can be an expensive and lengthy
process that could have a substantial negative effect on our anticipated return on the foreclosed
mortgage loan.
Loans collateralized by non-real estate assets create additional risk and may adversely affect our
REIT qualification.
We may in the future invest in secured corporate loans, which are loans collateralized by real
property, personal property connected to real property (i.e., fixtures) and/or personal property,
on which another lender may hold a first priority lien. If a default occurs, the value of the
collateral may not be sufficient to repay all of the lenders that have an interest in the
collateral. Our right in bankruptcy will be different for these loans than typical net lease
transactions. To the extent that loans are collateralized by personal property only, or to the
extent the value of the real estate collateral is less than the aggregate amount of our loans and
equal or higher-priority loans secured by the real estate collateral, that portion of the loan will
not be considered a real estate asset, for purposes of the 75% REIT asset test. Also, income from
that portion of such a loan will not qualify under the 75% REIT income test for REIT qualification.
Failure to qualify as a REIT would adversely affect our operations and ability to make
distributions.
If we fail to qualify as a REIT in any taxable year, we would be subject to U.S. federal income tax
on our net taxable income at corporate rates. In addition, we would generally be disqualified from
treatment as a REIT for the four taxable years following the year we lose our REIT qualification.
Losing our REIT qualification would reduce our net earnings available for investment or
distribution to shareholders because of the additional tax liability, and we would no longer be
required to make distributions. We might be required to borrow funds or liquidate some investments
in order to pay the applicable tax.
CPA®:16 Global 2009 10-K 16
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Qualification as a REIT involves the application of highly technical and complex Internal Revenue
Code provisions for which there are only limited judicial and administrative interpretations. The
determination of various factual matters and circumstances not entirely within our control may
affect our ability to qualify as a REIT. In order to qualify as a REIT, we must satisfy a number of
requirements regarding the composition of our assets and the sources of our gross income. Also, we
must make distributions to our shareholders aggregating annually at least 90% of our net taxable
income, excluding net capital gains. Because we have investments in foreign real property, we are
subject to foreign currency gains and losses. Foreign currency gains are qualifying income for
purposes of the REIT income requirements provided that the underlying income satisfies the REIT
income requirements. To reduce the risk of foreign currency gains adversely affecting our REIT
qualification, we may be required to defer the repatriation of cash from foreign jurisdictions or
to employ other structures that could affect the timing, character or amount of income we receive
from our foreign investments. No assurance can be given that we will be able to manage our foreign
currency gains in a manner that enables us to qualify as a REIT or to avoid U.S. federal and other
taxes on our income. In addition, legislation, new regulations, administrative
interpretations or court decisions may adversely affect our investors, our ability to qualify as a
REIT for U.S. federal income tax purposes or the desirability of an investment in a REIT relative
to other investments.
The Internal Revenue Service (IRS) may take the position that specific sale-leaseback
transactions we treat as true leases are not true leases for U.S. federal income tax purposes but
are, instead, financing arrangements or loans. If a sale-leaseback transaction were so
recharacterized, we might fail to satisfy the qualification requirements applicable to REITs.
We may elect to treat one or more of our corporate subsidiaries as a taxable REIT subsidiary
(TRS). In general, a TRS may perform additional services for our tenants and generally may engage
in any real estate or non-real estate related business (except for the operation or management of
health care facilities or lodging facilities or providing to any person, under a franchise, license
or otherwise, rights to any brand name under which any lodging facility or health care facility is
operated). A TRS is subject to corporate federal income tax. We have elected to treat two of our
corporate subsidiaries as TRSs.
We do not operate our hotels and, as a result, we do not have complete control over implementation
of our strategic decisions.
In order for us to satisfy certain REIT qualification rules, we cannot directly operate any of our
hotels. Instead, we must engage an independent management company to operate our hotels. Our TRSs
engage independent management companies as the property managers for our hotels, as required by the
REIT qualification rules. The management companies operating our hotels make and implement
strategic business decisions with respect to these hotels, such as decisions with respect to the
repositioning of a franchise or food and beverage operations and other similar decisions. Decisions
made by the management companies operating the hotels may not be in the best interests of a
particular hotel or of our company. Accordingly, we cannot assure you that the management companies
operating our hotels will operate them in a manner that is in our best interests.
Dividends payable by REITs generally do not qualify for reduced U.S. federal income tax rates
because qualifying REITs do not pay U.S. federal income tax on their net income.
The maximum U.S. federal income tax rate for dividends payable by domestic corporations to
individual domestic shareholders is 15% (through 2010, under current law). Dividends payable by
REITs, however, are generally not eligible for the reduced rates, except to the extent that they
are attributable to dividends paid by a taxable REIT subsidiary or a C corporation or relate to
certain other activities. This is because qualifying REITs receive an entity level tax benefit from
not having to pay U.S. federal income tax on their net income. As a result, the more favorable
rates applicable to regular corporate dividends could cause shareholders who are individuals to
perceive investments in REITs to be relatively less attractive than investments in the stocks of
non-REIT corporations that pay dividends, which could adversely affect the value of the stock of
REITs, including our common stock. In addition, the relative attractiveness of real estate in
general may be adversely affected by the reduced U.S. federal income tax rates applicable to
corporate dividends, which could negatively affect the value of our properties.
The ability of our board of directors to change our investment policies or revoke our REIT election
without shareholder approval may cause adverse consequences to our shareholders.
Our bylaws require that our independent directors review our investment policies at least annually
to determine that the policies we are following are in the best interest of our shareholders. These
policies may change over time. The methods of implementing our investment policies may also vary as
new investment techniques are developed. Except as otherwise provided in our bylaws, our investment
policies, the methods for their implementation, and our other objectives, policies and procedures
may be altered by a majority of the directors (which must include a majority of the independent directors),
without the approval of our shareholders. As a result, the nature of your investment could change
without your consent. A change in our investment strategy may, among other things, increase our
exposure to interest rate risk, default risk and commercial real property market fluctuations, all
of which could materially adversely affect our ability to achieve our investment objectives.
In addition, our organizational documents permit our board of directors to revoke or otherwise
terminate our REIT election, without the approval of our shareholders, if the board determines that
it is not in our best interest to qualify as a REIT. In such a case, we would become subject to
U.S. federal income tax on our net taxable income and we would no longer be required to distribute
most of our net taxable income to our shareholders, which may have adverse consequences on the
total return to our shareholders.
CPA®:16 Global 2009 10-K 17
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Potential liability for environmental matters could adversely affect our financial condition.
We have invested and in the future may invest in properties historically used for industrial,
manufacturing and other commercial purposes. We therefore own and may in the future acquire
properties that have known or potential environmental contamination as a result of historical
operations. Buildings and structures on the properties we own and purchase also may have known or
suspected asbestos-containing building materials. Our properties currently are used for industrial,
manufacturing, and other commercial purposes, and some of our tenants may handle hazardous or toxic
substances, generate hazardous wastes, or discharge regulated pollutants to the environment. We may
invest in properties located in countries that have adopted laws or observe environmental
management standards that are less stringent than those generally followed in the U.S., which may
pose a greater risk that releases of hazardous or toxic substances have occurred to the
environment. Leasing properties to tenants that engage in these activities, and owning properties
historically and currently used for industrial, manufacturing, and other commercial purposes, will
cause us to be subject to the risk of liabilities under environmental laws. Some of these laws
could impose the following on us:
| Responsibility and liability for the cost of investigation, removal or remediation of hazardous or toxic substances released on or from our property, generally without regard to our knowledge of, or responsibility for, the presence of these contaminants. |
| Liability for claims by third parties based on damages to natural resources or property, personal injuries, or costs of removal or remediation of hazardous or toxic substances in, on, or migrating from our property. |
| Responsibility for managing asbestos-containing building materials, and third-party claims for exposure to those materials. |
Our costs of investigation, remediation or removal of hazardous or toxic substances, or for
third-party claims for damages, may be substantial. The presence of hazardous or toxic substances
at any of our properties, or the failure to properly remediate a contaminated property, could give
rise to a lien in favor of the government for costs it may incur to address the contamination or
otherwise adversely affect our ability to sell or lease the property or to borrow using the
property as collateral. While we attempt to mitigate identified environmental risks by requiring
tenants contractually to acknowledge their responsibility for complying with environmental laws and
to assume liability for environmental matters, circumstances may arise in which a tenant fails, or
is unable, to fulfill its contractual obligations. In addition, environmental liabilities, or costs
or operating limitations imposed on a tenant to comply with environmental laws, could affect its
ability to make rental payments to us.
The returns on our investments in net leased properties may not be as great as returns on equity
investments in real properties during strong real estate markets.
As an investor in single tenant, long-term net leased properties, the returns on our investments
are based primarily on the terms of the lease. Payments to us under our leases do not rise and fall
based upon the market value of the underlying properties. In addition, we generally lease each
property to one tenant on a long-term basis, which means that we cannot seek to improve current
returns at a particular property through an active, multi-tenant leasing strategy. While we will
sell assets from time to time and may recognize gains or losses on the sales based on then-current
market values, we generally intend to hold our properties on a long-term basis. We view our leases
as fixed income investments through which we seek to achieve attractive risk-adjusted returns that
will support a steady dividend. The value of our assets will likely not appreciate to the same
extent as equity investments in real estate during periods when real estate markets are very
strong. Conversely, in weak markets, the existence of a long-term lease may positively affect the
value of the property, although it is nonetheless possible that, as a result of property declines
generally, we may recognize impairment charges on some properties.
A potential change in U.S. accounting standards regarding operating leases may make the leasing of
facilities less attractive to our potential domestic tenants, which could reduce overall demand for
our leasing services.
Under current authoritative accounting guidance for leases, a lease is classified by a tenant as a
capital lease if the significant risks and rewards of ownership are considered to reside with the
tenant. This situation is considered to be met if, among other things, the non-cancellable lease
term is more than 75% of the useful life of the asset or if the present value of the minimum lease
payments equals 90% or more of the leased propertys fair value. Under capital lease accounting for
a tenant, both the leased asset and liability are reflected on their balance sheet. If the lease
does not meet any of the criteria for a capital lease, the lease is considered an operating lease
by the tenant and the obligation does not appear on the tenants balance sheet; rather, the
contractual future minimum payment obligations are only disclosed in the footnotes thereto. Thus,
entering into an operating lease can appear to enhance a tenants balance sheet in comparison to
direct ownership. In response to concerns caused by a 2005 SEC study that the current model does
not have sufficient transparency, the Financial Accounting Standards Board (the FASB) and the
International Accounting Standards Board conducted a joint project to re-evaluate lease accounting.
In March 2009, the FASB issued a discussion paper providing its preliminary views that the scope
of the proposed new standard should be based on the scope of the existing standards. Changes to
the accounting guidance could affect both our accounting for leases as well as that of our current
and potential customers. These changes may affect how the real estate leasing business is conducted
both domestically and internationally. For example, if the accounting standards regarding the
financial statement classification of operating leases are revised, then companies may be less
willing to enter into leases in general or desire to enter into leases with shorter terms because
the apparent benefits to their balance sheets could be reduced or eliminated. This in turn could
make it more difficult for us to enter leases on terms we find favorable.
CPA®:16 Global 2009 10-K 18
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Our net tangible book value may be adversely affected if we are required to adopt certain fair
value accounting provisions.
In June 2007, the Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants (AICPA) issued accounting guidance that addresses when the accounting
principles of the AICPA Audit and Accounting Guide Investment Companies must be applied by an
entity and whether investment company accounting must be retained by a parent company in
consolidation or by an investor in the application of the equity method of accounting. In addition,
this guidance includes certain
disclosure requirements for parent companies and equity method investors in investment companies
that retain investment company accounting in the parent companys consolidated financial statements
or the financial statements of an equity method investor. In February 2008, the effective date of
this guidance was indefinitely delayed, and adoption of the guidance was prohibited for any entity
that had not previously adopted it. We are currently assessing the potential impact the adoption of
this statement will have on our financial position and results of operations if we were required to
adopt it.
While we maintain an exemption from the Investment Company Act of 1940, as amended (the Investment
Company Act), and are therefore not regulated as an investment company, we may be required to
adopt the fair value accounting provisions of this guidance. Under these provisions our investments
would be recorded at fair value with changes in value reflected in our earnings, which may result
in significant fluctuations in our results of operations and net tangible book value. In addition
to the immediate substantial dilution in net tangible book value per share equal to the costs of
the offering, as described earlier, net tangible book value per share may be further reduced by any
declines in the fair value of our investments.
Your investment return may be reduced if we are required to register as an investment company under
the Investment Company Act.
We do not intend to register as an investment company under the Investment Company Act. If we were
obligated to register as an investment company, we would have to comply with a variety of
substantive requirements under the Investment Company Act that impose, among other things:
| limitations on capital structure; | ||
| restrictions on specified investments; | ||
| prohibitions on transactions with affiliates; and |
| compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly increase our operating expenses. |
In general, we expect to be able to rely on the exemption from registration provided by Section
3(c)(5)(C) of the Investment Company Act. In order to qualify for this exemption, at least 55% of
our portfolio must be comprised of real property and mortgages and other liens on an interest in
real estate (collectively, qualifying assets) and at least 80% of our portfolio must be comprised
of real estate-related assets. Qualifying assets include mortgage loans, mortgage-backed securities
that represent the entire ownership in a pool of mortgage loans, and other interests in real
estate. In order to maintain our exemption from regulation under the Investment Company Act, we
must continue to engage primarily in the business of buying real estate.
To maintain compliance with the Investment Company Act exemption, we may be unable to sell assets
we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In
addition, we may have to acquire additional income or loss generating assets that we might not
otherwise have acquired or may have to forego opportunities to acquire interests in companies that
we would otherwise want to acquire and would be important to our investment strategy. If we were
required to register as an investment company, we would be prohibited from engaging in our business
as currently contemplated because the Investment Company Act imposes significant limitations on
leverage. In addition, we would have to seek to restructure the advisory agreement because the
compensation that it contemplates would not comply with the Investment Company Act. Criminal and
civil actions could also be brought against us if we failed to comply with the Investment Company
Act. In addition, our contracts would be unenforceable unless a court were to require enforcement,
and a court could appoint a receiver to take control of us and liquidate our business.
There is not, and may never be, an active public trading market for our shares, so it will be
difficult for shareholders to sell shares quickly.
There is no active public trading market for our shares. Our articles of incorporation also
prohibit the ownership of more than 9.8% of our stock by one person or affiliated group, unless
exempted by our board of directors, which may inhibit large investors from desiring to purchase
your shares and may also discourage a takeover. Moreover, our redemption plan includes numerous
restrictions that limit your ability to sell your shares to us, and our board of directors may
amend, suspend or terminate the plan. Therefore, it will be difficult for you to sell
your shares promptly or at all. In addition, the price received for any shares sold prior to a
liquidity event is likely to be less than the proportionate value of the real estate we own.
Investor suitability standards imposed by certain states may also make it more difficult to sell
your shares to someone in those states.
CPA®:16 Global 2009 10-K 19
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Maryland law could restrict change in control.
Provisions of Maryland law applicable to us prohibit business combinations with:
| any person who beneficially owns 10% or more of the voting power of outstanding shares, referred to as an interested shareholder; | ||
| an affiliate who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of our outstanding shares, also referred to as an interested shareholder; or |
| an affiliate of an interested shareholder. |
These prohibitions last for five years after the most recent date on which the interested
shareholder became an interested shareholder. Thereafter, any business combination must be
recommended by our board of directors and approved by the affirmative vote of at least 80% of the
votes entitled to be cast by holders of our outstanding shares and two-thirds of the votes entitled
to be cast by holders of our shares other than shares held by the interested shareholder or by an
affiliate or associate of the interested shareholder. These requirements could have the effect of
inhibiting a change in control even if a change in control was in our shareholders interest. These
provisions of Maryland law do not apply, however, to business combinations that are approved or
exempted by our board of directors prior to the time that someone becomes an interested
shareholder. In addition, a person is not an interested shareholder if the board of directors
approved in advance the transaction by which he or she otherwise would have become an interested
shareholder. However, in approving a transaction, the board of directors may provide that its
approval is subject to compliance at or after the time of approval, with any terms and conditions
determined by the board.
Our articles of incorporation restrict beneficial ownership of more than 9.8% of the outstanding
shares by one person or affiliated group in order to assist us in meeting the REIT qualification
rules. These requirements could have the effect of inhibiting a change in control even if a change
in control were in our shareholders interest.
Shareholders equity interests may be diluted.
Our shareholders do not have preemptive rights to any shares of common stock issued by us in the
future. Therefore, if we (1) sell shares of common stock in the future, including those issued
pursuant to our distribution reinvestment plan, (2) sell securities that are convertible into our
common stock, (3) issue common stock in a private placement to institutional investors, or (4)
issue shares of common stock to our directors or to WPC and its affiliates for payment of fees in
lieu of cash, then shareholders will experience dilution of their percentage ownership in us.
Depending on the terms of such transactions, most notably the offer price per share and the value
of our properties and our other investments, existing shareholders might also experience a dilution
in the book value per share of their investment in us.
Item 1B. | Unresolved Staff Comments. |
None.
Item 2. | Properties. |
Our principal corporate offices are located at 50 Rockefeller Plaza, New York, NY 10020. The
advisor also has its primary international investment offices in London and Amsterdam. The advisor also has office
space domestically in Dallas, Texas and San Francisco, California and internationally in
Shanghai.
See Item 1, Business Our Portfolio for a discussion of the properties we hold for rental
operations and Part II, Item 8, Financial Statements and Supplemental Data Schedule III Real
Estate and Accumulated Depreciation for a detailed listing of such properties.
Item 3. | Legal Proceedings. |
Various claims and lawsuits arising in the normal course of business are pending against us. The
results of these proceedings are not expected to have a material adverse effect on our consolidated
financial position or results of operations.
CPA®:16 Global 2009 10-K 20
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Item 4. | Removed and Reserved. |
PART II
Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Unlisted Shares and Distributions
There is no active public trading market for our shares. At March 18, 2010, there were 35,038
holders of record of our shares.
We are required to distribute annually at least 90% of our distributable REIT net taxable income to
maintain our status as a REIT. Quarterly distributions declared by us for the past two years are
as follows:
Years ended | ||||||||
2009 | 2008 | |||||||
First quarter |
$ | 0.1653 | $ | 0.1637 | ||||
Second quarter |
0.1656 | 0.1642 | ||||||
Third quarter |
0.1656 | 0.1647 | ||||||
Fourth quarter |
0.1656 | 0.1650 | ||||||
$ | 0.6621 | $ | 0.6576 | |||||
Unregistered Sales of Equity Securities
For the three months ended December 31, 2009, we issued 300,612 restricted shares of common stock
to the advisor as consideration for performance fees. These shares were issued at $9.80 per share,
which was our most recently published estimated net asset value per share as approved by our board
of directors at the date of issuance. Since none of these transactions were considered to have
involved a public offering within the meaning of Section 4(2) of the Securities Act, the shares
issued were deemed to be exempt from registration. In acquiring our shares, the advisor represented
that such interests were being acquired by it for the purposes of investment and not with a view to
the distribution thereof.
Issuer Purchases of Equity Securities
Maximum number (or | ||||||||||||||||
Total number of shares | approximate dollar value) | |||||||||||||||
purchased as part of | of shares that may yet be | |||||||||||||||
Total number of | Average price | publicly announced | purchased under the | |||||||||||||
2009 Period | shares purchased (a) | paid per share | plans or programs (a) | plans or programs (a) | ||||||||||||
October |
N/A | N/A | ||||||||||||||
November |
N/A | N/A | ||||||||||||||
December |
476,301 | $ | 9.11 | N/A | N/A | |||||||||||
Total |
476,301 | |||||||||||||||
(a) | Represents shares of our common stock purchased pursuant to our redemption plan. In December 2003, we announced a redemption plan under which we may elect to redeem shares at the request of our shareholders, subject to certain conditions and limitations. The maximum amount of shares purchasable by us in any period depends on a number of factors and is at the discretion of our board of directors. The redemption plan will terminate if and when our shares are listed on a national securities market |
CPA®:16 Global 2009 10-K 21
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Item 6. | Selected Financial Data. |
The following selected financial data should be read in conjunction with the consolidated financial
statements and related notes in Item 8.
(In thousands except per share amounts)
Years ended December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Operating Data (a) |
||||||||||||||||||||
Total revenues |
$ | 236,557 | $ | 235,009 | $ | 163,030 | $ | 67,033 | $ | 41,651 | ||||||||||
Income from continuing operations |
7,352 | 46,018 | 57,884 | 29,879 | 16,084 | |||||||||||||||
Net income (b) |
12,959 | 47,360 | 58,598 | 31,970 | 16,926 | |||||||||||||||
Add: Net loss (income) attributable to noncontrolling interests |
8,050 | (339 | ) | (6,048 | ) | (1,865 | ) | (642 | ) | |||||||||||
Less: Net income attributable to redeemable noncontrolling interests |
(23,549 | ) | (26,774 | ) | (18,346 | ) | | | ||||||||||||
Net (loss) income attributable to CPA®16 Global shareholders |
(2,540 | ) | 20,247 | 34,204 | 30,105 | 16,284 | ||||||||||||||
Earnings per share: |
||||||||||||||||||||
(Loss) income from continuing operations attributable to
CPA®:16 Global shareholders |
(0.07 | ) | 0.16 | 0.28 | 0.40 | 0.29 | ||||||||||||||
Net income attributable to CPA®:16 Global shareholders |
(0.02 | ) | 0.17 | 0.29 | 0.40 | 0.29 | ||||||||||||||
Cash distributions declared per share |
0.6621 | 0.6576 | 0.6498 | 0.6373 | 0.5763 | |||||||||||||||
Balance Sheet Data |
||||||||||||||||||||
Total assets |
$ | 2,889,005 | $ | 2,967,203 | $ | 3,081,869 | $ | 1,775,640 | $ | 929,649 | ||||||||||
Net investments in real estate (c) |
2,223,549 | 2,190,625 | 2,169,979 | 1,143,908 | 651,592 | |||||||||||||||
Long-term obligations (d) |
1,454,851 | 1,453,901 | 1,445,734 | 662,762 | 376,078 | |||||||||||||||
Other Information |
||||||||||||||||||||
Cash provided by operating activities |
$ | 119,879 | $ | 117,435 | $ | 120,985 | $ | 52,255 | $ | 40,338 | ||||||||||
Cash distributions paid |
80,778 | 79,011 | 72,551 | 41,227 | 28,939 | |||||||||||||||
Payment of mortgage principal (e) |
18,747 | 15,487 | 18,053 | 6,397 | 2,821 |
(a) | Certain prior year balances have been retrospectively adjusted as discontinued operations and for the adoption of recent accounting guidance for noncontrolling interests. | |
(b) | Net income in 2009 and 2008 reflected impairment charges totaling $59.6 million, inclusive of amounts attributable to noncontrolling interests totaling $12.8 million and $4.0 million, including $3.1 million related to our equity investments in real estate, respectively. | |
(c) | Net investments in real estate consists of net investments in properties, net investment in direct financing leases, equity investments in real estate, real estate under construction and assets held for sale, as applicable. | |
(d) | Represents non-recourse mortgages and deferred acquisition fee installments. | |
(e) | Represents scheduled mortgage principal payments. |
CPA®:16 Global 2009 10-K 22
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Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
Managements discussion and analysis of financial condition and results of operations (MD&A) is
intended to provide the reader with information that will assist in understanding our financial
statements and the reasons for changes in certain key components of our financial statements from
period to period. MD&A also provides the reader with our perspective on our financial position and
liquidity, as well as certain other factors that may affect our future results.
Business Overview
As described in more detail in Item 1 of this Report, we are a publicly owned, non-actively traded
REIT that invests in commercial properties leased to companies domestically and internationally. As
a REIT, we are not subject to U.S. federal income taxation as long as we satisfy certain
requirements, principally relating to the nature of our income, the level of our distributions and
other factors. We earn revenue principally by leasing the properties we own to single corporate
tenants, primarily on a triple-net lease basis, which requires the tenant to pay substantially all
of the costs associated with operating and maintaining the property. Revenue is subject to
fluctuation because of the timing of new lease transactions, lease terminations, lease expirations,
contractual rent increases, tenant defaults and sales of properties. We were formed in 2003 and are
managed by the advisor.
Financial Highlights
(In thousands)
Years ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Total revenues |
$ | 236,557 | $ | 235,009 | $ | 163,030 | ||||||
Net (loss) income attributable to CPA®:16 Global shareholders |
(2,540 | ) | 20,247 | 34,204 | ||||||||
Cash flow from operating activities |
119,879 | 117,435 | 120,985 |
Total revenues increased slightly in 2009 as compared to 2008 primarily due to recent investment
activity and scheduled rent increases. These increases were substantially offset by fluctuations in
foreign currency exchange rates.
Net loss attributable to CPA®:16 Global shareholders for 2009 reflects impairment
charges totaling $59.6 million, inclusive of amounts attributable to noncontrolling interests of
$12.8 million. These impairment charges were partially offset by gains recognized on the sale of a
property and extinguishment of debt, net of amounts attributable to noncontrolling interests,
totaling $13.2 million in 2009. During 2008, we incurred impairment charges totaling $4.0 million.
Our quarterly cash distribution remained at $0.1656 per share for the fourth quarter of 2009, or
$0.66 per share on an annualized basis.
We consider the performance metrics listed above as well as certain non-GAAP performance metrics to
be important measures in the evaluation of our results of operations, liquidity and capital
resources. We evaluate our results of operations with a primary focus on the ability to generate
cash flow necessary to meet our objectives of funding distributions to shareholders and increasing
equity in our real estate.
Current Trends
While we have substantially invested the proceeds of our offerings, we used $163.8 million,
inclusive of amounts attributable to noncontrolling interests of $45.9 million, to participate in
two transactions with our affiliates during 2009 and to fund construction costs at several
build-to-suit projects. We expect to continue to participate in future investments with our
affiliates to the extent we have funds available for investment.
As of the date of this Report, we believe we are seeing an easing of the global economic and
financial crisis that has severely curbed liquidity in the credit and real estate financing markets
during recent periods, although the full magnitude, effects and duration of the crisis cannot be
predicted. As a result of improving economic conditions, we have seen an improvement in financing
conditions for new transactions and refinancing of maturing debt, both domestically and
internationally, although generally at lower loan to value ratios than in prior periods. However,
the continuing effects of the challenging economic environment have also resulted in some negative
trends affecting our business. These trends include: continued tenant defaults; renewals of tenant
leases generally at lower rental rates than existing leases; low inflation rates, which will likely
limit rent increases in upcoming periods because most of our leases provide for rent adjustments
indexed to changes in the CPI; and higher impairment charges.
CPA®:16 Global 2009 10-K 23
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Despite recent indicators that the economy is beginning to recover, the current trends that affect
our business remain dependent on the rate and scope of the recovery, rendering any discussion of
the impact of these trends highly uncertain. Nevertheless, as of the date of this Report, the
impact of current financial and economic trends on our business segments, and our response to those
trends, is presented below.
Financing Conditions
Conditions in the real estate financing markets impact our ability to enter into investments and to
refinance maturing debt. Despite the recent weak financing environment, which has resulted in
lenders for both domestic and international investments offering loans at shorter maturities, with
lower loan to value ratios and subject to variable interest rates, we have begun to see some
improvements in the financing markets and to date have been successful obtaining financing for new
transactions and refinancing maturing debt. We generally attempt to obtain interest rate caps or
swaps to mitigate the impact of variable rate financing. During 2009, we obtained non-recourse
mortgage financing totaling $78.5 million, inclusive of amounts attributable to noncontrolling
interests of $38.8 million, including financing for new transactions and refinancing existing debt,
with a weighted average annual interest rate and term of up to 7.4% and 5.5 years, respectively. In
addition, ventures in which we have interests ranging from 25% to 40% obtained financing in
connection with recent investment activity totaling $146.4 million with a weighted average annual
interest rate and term of up to 8.5% and 5.3 years, respectively.
At December 31, 2009, we had balloon payments totaling $8.4 million due in 2011. We are actively
seeking to refinance this debt but believe we have sufficient financing alternatives and/or cash
resources to make these payments, if necessary. Our property level debt is generally non-recourse,
which means that if we default on a mortgage loan obligation, our exposure is limited to our equity
invested in that property.
Corporate Defaults
Some of our tenants have experienced financial stress, and we expect that this trend may continue,
albeit at a less severe rate, in 2010. Corporate defaults can reduce our results of operations and
cash flow from operations.
Tenants in financial distress may become delinquent on their rent and/or default on their leases
and, if they file for bankruptcy protection, may reject our lease in bankruptcy court, all of which
may require us to incur impairment charges. Even where a default has not occurred and a tenant is
continuing to make the required lease payments, we may restructure or renew leases on less
favorable terms, or the tenants credit profile may deteriorate, which could affect the value of
the leased asset and could in turn require us to incur impairment charges. Based on tenant activity
during 2009, including lease amendments, early lease renewals and lease rejections in bankruptcy
court, we currently expect that 2010 lease revenue will decrease by less than 1% on an annualized
basis. However, this amount may increase or decrease based on additional tenant activity and
changes in economic conditions, both of which are outside of our control. If the North American and
European economic zones continue to experience the improving economic conditions that they have
experienced recently, we would expect to see an improvement in the general business conditions for
our tenants, which should result in less stress for them financially. However, if economic
conditions deteriorate, it is possible that our tenants financial condition will deteriorate as
well.
We have several tenants that were in various stages of the bankruptcy process at December 31, 2009.
During 2009, we incurred impairment charges totaling $59.6 million, inclusive of amounts
attributable to noncontrolling interests of $12.8 million, a significant portion of which related
to these tenants. Impairment charges do not necessarily reflect the true economic loss caused by
the default of a tenant, which may be greater or less than the impairment amount. As a result of
several of these corporate defaults, during 2009 we suspended debt service on three related
non-recourse mortgage loans with an aggregate outstanding balance of $27.2 million at December 31,
2009, inclusive of amounts attributable to noncontrolling interests of $11.6 million.
To mitigate these risks, we have invested in assets that we believe are critically important to a
tenants operations and have attempted to diversify our portfolio by tenant and tenant industry. We
also monitor tenant performance through review of rent delinquencies as a precursor to a potential
default, meetings with tenant management and review of tenants financial statements and compliance
with any financial covenants. When necessary, our asset management process includes restructuring
transactions to meet the evolving needs of tenants, re-leasing properties, refinancing debt and
selling properties, where possible, as well as protecting our rights when tenants default or enter
into bankruptcy.
Net Asset Values
We generally calculate an estimated net asset value per share for our portfolio on an annual basis.
This calculation is based in part on an estimate of the fair market value of our real estate
provided by a third party, adjusted to give effect to the estimated fair value of mortgages
encumbering our assets (also provided by a third party) as well as other adjustments. There are a
number of variables that
comprise this calculation, including individual tenant credits, tenant defaults, lease terms,
lending credit spreads, and foreign currency exchange rates, among others. We do not control these
variables and, as such, cannot predict how they will change in the future.
CPA®:16 Global 2009 10-K 24
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As a result of the overall continued weakness in the economy during 2009, our estimated net
asset value per share as of December 31, 2009 decreased to $9.20, a 6.1% decline from our December
31, 2008 estimated net asset value per share of $9.80. We generally would not expect to update our
estimated net asset value on an interim basis unless we were to undertake an extraordinary
corporate transaction. However, there can be no assurance that, if we were to calculate our
estimated net asset value on an interim basis, it would not be less than $9.20 per share,
particularly given current market volatility.
Redemptions and Distributions
We have experienced higher levels of share redemptions during 2008 and 2009. While higher levels of
redemptions consume cash, we have actively conserved our capital by restraining dividend increases.
For the fourth quarter of 2009, we did not increase our quarterly distribution from the
distribution paid in the third quarter. To date, we have not experienced conditions that have
affected our ability to continue to pay distributions.
Inflation and Foreign Exchange Rates
Our leases generally have rent adjustments based on formulas indexed to changes in the CPI or other
similar indices for the jurisdiction in which the property is located. Because these rent
adjustments may be calculated based on changes in the CPI over a multi-year period, changes in
inflation rates can have a delayed impact on our results of operations. Rent adjustments during
2008 and 2009 have generally benefited from increases in inflation rates during the years prior to
the scheduled rent adjustment date. However, we expect that rent increases will be significantly
lower in coming years as a result of the current historically low inflation rates in the U.S. and
the Euro zone.
We have foreign investments and as a result are subject to risk from the effects of exchange rate
movements. Because we generally place both our debt obligation to the lender and the tenants
rental obligation to us in the same currency, our results of foreign operations benefit from a
weaker U.S. dollar and are adversely affected by a stronger U.S. dollar relative to foreign
currencies; that is, a weaker U.S. dollar will tend to increase both our revenues and our expenses,
while a stronger U.S. dollar will tend to reduce both our revenues and our expenses.
The average rate for the U.S. dollar in relation to the Euro strengthened by approximately 5%
during 2009 in comparison to 2008, resulting in a modestly negative impact on our results of
operations for Euro-denominated investments in the current year. For 2008 as compared with 2007,
the average rate for the U.S. dollar in relation to the Euro weakened by approximately 7%,
resulting in a modestly positive impact on our results of operations for Euro-denominated
investments in 2008 as compared with 2007. Investments denominated in the Euro accounted for
approximately 38%, 33% and 34% of our annualized lease revenues for 2009, 2008 and 2007,
respectively. To the extent foreign currency exchange rates are in line with 2008 and 2009 levels,
they will have a minimal impact on our financial conditions and results of operations. However,
significant shifts in the value of the Euro could have a material impact on our future results. For
example, in the first two months of 2010, the dollar has strengthened significantly relative to the
Euro.
How We Evaluate Results of Operations
We evaluate our results of operations with a primary focus on our ability to generate cash flow
necessary to meet our objectives of funding distributions to shareholders and increasing our equity
in our real estate. As a result, our assessment of operating results gives less emphasis to the
effect of unrealized gains and losses, which may cause fluctuations in net income for comparable
periods but have no impact on cash flows, and to other non-cash charges, such as depreciation and
impairment charges.
We consider cash flows from operating activities, cash flows from investing activities and cash
flows from financing activities and certain non-GAAP performance metrics to be important measures
in the evaluation of our results of operations, liquidity and capital resources. Cash flows from
operating activities are sourced primarily from long-term lease contracts. These leases are
generally triple net and mitigate, to an extent, our exposure to certain property operating
expenses. Our evaluation of the amount and expected fluctuation of cash flows from operating
activities is essential in assessing our ability to fund operating expenses, service debt and fund
distributions to shareholders.
We consider cash flows from operating activities plus cash distributions from equity investments in
real estate in excess of equity income, less cash distributions paid to consolidated joint venture
partners, as a supplemental measure of liquidity in evaluating our ability to sustain distributions
to shareholders. We consider this measure useful as a supplemental measure to the extent the source
of distributions in excess of equity income in real estate is the result of non-cash charges, such
as depreciation and amortization, because it allows us to evaluate the cash flows from consolidated
and unconsolidated investments in a comparable manner. In deriving this measure, we exclude cash
distributions from equity investments in real estate that are sourced from the sales of the equity
investees assets or refinancing of debt because we deem them to be returns of investment.
CPA®:16 Global 2009 10-K 25
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We focus on measures of cash flows from investing activities and cash flows from financing
activities in our evaluation of our capital resources. Investing activities typically consist of
the acquisition or disposition of investments in real property and the funding of capital
expenditures with respect to real properties. Financing activities primarily consist of the payment
of distributions to shareholders, obtaining non-recourse mortgage financing, generally in
connection with the acquisition or refinancing of properties, and making mortgage principal
payments. Our financing strategy has been to purchase substantially all of our properties with a
combination of equity and non-recourse mortgage debt. A lender on a non-recourse mortgage loan
generally has recourse only to the property collateralizing such debt and not to any of our other
assets. This strategy has allowed us to diversify our portfolio of properties and, thereby, limit
our risk. However, because of recent conditions in credit markets, obtaining financing is more
challenging at present and we may complete transactions without obtaining financing. In the event
that a balloon payment comes due, we may seek to refinance the loan, restructure the debt with
existing lenders, or evaluate our ability to pay the balloon payment from our cash reserves or sell
the property and use the proceeds to satisfy the mortgage debt.
Results of Operations
For the three years ended December 31, 2009 presented in this Report, our results of operations
were significantly impacted by a transaction in April 2007 (the Hellweg 2 transaction) in which
we and our affiliates acquired a venture (the property venture) that in turn acquired a 24.7%
ownership interest in a limited partnership owning 37 properties throughout Germany. We and our
affiliates also acquired a second venture (the lending venture), which made a loan (the note
receivable) to the holder of the remaining 75.3% interests in the limited partnership (the
partner). Our total effective ownership interest in the ventures is 26% and we consolidate the
ventures in our financial statements under current accounting guidance. The total cost of the
interests in these ventures was $446.4 million, inclusive of our affiliates noncontrolling
interest of $330.4 million. In connection with these transactions, the ventures obtained combined
non-recourse mortgage financing of $378.6 million, inclusive of our affiliates noncontrolling
interest of $280.2 million, having a fixed annual interest rate of 5.5% and a term of 10 years.
Under the terms of the note receivable, which has a principal balance of $314.2 million, inclusive
of our affiliates noncontrolling interest of $233.6 million, the lending venture will receive
interest that approximates 75.3% of all operating income earned by the limited partnership, less
adjustments.
Although we consolidate the results of operations of the Hellweg 2 transaction, because our
effective ownership interest is 26% a significant portion of the results of operations from this
transaction is reduced by our affiliates noncontrolling interests. As a result of obtaining
non-recourse mortgage debt to finance a significant portion of the purchase price and
depreciating/amortizing assets over their estimated useful lives, we do not expect this transaction
to have a significant impact on our net income. However, the transaction has a significant impact
on many of the components of our net income, as described below. Based on the exchange rate of the
Euro at December 31, 2009, we expect this transaction will generate annualized property level cash
flow from operations (revenues less interest expense) of approximately $12.4 million, inclusive of
noncontrolling interest of $9.2 million.
Our evaluation of the sources of lease revenues is as follows (in thousands):
Years ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Rental income |
$ | 153,066 | $ | 149,982 | $ | 112,753 | ||||||
Interest income from direct financing leases |
27,448 | 28,864 | 24,134 | |||||||||
$ | 180,514 | $ | 178,846 | $ | 136,887 | |||||||
CPA®:16 Global 2009 10-K 26
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The following table sets forth the net lease revenues (i.e., rental income and interest income
from direct financing leases) that we earned from lease obligations through our direct ownership of
real estate (in thousands):
Years ended December 31, | ||||||||||||
Lessee | 2009 | 2008 | 2007 | |||||||||
Hellweg Die Profi-Baumarkte GmbH & Co. KG (a) (b) (c) |
$ | 35,889 | $ | 37,128 | $ | 25,536 | ||||||
Telcordia Technologies, Inc. |
9,371 | 9,311 | 9,127 | |||||||||
Nordic Cold Storage LLC (d) |
6,830 | 6,257 | 5,591 | |||||||||
Berry Plastics Corporation (a) (c) |
6,641 | 6,651 | 218 | |||||||||
Fraikin SAS (a) (b) (e) |
5,935 | 5,888 | 4,911 | |||||||||
MetoKote Corp., MetoKote Canada Limited and MetoKote de Mexico (b) (f) (g) |
4,715 | 6,365 | 3,992 | |||||||||
International Aluminum Corp. and United States Aluminum of Canada, Ltd. (a) (b) |
4,518 | 4,454 | 2,411 | |||||||||
The Talaria Company (Hinckley) (c) (e) (h) |
4,133 | 4,984 | 4,998 | |||||||||
Huntsman International, LLC |
4,027 | 4,027 | 4,027 | |||||||||
Best Brands Corp. (e) (i) |
3,995 | 3,129 | | |||||||||
LFD Manufacturing Ltd., IDS Logistics (Thailand) Ltd. and IDS
Manufacturing SDN BHD (b) (d) |
3,903 | 4,109 | 3,659 | |||||||||
Ply Gem Industries, Inc. (b) |
3,884 | 3,834 | 3,730 | |||||||||
Gortz & Schiele GmbH & Co. and Goertz & Schiele Corporation (b) (c) (e) (g) |
3,761 | 3,653 | 3,400 | |||||||||
TRW Vehicle Safety Systems Inc. (g) |
3,568 | 3,568 | 3,568 | |||||||||
Bobs Discount Furniture, LLC (a) |
3,564 | 3,538 | 2,643 | |||||||||
Tesco plc (b)(j) |
3,420 | | | |||||||||
Universal Technical Institute of California, Inc. (a) |
3,418 | 3,418 | 1,555 | |||||||||
Kings Super Markets Inc. |
3,416 | 3,416 | 3,416 | |||||||||
Performance Fibers GmbH (b) |
3,408 | 3,531 | 3,276 | |||||||||
Finisar Corporation |
3,287 | 3,224 | 3,276 | |||||||||
Dicks Sporting Goods, Inc. (a) (c) |
3,141 | 3,141 | 3,030 | |||||||||
Other (b) (c) (g) (e) |
55,690 | 55,220 | 44,523 | |||||||||
$ | 180,514 | $ | 178,846 | $ | 136,887 | |||||||
(a) | Investment acquired or placed into service in 2007. We also own an equity investment in other properties leased to Hellweg through a 2005 transaction. | |
(b) | Amounts are subject to fluctuations in foreign currency exchange rates. The average rate for the U.S. dollar in relation to the Euro during the year ended December 31, 2009 strengthened by approximately 5% in comparison to 2008, resulting in a negative impact on lease revenues for our Euro-denominated investments in 2009. This impact was mitigated in some cases by CPI or similar rent increases. | |
(c) | These revenues are generated in consolidated ventures, generally with our affiliates, and include lease revenues applicable to noncontrolling interests totaling $43.0 million, $40.0 million and $28.4 million for the years ended December 31, 2009, 2008 and 2007, respectively. | |
(d) | Increase in 2009 or 2008 was due to CPI-based (or equivalent) rent increase. | |
(e) | During 2009, we incurred impairment charges related to these tenants (Note 11) | |
(f) | Inclusive of an out-of-period adjustment of $1.8 million in 2008 (Note 2) | |
(g) | Tenant operates in the automotive industry. Included in Other are lease revenues from three additional tenants operating in the automotive industry totaling $5.9 million, $6.3 million, and $4.5 million for 2009, 2008 and 2007, respectively. | |
(h) | During 2009, we entered into a lease amendment with the tenant to defer certain rental payments until April 2010 as a result of the tenants financial difficulties. | |
(i) | We acquired our interest in this investment during 2008. | |
(j) | We acquired our interest in this investment during 2009. |
CPA®:16 Global 2009 10-K 27
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We recognize income from equity investments in real estate, of which lease revenues are a
significant component. The following table sets forth the net lease revenues earned by these
ventures. Amounts provided are the total amounts attributable to the ventures and do not represent
our proportionate share (dollars in thousands):
Ownership | ||||||||||||||||
Interest at | Years ended December 31, | |||||||||||||||
Lessee | December 31, 2009 | 2009 | 2008 | 2007 | ||||||||||||
U-Haul Moving Partners, Inc. and Mercury Partners, L.P. (a) |
31 | % | $ | 30,589 | $ | 28,541 | $ | 28,541 | ||||||||
The New York Times Company (b) |
27 | % | 21,751 | | | |||||||||||
OBI A.G. (c) |
25 | % | 16,637 | 17,317 | 15,506 | |||||||||||
Hellweg Die Profi-Baumarkte GmbH & Co. KG (c) (d) |
25 | % | 14,881 | 15,155 | 14,115 | |||||||||||
Pohjola Non-life Insurance Company (c) (d) |
40 | % | 9,240 | 9,343 | 8,454 | |||||||||||
TietoEnator Plc (c) (d) |
40 | % | 8,636 | 8,790 | 7,963 | |||||||||||
Police Prefecture, French Government (c) (d) |
50 | % | 8,272 | 8,109 | 7,109 | |||||||||||
Schuler A.G. (c) (e) |
33 | % | 6,568 | 6,802 | 1,808 | |||||||||||
Frontier Spinning Mills, Inc. (f) |
40 | % | 4,469 | 12 | | |||||||||||
Thales S.A. (c) (d) (g) |
35 | % | 9,357 | 14,240 | 12,990 | |||||||||||
Actebis Peacock GmbH. (c) (f) |
30 | % | 4,143 | 2,065 | | |||||||||||
Lindenmaier A.G. (c) (e) (h) |
33 | % | 2,000 | 2,703 | 510 | |||||||||||
Actuant Corporation (c) |
50 | % | 1,856 | 1,905 | 1,747 | |||||||||||
Consolidated Systems, Inc. |
40 | % | 1,831 | 1,831 | 1,810 | |||||||||||
$ | 140,230 | $ | 116,813 | $ | 100,553 | |||||||||||
(a) | Increase in 2009 was due to CPI-based rent increase. | |
(b) | We acquired our interest in this venture in March 2009. | |
(c) | Amounts are subject to fluctuations in foreign currency exchange rates. The average rate for the U.S. dollar in relation to the Euro during the year ended December 31, 2009 strengthened by approximately 5% in comparison to 2008, resulting in a negative impact on lease revenues for our Euro-denominated investments in 2009. This impact was mitigated in some cases by CPI or similar rent increases. | |
(d) | Increase in 2008 was due to CPI-based (or equivalent) rent increases. | |
(e) | We acquired our interest in this venture during 2007. | |
(f) | We acquired our interest in the Frontier Spinning Mills venture in December 2008 and the Actebis Peacock venture in July 2008. | |
(g) | The venture sold four of the five properties leased to Thales in July 2009 (Note 6). | |
(h) | Tenant operates in the automotive industry and is operating under bankruptcy protection. |
Lease Revenues
Our net leases generally have rent adjustments based on formulas indexed to changes in the CPI or
other similar indices for the jurisdiction in which the property is located, sales overrides or
other periodic increases, which are designed to increase lease revenues in the future. We own
international investments and, therefore, lease revenues from these investments are subject to
fluctuations in exchange rate movements in foreign currencies. In certain cases, although we
recognize lease revenue in connection with our tenants obligation to pay rent, we may also
increase our uncollected rent expense if tenants are experiencing financial distress and have not
paid the rent to us that they owe, as described in Property expenses below.
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, lease revenues increased
by $1.7 million. Lease revenues increased by $6.3 million from investments entered into during 2009
and 2008 and by $3.9 million as a result of scheduled rent increases at several properties during
the same periods. These increases were substantially offset by the negative impact of fluctuations
in foreign currency exchange rates (primarily the Euro), which reduced lease revenues by $4.7
million, as well as sales of properties and lease restructurings during 2009, which reduced lease
revenues by $2.0 million. In addition, lease revenues in 2008 included an out-of-period adjustment
of $1.8 million (Note 2). The Hellweg 2 transaction contributed $35.9 million to lease revenue in
2009, inclusive of noncontrolling interest of $33.5 million.
2008 vs. 2007 For the year ended December 31, 2008 as compared to 2007, lease revenues increased
by $42.0 million. Rental income from investments acquired or placed into service during 2007 and
2008 contributed $29.0 million and $6.8 million, respectively, to lease revenue in 2008, while
fluctuations in foreign currency exchange rates contributed $2.9 million. In addition,
lease revenues in 2008 included the $1.8 million out-of-period adjustment noted above. The Hellweg
2 transaction contributed $37.1 million to lease revenue in 2008, inclusive of noncontrolling
interest of $34.7 million.
CPA®:16 Global 2009 10-K 28
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Interest Income on Notes Receivable
2009 vs. 2008 Interest income on notes receivable was $28.8 million, $29.5 million and $20.7
million for the years ended December 31, 2009, 2008 and 2007, respectively. For the year ended
December 31, 2008 as compared to 2007, the $8.7 million increase was primarily due to the full year
impact from our investment in a note receivable in connection with the Hellweg 2 transaction, which
occurred in April 2007. The Hellweg 2 transaction contributed interest income of $27.1 million,
$28.1 million and $19.5 million in 2009, 2008 and 2007, respectively, inclusive of noncontrolling
interests of $20.2 million, $20.9 million and $14.5 million in 2009, 2008 and 2007, respectively.
Other Real Estate Income
Other real estate income generally consists of revenue from taxable subsidiaries that earn revenue
from domestic hotels.
Other real estate income was $23.7 million, $23.4 million and $3.6 million for the years ended
December 31, 2009, 2008 and 2007, respectively. For the year ended December 31, 2008 as compared to
2007, the $19.9 million increase was due to the full year impact of income earned from a September
2007 hotel property acquisition, which contributed $10.1 million of the increase, while income from
a hotel property placed into service in the first quarter of 2008 contributed $9.8 million.
Depreciation and Amortization
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, depreciation and
amortization expense increased by $2.2 million, primarily due to investments entered into or placed
into service during 2008 and 2009.
2008 vs. 2007 For the year ended December 31, 2008 as compared to 2007, depreciation and
amortization increased by $14.0 million, substantially all of which was due to depreciation and
amortization incurred on investments entered into or placed into service during 2008 and 2007. The
full year impact on depreciation and amortization in connection with the Hellweg 2 transaction in
April 2007 accounted for $3.1 million of the increase in 2008, inclusive of noncontrolling
interests of $2.4 million.
Property Expenses
2009 vs. 2008 For the year ended December 31, 2009
as compared to 2008, property expenses
increased by $2.3 million, primarily due to an increase in uncollected rent expense as a result of
a higher number of tenants experiencing financial difficulties.
2008 vs. 2007 For the year ended December 31, 2008 as compared to 2007, property expenses
increased by $12.7 million. Asset management and performance fees in 2008 increased by $6.1 million
as a result of the increase in our asset base due to investment activity in 2008 and 2007.
Uncollected rent expense increased by $3.8 million, primarily due to a higher number of tenants
experiencing financial difficulties, while reimbursable tenant costs increased by $1.9 million.
Actual recoveries of reimbursable tenant costs are recorded as both revenue and expense and
therefore have no impact on net income.
Other Real Estate Expenses
Other real estate expenses generally consist of expenses incurred by taxable subsidiaries that earn
revenue from domestic hotels.
Other real estate expenses were $18.1 million, $19.4 million and $3.3 million for the years ended
December 31, 2009, 2008 and 2007, respectively. For the year ended December 31, 2008 as compared
to 2007, the $16.1 million increase was due to expenses incurred at a hotel property placed into
service during the first quarter of 2008, which totaled $8.5 million, while the full year impact of
expenses incurred at a hotel property acquired in 2007 contributed $7.6 million.
General and Administrative
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, general and
administrative expenses decreased by $3.5 million primarily due to a reduction in business
development costs of $2.0 million, as well as a decrease in professional services fees of $1.4
million. Business development costs are costs incurred in connection with potential investments
that ultimately were not consummated.
2008 vs. 2007 For the year ended December 31, 2008 as compared to 2007, general and
administrative expenses increased by $3.0 million. Professional services fees increased by $1.5
million in 2008 and expenses allocated by the advisor increased by $1.2 million, primarily as a
result of the growth in our asset base and revenues due to our investment volume in 2007 and 2008.
CPA®:16 Global 2009 10-K 29
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Impairment Charges
For the years ended December 31, 2009 and 2008, we incurred impairment charges in our continuing
real estate assets totaling $50.9 million and $0.9 million, respectively. The table below
summarizes these impairment charges (in thousands):
Years ended December 31, | ||||||||||||
Lessee | 2009 | 2008 | Reason | |||||||||
Gortz & Schiele GmbH & Goertz & Schiele Corp. (3 properties) |
$ | 25,393 | $ | | Tenant filed for bankruptcy | |||||||
Foss Manufacturing |
15,985 | | Tenant experiencing financial difficulties | |||||||||
John McGavigan Ltd. |
5,294 | | Tenant filed for bankruptcy | |||||||||
Valley Diagnostics |
1,906 | | Tenant experiencing financial difficulties | |||||||||
Various lessees |
2,279 | 890 | Decline in guaranteed residual values | |||||||||
Impairment charges from continuing operations |
$ | 50,857 | $ | 890 | ||||||||
We did not incur any impairment charges on consolidated investments during 2007.
See Income from Equity Investments in Real Estate and Discontinued Operations below for additional
impairment charges incurred.
Income from Equity Investments in Real Estate
Income from equity investments in real estate represents our proportionate share of net income
(revenue less expenses) from investments entered into with affiliates or third parties in which we
have a non controlling interest but exercise significant influence.
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, income from equity
investments in real estate increased by $5.1 million, primarily due to our investment in The New
York Times transaction in March 2009, which contributed income of $5.4 million, as well as our
investment in the Frontier Spinning Mills transaction in December 2008, which contributed income of
$1.4 million. This income was partially offset by net other-than-temporary impairment charges
totaling $3.6 million on two equity investments, including $2.6 million recorded during 2009 on our
Lindenmaier A.G. equity investment as a result of the tenant filing for bankruptcy. In July 2009,
the venture entered into an interim lease agreement with Lindenmaier that expired in February 2010
and was then converted to a month-to-month lease. This interim agreement provides for substantially
lower rental income than the original lease.
2008 vs. 2007 For the year ended December 31, 2008 as compared to 2007, income from equity
investments in real estate increased by $6.7 million. Income from our equity investment in the
Thales S.A. venture increased by $4.2 million primarily due to a decrease in impairment charges
recognized by this venture in 2008. During 2008, we recognized impairment charges totaling $1.7
million on the Thales venture as compared to $6.0 million in 2007. At December 31, 2008, our
proportionate share of losses at the equity investment level, including impairment charges, was
greater than our investment basis, and as such, the carrying value of our equity investment was
reduced to zero. In addition, income earned on equity investments we entered into during 2008 and
2007 contributed $1.8 million, while scheduled rent increases at several ventures and fluctuations
in foreign currency exchange rates contributed $1.1 million. These increases were partially offset
by an impairment charge of $1.4 million recognized by the Lindenmaier A.G. venture in 2008.
Other Interest Income
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, other interest income
decreased by $3.9 million primarily due to lower average cash balances as a result of our real
estate investment activity during 2008 and 2009 and lower rates of return earned on our cash
balances reflecting current market conditions.
2008 vs. 2007 For the year ended December 31, 2008 as compared to 2007, other interest income
decreased by $16.2 million, primarily due to lower average cash balances as a result of using the
proceeds received from our second public offering to make investments in real estate assets during
2008 and 2007 and lower rates of return earned on such balances due to then current market
conditions.
Gain on Extinguishment of Debt
In February 2009, a venture in which we and an affiliate each hold 50% interests, which we
consolidate, repaid its existing non-recourse debt from the lender at a discount and recognized a
gain on extinguishment of debt of $6.5 million, inclusive of noncontrolling interests of $3.2
million.
CPA®:16 Global 2009 10-K 30
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Other Income and (Expenses)
Other income and (expenses) generally consists of gains and losses on foreign currency transactions
and derivative instruments. We and certain of our foreign consolidated subsidiaries have
intercompany debt and/or advances that are not denominated in the entitys functional currency.
When the intercompany debt or accrued interest thereon is remeasured against the functional
currency of the entity, a gain or loss may result. For intercompany transactions that are of a
long-term investment nature, the gain or loss is recognized as a cumulative translation adjustment
in other comprehensive income (loss). We also recognize gains or losses on foreign currency
transactions when we repatriate cash from our foreign investments. In addition, we have certain
derivative instruments, including embedded credit derivatives and common stock warrants, for which
realized and unrealized gains and losses are included in earnings. The timing and amount of such
gains and losses cannot always be estimated and are subject to fluctuation.
2009 For the year ended December 31, 2009, we recognized net other expenses of $0.7 million,
which was primarily comprised of an unrealized loss on an embedded credit derivative recognized by
Hellweg 2.
2008 For the year ended December 31, 2008, we recognized net other expenses of $1.8 million,
which was primarily due to an unrealized loss on the Hellweg 2 embedded credit derivative of $3.4
million, partially offset by realized gains on foreign currency transactions of $1.4 million.
2007 For the year ended December 31, 2007, we recognized net other income of $5.1 million, which
was comprised of an unrealized gain on the Hellweg 2 embedded credit derivative of $2.7 million and
net realized gains on foreign currency transactions of $2.4 million.
Interest Expense
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, interest expense
decreased by $2.2 million. Interest expense decreased by $2.3 million as a result of the impact of
fluctuations in foreign currency exchange rates and by $1.7 million as a result of making scheduled
principal payments and refinancing non-recourse mortgages during 2009 and 2008, which reduced the
balances on which interest was incurred. These decreases were partially offset by $2.2 million in
interest expense incurred on new non-recourse mortgages obtained during 2008 and 2009. Interest
expense in 2009 related to the Hellweg 2 transaction was $21.6 million, inclusive of noncontrolling
interest of $16.0 million.
2008 vs. 2007 For the year ended December 31, 2008 as compared to 2007, interest expense
increased by $19.2 million, primarily due to the impact of non-recourse mortgage loans obtained on
investments acquired or placed into service during 2007 and 2008, which contributed $19.3 million
in 2008, and the impact of fluctuations in foreign currency exchange rates, which contributed $1.3
million. These increases were partially offset by a reduction in interest expense in 2008 as a
result of making scheduled principal payments and paying our first annual installment of deferred
acquisition fees to the advisor in January 2008. Interest expense in 2008 related to the Hellweg 2
transaction was $23.2 million, inclusive of noncontrolling interest of $17.1 million, as compared
to $15.8 million (inclusive of noncontrolling interest of $11.7 million) in 2007.
Provision for Income Taxes
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, provision for income
taxes increased by $1.6 million primarily due to an increase in foreign tax liabilities as a result
of investments entered into during 2008. Taxes on our foreign investments, primarily in Germany,
comprised a significant portion of our tax provision for both 2009 and 2008. Our investments
generate taxable income in state, local and foreign jurisdictions primarily as a result of rent
increases and scheduled amortization of mortgage principal payments, which reduced interest expense
and increased income subject to local tax.
2008 vs. 2007 For the year ended December 31, 2008 as compared to 2007, provision for income
taxes increased by $1.4 million, primarily due to international investment activity during 2008.
Income from Discontinued Operations
Income from discontinued operations was $5.6 million, $1.3 million and $0.7 million in 2009, 2008
and 2007, respectively. During 2009, we sold two domestic properties for $51.9 million, net of
selling costs, and recognized net gain on sale of $7.6 million and net gain on extinguishment of
debt of $2.3 million, excluding an impairment charge recognized in the current year of $5.1
million.
Net (Loss) Income Attributable to CPA®:16 Global Shareholders
2009 vs. 2008 For the year ended December 31, 2009, the resulting net loss attributable to
CPA®:16 Global shareholders was $2.5 million as compared to net income of $20.2
million for 2008.
CPA®:16 Global 2009 10-K 31
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2008 vs. 2007 For the year ended December 31, 2008 as compared to 2007, the resulting net income
attributable to CPA®:17 Global shareholders decreased by $14.0 million.
Financial Condition
Sources and Uses of Cash During the Year
One of our objectives is to use the cash flow from net leases to meet operating expenses, service
debt and fund distributions to shareholders. Our cash flows fluctuate period to period due to a
number of factors, which may include, among other things, the timing of purchases and sales of real
estate, timing of proceeds from non-recourse mortgage loans and receipt of lease revenues, the
advisors annual election to receive fees in restricted shares of our common stock or cash, the
timing and characterization of distributions from equity investments in real estate and payment to
the advisor of the annual installment of deferred acquisition fees and interest thereon in the
first quarter. Despite this fluctuation, we believe that we will generate sufficient cash from
operations and from equity distributions in excess of equity income in real estate to meet our
short-term and long-term liquidity needs. We may also use existing cash resources, the proceeds of
non-recourse mortgage loans and the issuance of additional equity securities to meet these needs.
We assess our ability to access capital on an ongoing basis. Our sources and uses of cash during
the period are described below.
Operating Activities
During 2009, we used cash flows from operating activities of $119.9 million to fund distributions
to shareholders of $80.8 million. We also made scheduled mortgage principal installments of $18.8
million and paid distributions of $44.4 million to affiliates and third parties that hold noncontrolling interests in various entities with us. We used cash
distributions from equity investments in real estate in excess of equity income of $47.0 million
(see Investing Activities below) and our existing cash resources to fund these payments. For 2009,
the advisor elected to continue to receive its performance fees in restricted shares of our common
stock, and as a result, we paid performance fees of $11.8 million through the issuance of
restricted stock rather than in cash.
Investing Activities
Our investing activities are generally comprised of real estate related transactions (purchases and
sales of real estate and mortgage loans collateralized by real estate), payment of our annual
installment of deferred acquisition fees to the advisor and capitalized property related costs.
During 2009, we used $137.4 million to enter into an investment in Hungary and to fund construction
costs at several build-to-suit and expansion projects. We also used $62.4 million to purchase an
equity investment in The New York Times Company transaction. In January 2009, we paid our annual
installment of deferred acquisition fees to the advisor, which totaled $9.1 million. Cash inflows
consisted of distributions from equity investments in real estate of $47.0 million, including our
share of mortgage proceeds obtained by two ventures of $40.2 million, $28.2 million primarily from
the sale of two domestic properties during the second quarter of 2009 and the release of $11.1
million of funds held in escrow to fund expansions at existing properties.
Financing Activities
In addition to making scheduled mortgage principal installments and paying distributions to
shareholders and to affiliates that hold noncontrolling interests in various entities with us,
during 2009 we received mortgage proceeds totaling $78.5 million, including $49.5 million related
to our investment in Hungary and $29.0 million obtained as a result of refinancing an existing
non-recourse mortgage. We used $34.8 million to prepay certain non-recourse mortgages, primarily
consisting of $32.5 million used to prepay, at a discount, a $39.0 million outstanding balance on a
non-recourse mortgage loan. Concurrent with this prepayment, we obtained new non-recourse debt of
$29.0 million with a term of three years, plus two one-year extensions. We also received
contributions of $24.9 million from holders of noncontrolling interests primarily in connection
with the Hungary transaction. We received $32.3 million as a result of issuing shares through our
distribution reinvestment and stock purchase plan and used $35.1 million to repurchase our shares
through a redemption plan that allows shareholders to sell shares back to us, subject to certain
limitations as described below.
We maintain a quarterly redemption program pursuant to which we may, at the discretion of our board
of directors, redeem shares of our common stock from shareholders seeking liquidity. We limit the
number of shares we may redeem so that the shares we redeem in any quarter, together with the
aggregate number of shares redeemed in the preceding three fiscal quarters, does not exceed a
maximum of 5% of our total shares outstanding as of the last day of the immediately preceding
quarter. We have recently experienced higher levels of redemption requests as compared to prior
years. At December 31, 2009, redemptions totaled approximately 3.2% of total shares outstanding. In
addition, our ability to effect redemptions is subject to our having available cash to do so. If we
have sufficient funds to purchase some but not all of the shares offered to us for redemption in a
particular quarter, or if the shares offered for redemption in a quarter would exceed the 5%
limitation, shares will be redeemed on a pro rata basis, subject in all cases to the discretion of
our board of directors. Requests not fulfilled in a quarter and not revoked by the shareholder will
automatically be carried forward to the next quarter, unless our board of directors determines
otherwise, and will receive priority over requests made in the relevant quarter.
CPA®:16 Global 2009 10-K 32
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For the year ended December 31, 2009, we received requests to redeem 3,847,598 shares of our common
stock pursuant to our redemption plan, and we redeemed all of these requests at a price per share
of $9.15. Of the total 2009 redemptions, we redeemed 476,301 shares in the fourth quarter of 2009.
We funded share redemptions during 2009 from the proceeds of the sale of shares of our common
stock pursuant to our distribution reinvestment and share purchase plan and existing cash
resources.
Summary of Financing
The table below summarizes our non-recourse long-term debt (dollars in thousands):
December 31, | ||||||||
2009 | 2008 | |||||||
Balance |
||||||||
Fixed rate |
$ | 1,385,550 | $ | 1,406,926 | ||||
Variable rate (a) |
60,339 | 31,300 | ||||||
Total |
$ | 1,445,889 | $ | 1,438,226 | ||||
Percent of total debt |
||||||||
Fixed rate |
96 | % | 98 | % | ||||
Variable rate (a) |
4 | % | 2 | % | ||||
100 | % | 100 | % | |||||
Weighted average interest rate at end of year |
||||||||
Fixed rate |
5.9 | % | 5.9 | % | ||||
Variable rate(a) |
6.0 | % | 5.4 | % |
(a) | Variable rate debt at December 31, 2009 included (i) $3.9 million that has been effectively converted to a fixed rate through an interest rate swap derivative instrument, (ii) $29.0 million that is subject to an interest rate cap, but for which the interest rate cap was not in effect at December 31, 2009 and (iii) $27.5 million in mortgage obligations that bore interest at fixed rates but that have interest rate reset features that may change the interest rates to then-prevailing market fixed rates (subject to specific caps) at certain points during their term. No interest rate resets or expirations of interest rate swaps or caps are scheduled to occur during the next twelve months. |
Cash Resources
At December 31, 2009, our cash resources consisted of cash and cash equivalents of $84.0 million.
Of this amount, $29.0 million, at then-current exchange rates, was held in foreign bank accounts,
and we could be subject to restrictions or significant costs should we decide to repatriate these
amounts. We also had unleveraged properties that had an aggregate carrying value of $185.5 million
although, given the current economic environment, there can be no assurance that we would be able
to obtain financing for these properties. Our cash resources can be used to fund future investments
as well as for working capital needs and other commitments.
At December 31, 2009, five tenants, four of which operate in the automotive industry, were in
various stages of the bankruptcy process. These tenants accounted for lease revenues and net loss
from equity investments in real estate as follows: lease revenues from these tenants were $5.4
million,
inclusive of amounts attributable to noncontrolling interests of $1.9 million, for both of the years ended December 31, 2009 and 2008. For our equity investments in real
estate, net losses of $3.2 million and $0.8 million were recognized for the years ended December
31, 2009 and 2008, respectively. These investments had an aggregate carrying value of $19.6 million
and $49.6 million at December 31, 2009 and 2008, respectively. For the years ended December 31,
2009 and 2008, we incurred impairment charges totaling $35.3 million and $1.4 million,
respectively, inclusive of noncontrolling interests of $12.7 million for the year ended December
31, 2009, on properties leased to these tenants (Note 11). At December 31, 2009, three of these
tenants had ceased making rent payments. As a result of these tenants noncompliance with the terms
of their leases, we suspended debt service on three non-recourse mortgage loans, which had an
aggregate outstanding balance of $27.2 million at December 31, 2009, inclusive of amounts
attributable to noncontrolling interests of $11.6 million.
Cash Requirements
During 2010, we expect that cash requirements will include paying distributions to shareholders and
to our affiliates who hold noncontrolling interests in entities we control, making scheduled
mortgage principal payments (we have no balloon payments on our mortgage obligations until 2011)
and funding build-to-suit and lending commitments that we currently estimate to total $10.4
million, as well as other normal recurring operating expenses.
CPA®:16 Global 2009 10-K 33
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Off-Balance Sheet Arrangements and Contractual Obligations
The table below summarizes our off-balance sheet arrangements and contractual obligations at
December 31, 2009 and the effect that these arrangements and obligations are expected to have on
our liquidity and cash flow in the specified future periods (in thousands):
Less than | More than | |||||||||||||||||||
Total | 1 Year | 1-3 Years | 3-5 Years | 5 years | ||||||||||||||||
Non-recourse debt Principal |
$ | 1,443,522 | $ | 21,958 | $ | 81,940 | $ | 127,994 | $ | 1,211,630 | ||||||||||
Deferred acquisition fees Principal |
8,962 | 6,261 | 2,701 | | | |||||||||||||||
Interest on borrowings and deferred acquisition fees (a) |
620,634 | 85,232 | 164,358 | 154,074 | 216,970 | |||||||||||||||
Subordinated disposition fees (b) |
1,013 | | | | 1,013 | |||||||||||||||
Build-to-suit commitments (c) |
9,357 | 9,357 | | | | |||||||||||||||
Lending commitments (d) |
1,000 | 1,000 | | | | |||||||||||||||
Operating and other lease commitments (e) |
59,195 | 1,833 | 3,696 | 3,701 | 49,965 | |||||||||||||||
$ | 2,143,683 | $ | 125,641 | $ | 252,695 | $ | 285,769 | $ | 1,479,578 | |||||||||||
(a) | Interest on an unhedged variable rate debt obligation was calculated using the variable interest rate and balance outstanding at December 31, 2009. | |
(b) | Payable to the advisor, subject to meeting contingencies, in connection with any liquidity event. | |
(c) | Represents remaining build-to-suit commitment for a domestic project. Estimated total construction costs for this project are currently projected to be $63.0 million, of which $53.6 million had been funded at December 31, 2009. | |
(d) | Represents unfunded amount on a commitment to provide a loan to a developer of a domestic property. The total commitment for the loan is $15.8 million, of which $14.8 million had been funded at December 31, 2009. | |
(e) | Operating and other lease commitments consist primarily of rent obligations under ground leases and our share of future minimum rents payable under an office cost-sharing agreement with certain affiliates for the purpose of leasing office space used for the administration of real estate entities. Amounts under the cost-sharing agreement are allocated among the entities based on gross revenues and are adjusted quarterly. Rental obligations under ground leases are inclusive of noncontrolling interests of approximately $9.4 million. |
Amounts in the table above related to our foreign operations are based on the exchange rate of the
local currencies at December 31, 2009. At December 31, 2009, we had no material capital lease
obligations for which we are the lessee, either individually or in the aggregate.
As noted in Results of Operations above, we, together with our advisor and certain of our
affiliates, acquired two related investments in 2007 in which we have a total effective ownership
interest of 26% and that we consolidate, as we are the managing member of the ventures (the Hellweg
2 transaction). The primary purpose of these investments was to ultimately acquire an interest in
the underlying properties and as such was structured to effectively transfer the economics of
ownership to us and our affiliates while still monetizing the sales value by transferring the legal
ownership in the underlying properties over time. In connection with the acquisition, the property
venture agreed to an option agreement that gives the property venture the right to purchase, from
the partner, an additional 75% interest in the limited partnership no later than December 2010 at a
price equal to the principal amount of the note receivable at the time of purchase. Upon exercise
of this purchase option, the property venture would own 99.7% of the limited partnership. The
property venture has also agreed to a second assignable option agreement to acquire the remaining
0.3% interest in the limited partnership by December 2012. If the property venture does not
exercise its option agreements, the partner has option agreements to put its remaining interests in
the limited partnership to the property venture during 2014 at a price equal to the principal
amount of the note receivable at the time of purchase.
Upon exercise of the purchase option or the put, in order to avoid circular transfers of cash, the
seller and the lending venture and the property venture agreed that the lending venture or the
seller may elect, upon exercise of the respective purchase option or put option, to have the loan
from the lending venture to the seller repaid by a deemed transfer of cash. The deemed transfer
shall be in amounts necessary to fully satisfy the sellers obligations to the lending venture, and
the lending venture shall be deemed to have transferred such funds up to us and our affiliates as
if we had recontributed them down into the property venture based on our pro rata ownership.
Accordingly, at December 31, 2009 (based on the exchange rate of the Euro), the only additional
cash required by us to fund the exercise of the purchase option or the put would be the pro rata
amounts necessary to redeem the advisors interest, the aggregate of which would be approximately
$2.4 million, with our share approximating $0.6 million. In addition, our maximum exposure to loss
on these ventures was approximately $105.9 million (inclusive of noncontrolling interests and of both
our existing investment and the amount to fund our future commitment).
CPA®:16 Global 2009 10-K 34
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We have investments in unconsolidated ventures that own single-tenant properties net leased to
corporations. All of the underlying investments are owned with our affiliates. Summarized financial
information for these ventures and our ownership interest in the ventures at December 31, 2009 is
presented below. Summarized financial information provided represents the total amount attributable
to the ventures and does not represent our proportionate shares (dollars in thousands):
Ownership | ||||||||||||||||
Interest at | Total Third | |||||||||||||||
Lessee | December 31, 2009 | Total Assets | Party Debt | Maturity Date | ||||||||||||
Thales S.A.(a) (b) |
35 | % | $ | 29,478 | $ | 27,478 | 7/2011 | |||||||||
U-Haul Moving Partners, Inc. and Mercury Partners, LP |
31 | % | 294,101 | 164,328 | 5/2014 | |||||||||||
Actuant Corporation (a) |
50 | % | 18,246 | 12,030 | 5/2014 | |||||||||||
TietoEnator Plc (a) |
40 | % | 98,792 | 75,785 | 7/2014 | |||||||||||
The New York Times Company (c) |
27 | % | 241,759 | 119,154 | 9/2014 | |||||||||||
Pohjola Non-life Insurance Company (a) |
40 | % | 104,277 | 85,729 | 1/2015 | |||||||||||
Hellweg Die Profi-Baumarkte GmbH & Co. KG (a) |
25 | % | 195,881 | 106,937 | 5/2015 | |||||||||||
Actebis Peacock GmbH. (a) |
30 | % | 52,053 | 32,034 | 7/2015 | |||||||||||
Frontier Spinning Mills, Inc. (d) |
40 | % | 39,144 | 23,300 | 8/2016 | |||||||||||
Consolidated Systems, Inc. |
40 | % | 16,976 | 11,538 | 11/2016 | |||||||||||
Lindenmaier A.G. (a) (e) |
33 | % | 18,054 | 12,656 | 10/2017 | |||||||||||
OBI A.G. (a) |
25 | % | 211,959 | 171,207 | 3/2018 | |||||||||||
Police Prefecture, French Government (a) |
50 | % | 109,345 | 90,602 | 8/2020 | |||||||||||
Schuler A.G. (a) |
33 | % | 74,310 | | N/A | |||||||||||
$ | 1,504,375 | $ | 932,778 | |||||||||||||
(a) | Dollar amounts shown are based on the applicable exchange rate of the foreign currency at December 31, 2009. | |
(b) | In July 2009, this venture sold four of its five properties back to the tenant for $46.6 million and used the proceeds to partially repay the existing non-recourse mortgage loan on these properties, which had an outstanding balance of $74.7 million at the date of the sale. The remaining loan balance is collateralized by the unsold fifth property. We recognized a net other-than-temporary impairment charge of $0.9 million in connection with this venture during 2009. | |
(c) | We acquired our interest in this investment in March 2009. In August 2009, the venture obtained mortgage financing on the property of $119.8 million. | |
(d) | In July 2009, this venture obtained mortgage financing of $23.4 million. | |
(e) | We recognized other-than-temporary impairment charges of $2.7 million in connection with this venture during 2009 (Note 11). |
In connection with the purchase of many of our properties, we required the sellers to perform
environmental reviews. We believe, based on the results of these reviews, that our 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 other 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, our leases generally require tenants to indemnify us from all liabilities and losses
related to the leased properties, with provisions of this indemnification specifically addressing
environmental matters. The leases generally include provisions that allow for periodic
environmental assessments, paid for by the tenant, and allow us to extend leases until such time as
a tenant has satisfied its environmental obligations. Certain of our leases allow us to require
financial assurances from tenants, such as performance bonds or letters of credit, if the costs of
remediating environmental conditions are, in our estimation, in excess of specified amounts.
Accordingly, we believe that the ultimate resolution of any environmental matters should not have a
material adverse effect on our financial condition, liquidity or results of operations.
Critical Accounting Estimates
Our significant accounting policies are described in Note 2 to the consolidated financial
statements. Many of these accounting policies require judgment and the use of estimates and
assumptions when applying these policies in the preparation of our consolidated
financial statements. On a quarterly basis, we evaluate these estimates and judgments based on
historical experience as well as other factors that we believe to be reasonable under the
circumstances. These estimates are subject to change in the future if underlying assumptions or
factors change. Certain accounting policies, while significant, may not require the use of
estimates. Those accounting policies that require significant estimation and/or judgment are listed
below.
CPA®:16 Global 2009 10-K 35
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Classification of Real Estate Assets
We classify our directly owned leased assets for financial reporting purposes at the inception of a
lease, or when significant lease terms are amended, as either real estate leased under operating
leases or net investment in direct financing leases. This classification is based on several
criteria, including, but not limited to, estimates of the remaining economic life of the leased
assets and the calculation of the present value of future minimum rents. We estimate remaining
economic life in part using third party appraisals of the leased assets. We calculate the present value of
future minimum rents using the leases implicit interest rate, which requires an estimate of the
residual value of the leased assets as of the end of the non-cancelable lease term. Estimates of
residual values are generally based on third party appraisals. Different estimates of residual
value result in different implicit interest rates and could possibly affect the financial reporting
classification of leased assets. The contractual terms of our leases are not necessarily different
for operating and direct financing leases; however, the classification is based on accounting
pronouncements that are intended to indicate whether the risks and rewards of ownership are
retained by the lessor or substantially transferred to the lessee. We believe that we retain
certain risks of ownership regardless of accounting classification. Assets classified as net
investment in direct financing leases are not depreciated but are written down to expected residual
value over the lease term. Therefore, the classification of assets may have a significant impact on
net income even though it has no effect on cash flows.
Identification of Tangible and Intangible Assets in Connection with Real Estate Acquisitions
In connection with our acquisition of properties accounted for as operating leases, we allocate
purchase costs to tangible and intangible assets and liabilities acquired based on their estimated
fair values. We determine the value of tangible assets, consisting of land and buildings, as if
vacant, and record intangible assets, including the above- and below-market value of leases, the
value of in-place leases and the value of tenant relationships, at their relative estimated fair
values.
We determine the value attributed to tangible assets in part using a discounted cash flow model
that is intended to approximate both what a third party would pay to purchase the vacant property
and rent at current estimated market rates. In applying the model, we assume that the disinterested
party would sell the property at the end of an estimated market lease term. Assumptions used in the
model are property-specific where this information is available; however, when certain necessary
information is not available, we use available regional and property-type information. Assumptions
and estimates include a discount rate or internal rate of return, marketing period necessary to put
a lease in place, carrying costs during the marketing period, leasing commissions and tenant
improvements allowances, market rents and growth factors of these rents, market lease term and a
cap rate to be applied to an estimate of market rent at the end of the market lease term.
We acquire properties subject to net leases and determine the value of above-market and
below-market lease intangibles based on the difference between (i) the contractual rents to be paid
pursuant to the leases negotiated and in place at the time of acquisition of the properties and
(ii) our estimate of fair market lease rates for the property or a similar property, both of which
are measured over a period equal to the estimated market lease term. We discount the difference
between the estimated market rent and contractual rent to a present value using an interest rate
reflecting our current assessment of the risk associated with the lease acquired, which includes a
consideration of the credit of the lessee. Estimates of market rent are generally based on a third
party appraisal obtained in connection with the property acquisition and can include estimates of
market rent increase factors, which are generally provided in the appraisal or by local brokers.
We evaluate the specific characteristics of each tenants lease and any pre-existing relationship
with each tenant in determining the value of in-place lease and tenant relationship intangibles. To
determine the value of in-place lease intangibles, we consider estimated market rent, estimated
carrying costs of the property during a hypothetical expected lease-up period, current market
conditions and costs to execute similar leases. Estimated carrying costs include real estate taxes,
insurance, other property operating costs and estimates of lost rentals at market rates during the
hypothetical expected lease-up periods, based on assessments of specific market conditions. In
determining the value of tenant relationship intangibles, we consider the expectation of lease
renewals, the nature and extent of our existing relationship with the tenant, prospects for
developing new business with the tenant and the tenants credit profile. We also consider estimated
costs to execute a new lease, including estimated leasing commissions and legal costs, as well as
estimated carrying costs of the property during a hypothetical expected lease-up period. We
determine these values using third party appraisals or our estimates.
Basis of Consolidation
When we obtain an economic interest in an entity, we evaluate the entity to determine if it is
deemed a variable interest entity (VIE) and, if so, whether we are deemed to be the primary
beneficiary and are therefore required to consolidate the entity. Significant
judgment is required to determine whether a VIE should be consolidated. We review the contractual
arrangements provided for in the partnership agreement or other related contracts to determine
whether the entity is considered a VIE under current authoritative accounting guidance, and to
establish whether we have any variable interests in the VIE. We then compare our variable
interests, if any, to those of the other venture partners to identify the party that is exposed to
the majority of the VIEs expected losses, expected residual returns, or both. We use this analysis
to determine who should consolidate the VIE. The comparison uses both qualitative and quantitative
analytical techniques that may involve the use of a number of assumptions about the amount and
timing of future cash flows.
CPA®:16 Global 2009 10-K 36
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For an entity that is not considered to be a VIE, the general partners in a limited partnership (or
similar entity) are presumed to control the entity regardless of the level of their ownership and,
accordingly, may be required to consolidate the entity. We evaluate the partnership agreements or
other relevant contracts to determine whether there are provisions in the agreements that would
overcome this presumption. If the agreements provide the limited partners with either (a) the
substantive ability to dissolve or liquidate the limited partnership or otherwise remove the
general partners without cause or (b) substantive participating rights, the limited partners
rights overcome the presumption of control by a general partner of the limited partnership, and,
therefore, the general partner must account for its investment in the limited partnership using the
equity method of accounting.
When we obtain an economic interest in an entity that is structured at the date of acquisition as a
tenant-in-common interest, we evaluate the tenancy-in-common agreements or other relevant documents
to ensure that the entity does not qualify as a VIE and does not meet the control requirement
required for consolidation. We also use judgment in determining whether the shared decision-making
involved in a tenant-in-common interest investment creates an opportunity for us to have
significant influence on the operating and financial decisions of these investments and thereby
creates some responsibility by us for a return on our investment. We account for tenancy-in-common
interests under the equity method of accounting.
Impairments
We periodically assess whether there are any indicators that the value of our long-lived assets may
be impaired or that their carrying value may not be recoverable. These impairment indicators
include, but are not limited to, the vacancy of a property that is not subject to a lease; a lease
default by a tenant that is experiencing financial difficulty; the termination of a lease by a
tenant or the rejection of a lease in a bankruptcy proceeding. Impairment charges do not
necessarily reflect the true economic loss caused by the default of the tenant, which may be
greater or less than the impairment amount. In addition, we often use non-recourse debt to finance our acquisitions,
and to the extent that the value of an asset is written down to below the value of its debt, there is
an unrealized gain that will be triggered when we turn the asset back to the lender in satisfaction
of the debt. We may incur impairment charges on long-lived assets, including real estate, direct
financing leases, assets held for sale and equity investments in real estate. We may also incur
impairment charges on marketable securities. Estimates and judgments used when evaluating whether
these assets are impaired are presented below.
Real Estate
For real estate assets in which an impairment indicator is identified, we follow a two-step process
to determine whether an asset is impaired and to determine the amount of the charge. First, we
compare the carrying value of the property to the future net undiscounted cash flow that we expect
the property will generate, including any estimated proceeds from the eventual sale of the
property. The undiscounted cash flow analysis requires us to make our best estimate of market
rents, residual values and holding periods. We estimate market rents and residual values using
market information from outside sources such as broker quotes or recent comparable sales. In cases
where the available market information is not deemed appropriate, we perform a future net cash flow
analysis discounted for inherent risk associated with each asset to determine an estimated fair
value. As our investment objective is to hold properties on a long-term basis, holding periods used
in the undiscounted cash flow analysis generally range from five to ten years. Depending on the
assumptions made and estimates used, the future cash flow projected in the evaluation of long-lived
assets can vary within a range of outcomes. We consider the likelihood of possible outcomes in
determining the best possible estimate of future cash flows. If the future net undiscounted cash
flow of the property is less than the carrying value, the property is considered to be impaired. We
then measure the loss as the excess of the carrying value of the property over its estimated fair
value. The propertys estimated fair value is primarily determined using market information from
outside sources such as broker quotes or recent comparable sales.
Direct Financing Leases
We review our direct financing leases at least annually to determine whether there has been an
other-than-temporary decline in the current estimate of residual value of the property. The
residual value is our estimate of what we could realize upon the sale of the property at the end of
the lease term, based on market information from outside sources such as broker quotes or recent
comparable sales. If this review indicates that a decline in residual value has occurred that is
other-than-temporary, we recognize an impairment charge and revise the accounting for the direct
financing lease to reflect a portion of the future cash flow from the lessee as a return of
principal rather than as revenue. While we evaluate direct financing leases if there are any
indicators that the residual value may be
impaired, the evaluation of a direct financing lease can be affected by changes in long-term market
conditions even though the obligations of the lessee are being met.
CPA®:16 Global 2009 10-K 37
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Assets Held for Sale
We classify assets that are accounted for as operating leases as held for sale when we have entered
into a contract to sell the property, all material due diligence requirements have been satisfied
and we believe it is probable that the disposition will occur within one year. When we classify an
asset as held for sale, we calculate its estimated fair value as the expected sale price, less
expected selling costs. We base the expected sale price on the contract and the expected selling
costs on information provided by brokers and legal counsel. We then compare the assets estimated
fair value to its carrying value, and if the estimated fair value is less than the propertys
carrying value, we reduce the carrying value to the estimated fair value. We will continue to
review the property for subsequent changes in the estimated fair value, and may recognize an
additional impairment charge if warranted.
If circumstances arise that we previously considered unlikely and, as a result, we decide not to
sell a property previously classified as held for sale, we reclassify the property as held and
used. We record a property that is reclassified as held and used at the lower of (a)
its carrying amount before the property was classified as held for sale, adjusted for any
depreciation expense that would have been recognized had the property been continuously classified
as held and used, or (b) the estimated fair value at the date of the subsequent decision not to
sell.
Equity Investments in Real Estate
We evaluate our equity investments in real estate on a periodic basis to determine if there are any
indicators that the value of our equity investment may be impaired and to establish whether or not
that impairment is other-than-temporary. To the extent impairment has occurred, we measure the
charge as the excess of the carrying value of our investment over its estimated fair value, which
is determined by multiplying the estimated fair value of the underlying ventures net assets by our
ownership interest percentage. For our unconsolidated ventures in real estate, we calculate the
estimated fair value of the underlying ventures real estate or net investment in direct financing
lease as described in Real Estate and Direct Financing Leases above. The fair value of the
underlying ventures debt, if any, is calculated based on market interest rates and other market
information. The fair value of the underlying ventures other assets and liabilities is generally
assumed to be equal to their carrying value.
Marketable Securities
We evaluate our marketable securities for impairment if a decline in estimated fair value below
cost basis is significant and/or has lasted for an extended period of time. We review the
underlying cause of the decline in value and the estimated recovery period, as well as the severity
and duration of the decline, to determine if the decline is other-than-temporary. In our
evaluation, we consider our ability and intent to hold these investments for a reasonable period of
time sufficient for us to recover our cost basis. We also evaluate the near-term prospects for each
of these investments in relation to the severity and duration of the decline. If we determine that
the decline is other-than-temporary, we record an impairment charge to reduce our cost basis to the
estimated fair value of the security.
Provision for Uncollected Amounts from Lessees
On an ongoing basis, we assess our ability to collect rent and other tenant-based receivables and
determine an appropriate allowance for uncollected amounts. Because we have a limited number of
lessees (21 lessees represented 69% of lease revenues during 2009), we believe that it is necessary
to evaluate the collectibility of these receivables based on the facts and circumstances of each
situation rather than solely using statistical methods. Therefore, in recognizing our provision for
uncollected rents and other tenant receivables, we evaluate actual past due amounts and make
subjective judgments as to the collectability of those amounts based on factors including, but not
limited to, our knowledge of a lessees circumstances, the age of the receivables, the tenants
credit profile and prior experience with the tenant. Even if a lessee has been making payments, we
may reserve for the entire receivable amount from the lessee if we believe there has been
significant or continuing deterioration in the lessees ability to meet its lease obligations.
Interest Capitalized in Connection with Real Estate Under Construction
Operating real estate is stated at cost less accumulated depreciation. Costs directly related to
build-to-suit projects, primarily interest, if applicable, are capitalized. Interest capitalized in
2009, 2008 and 2007 was $2.4 million, $2.4 million and $2.7 million, respectively. We consider a
build-to-suit project as substantially completed upon the completion of improvements. If portions
of a project are substantially completed and occupied and other portions have not yet reached that
stage, the substantially completed portions are accounted for separately. We allocate costs
incurred between the portions under construction and the portions substantially completed and only
capitalize those costs associated with the portion under construction. We do not have a credit
facility and determine an interest rate to be applied for capitalizing interest based on an average
rate on our outstanding non-recourse mortgage debt.
Income Taxes
We have elected to be treated as a REIT under Sections 856 through 860 of the Code. In order to
maintain our qualification as a REIT, we are required to, among other things, distribute at least
90% of our REIT net taxable income to our shareholders (excluding net
capital gains) and meet certain tests regarding the nature of our income and assets. As a REIT, we
are not subject to U.S. federal income tax with respect to the portion of our income that meets
certain criteria and is distributed annually to shareholders. Accordingly, no provision for U.S.
federal income taxes is included in the consolidated financial statements with respect to these
operations. We believe we have operated, and we intend to continue to operate, in a manner that
allows us to continue to meet the requirements for taxation as a REIT. Many of these requirements,
however, are highly technical and complex. If we were to fail to meet these requirements, we would
be subject to U.S. federal income tax.
CPA®:16 Global 2009 10-K 38
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We conduct business in various states and municipalities within the U.S. and internationally and,
as a result, we or one or more of our subsidiaries file income tax returns in the U.S. federal
jurisdiction and various state and certain foreign jurisdictions. As a result, we are subject to
certain state, local and foreign taxes and a provision for such taxes is included in the
consolidated financial statements.
Significant judgment is required in determining our tax provision and in evaluating our tax
positions. We establish tax reserves in accordance using a benefit recognition model, which we
believe could result in a greater amount of benefit (and a lower amount of reserve) being initially
recognized in certain circumstances. Provided that the tax position is deemed more likely than not
of being sustained, we recognize the largest amount of tax benefit that is greater than 50 percent
likely of being ultimately realized upon settlement. The tax position must be derecognized when it
is no longer more likely than not of being sustained.
We have elected to treat certain of our corporate subsidiaries as a taxable REIT subsidiary
(TRS). In general, a TRS may perform additional services for our tenants and generally may engage
in any real estate or non-real estate related business (except for the operation or management of
health care facilities or lodging facilities or providing to any person, under a franchise, license
or otherwise, rights to any brand name under which any lodging facility or health care facility is
operated). A TRS is subject to corporate federal income tax. Our TRS subsidiaries own hotels that
are managed on our behalf by third party hotel management companies.
Our earnings and profits, which determine the taxability of dividends to shareholders, differ from
net income reported for financial reporting purposes due primarily to differences in depreciation,
including hotel properties, for federal income tax purposes. Deferred income taxes relate primarily
to our TRSs and are accounted for using the asset and liability method. Under this method, deferred
income taxes are recognized for temporary differences between the financial reporting bases of
assets and liabilities of our TRSs and their respective tax bases and for their operating loss and
tax credit carry forwards based on enacted tax rates expected to be in effect when such amounts are
realized or settled. However, deferred tax assets are recognized only to the extent that it is more
likely than not that they will be realized based on consideration of available evidence, including
tax planning strategies and other factors.
Although our TRSs may operate at a profit for federal income tax purposes in future periods, we
cannot quantify the value of our deferred tax assets with certainty. Therefore, any deferred tax
assets have been reserved as we have not concluded that it is more likely than not that these
deferred tax assets will be realizable.
Future Accounting Requirements
In June 2009, the FASB issued amended guidance related to the consolidation of VIEs. These
amendments require an enterprise to qualitatively assess the determination of the primary
beneficiary of a VIE based on whether the entity (1) has the power to direct matters that most
significantly impact the activities of the VIE, and (2) has the obligation to absorb losses or the
right to receive benefits of the VIE that could potentially be significant to the VIE. The
amendments change the consideration of kick-out rights in determining if an entity is a VIE, which
may cause certain additional entities to now be considered VIEs. Additionally, they require an
ongoing reconsideration of the primary beneficiary and provide a framework for the events that
trigger a reassessment of whether an entity is a VIE. This guidance is effective for us beginning
January 1, 2010. We are currently assessing the potential impact that the adoption of the new
guidance will have on our financial position and results of operations.
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk. |
Market Risks
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency
exchange rates and equity prices. The primary risks to which we are exposed are interest rate risk
and foreign currency exchange risk. We are also exposed to market risk as a result of
concentrations in certain tenant industries, including automotive related industries.
We do not generally use derivative instruments to manage foreign currency exchange risk exposure
and do not use derivative instruments to hedge credit/market risks or for speculative purposes.
However, from time to time, we may enter into foreign currency forward contracts to hedge our
foreign currency cash flow exposures.
Interest Rate Risk
The value of our real estate and related fixed rate debt obligations are subject to fluctuations
based on changes in interest rates. The value of our real estate is also subject to fluctuations
based on local and regional economic conditions and changes in the creditworthiness of lessees, all
of which may affect our ability to refinance property-level mortgage debt when balloon payments are
scheduled. Interest rates are highly sensitive to many factors, including governmental monetary and
tax policies, domestic and international economic and political conditions, and other factors
beyond our control. An increase in interest rates would likely cause the value of our owned assets
to decrease. Increases in interest rates may also have an impact on the credit profile of certain
tenants.
CPA®:16 Global 2009 10-K 39
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Although we have not experienced any credit losses on investments in loan participations, in the
event of a significant rising interest rate environment and given the current economic crisis, loan
defaults could occur and result in our recognition of credit losses, which could adversely affect
our liquidity and operating results. Further, such defaults could have an adverse effect on the
spreads between interest earning assets and interest bearing liabilities.
We are exposed to the impact of interest rate changes primarily through our borrowing activities.
To limit this exposure, we attempt to obtain mortgage financing on a long-term, fixed-rate basis.
However, from time to time, we or our venture partners may obtain variable rate non-recourse
mortgage loans and, as a result, may enter into interest rate swap agreements or interest rate cap
agreements with lenders that effectively convert the variable rate debt service obligations of the
loan to a fixed rate. Interest rate swaps are agreements in which one party exchanges a stream of
interest payments for a counterpartys stream of cash flow over a specific period, and interest
rate caps limit the effective borrowing rate of variable rate debt obligations while allowing
participants to share in downward shifts in interest rates. These interest rate swaps and caps are
derivative instruments designated as cash flow hedges on the forecasted interest payments on the
debt obligation. The notional, or face, amount on which the swaps or caps are based is not
exchanged. Our objective in using these derivatives is to limit our exposure to interest rate
movements. At December 31, 2009, we estimate that the net fair value of our interest rate swap and
interest rate cap, which are included in Other assets, net and Accounts payable, accrued expenses
and other liabilities in the consolidated financial statements, was a liability of $0.2 million. In
addition, two unconsolidated ventures in which we have interests ranging from 25% to 27.25% had an
interest rate swap and an interest rate cap with a net estimated fair value liability of $5.3
million in the aggregate, representing the total amount attributable to the ventures, not our
proportionate share, at December 31, 2009.
In connection with the Hellweg 2 transaction, two ventures in which we have a total effective
ownership interest of 26%, which we consolidate, obtained participation rights in two interest rate
swaps obtained by the lender of the non-recourse mortgage financing on the transaction. The
participation rights are deemed to be embedded credit derivatives. For the years ended December 31,
2009 and 2008, the embedded credit derivatives generated unrealized losses of $1.1 million and $3.4
million, inclusive of noncontrolling interest of $0.8 million and $2.7 million, respectively.
Because of current market volatility, we are experiencing significant fluctuation in the unrealized
gains or losses generated from these derivatives and expect this trend to continue until market
conditions stabilize.
At December 31, 2009, substantially all of our non-recourse debt either bore interest at fixed
rates or bore interest at fixed rates that were scheduled to convert to then-prevailing market
fixed rates at certain future points during their term. The annual interest rates on our fixed rate
debt at December 31, 2009 ranged from 4.4% to 7.7%. The annual interest rates on our variable rate
debt at December 31, 2009 ranged from 5.2% to 6.7%. Our debt obligations are more fully described
in Financial Condition in Item 7 above. The following table presents principal cash flows based
upon expected maturity dates of our debt obligations outstanding at December 31, 2009 (in
thousands):
2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | Fair value | |||||||||||||||||||||||||
Fixed rate debt |
$ | 21,536 | $ | 25,006 | $ | 27,075 | $ | 30,255 | $ | 96,787 | $ | 1,182,524 | $ | 1,383,183 | $ | 1,225,962 | ||||||||||||||||
Variable rate debt |
$ | 422 | $ | 427 | $ | 29,432 | $ | 438 | $ | 514 | $ | 29,106 | $ | 60,339 | $ | 60,338 |
The estimated fair value of our fixed rate debt and our variable rate debt that currently
bears interest at fixed rates or has effectively been converted to a fixed rate through the use of
interest rate swaps or caps is affected by changes in interest rates. A decrease or increase in
interest rates of 1% would change the estimated fair value of such debt at December 31, 2009 by an
aggregate increase of $73.0 million or an aggregate decrease of $67.9 million, respectively. Annual
interest expense on our unhedged variable rate debt that does not bear interest at fixed rates at
December 31, 2009 would increase or decrease by $0.3 million for each respective 1% change in
annual interest rates. As more fully described in Summary of Financing in Item 7 above, a portion
of the debt classified as variable rate debt in the tables above bore interest at fixed rates at
December 31, 2009 but has interest rate reset features that will change the fixed interest rates to
then-prevailing market fixed rates at certain points in their term. Such debt is generally not
subject to short-term fluctuations in interest rates.
Foreign Currency Exchange Rate Risk
We own investments in the European Union and other foreign countries, and as a result we are
subject to risk from the effects of exchange rate movements of foreign currencies, primarily the
Euro and British Pound Sterling and to a lesser extent, certain other currencies, which may affect
future costs and cash flows. We manage foreign currency exchange rate movements by generally
placing both our debt obligation to the lender and the tenants rental obligation to us in the same
currency. For 2009, Hellweg 2, which leases properties in Germany, contributed 20% of lease
revenues, inclusive of noncontrolling interests. We are generally a net receiver of these
currencies (we receive more cash than we pay out), and therefore our foreign operations benefit
from a weaker U.S. dollar, and are adversely affected by a stronger U.S. dollar, relative to the
foreign currency. For 2009, we recognized net realized foreign currency losses of $0.4 million and
net unrealized foreign currency gains of $0.4 million. These gains and losses are included in Other
income and expenses in the consolidated financial statements and were primarily due to changes in
the value of the foreign currency on deposits held for new investments and accrued interest
receivable on notes receivable from wholly-owned subsidiaries.
CPA®:16 Global 2009 10-K 40
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In January 2009, we entered into foreign currency forward contracts with a total notional amount of
$4.2 million, based on the exchange rate of the Euro at December 31, 2009. These contracts fixed
the exchange rate of the Euro to rates ranging from $1.3307 to $1.3436 with maturity dates between
March 2009 and December 2010. During 2009, we recorded a net gain of less than $0.1 million upon
settlement of four of these contracts. This gain was included in Other income and expenses in the
consolidated financial statements. The net estimated fair value of the foreign currency forward
contracts, which is included in Accounts payable, accrued expenses and other liabilities in the
consolidated financial statements, was a liability of $0.1 million at December 31, 2009.
Scheduled future minimum rents, exclusive of renewals, under non-cancelable leases for our foreign
operations during each of the next five years and thereafter, are as follows (in thousands):
Lease Revenues (a) | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | |||||||||||||||||||||
Euro |
$ | 72,055 | $ | 72,050 | $ | 72,058 | $ | 72,054 | $ | 72,054 | $ | 917,541 | $ | 1,277,812 | ||||||||||||||
British pound sterling |
5,090 | 5,143 | 5,200 | 5,256 | 5,314 | 82,950 | 108,953 | |||||||||||||||||||||
Other foreign currencies (b) |
7,058 | 7,056 | 7,059 | 7,058 | 7,058 | 56,630 | 91,919 | |||||||||||||||||||||
$ | 84,203 | $ | 84,249 | $ | 84,317 | $ | 84,368 | $ | 84,426 | $ | 1,057,121 | $ | 1,478,684 | |||||||||||||||
Scheduled debt service payments (principal and interest) for mortgage notes payable for our
foreign operations during each of the next five years and thereafter, are as follows (in
thousands):
Debt service (a) (c) | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | |||||||||||||||||||||
Euro |
$ | 42,820 | $ | 43,740 | $ | 43,928 | $ | 44,898 | $ | 88,228 | $ | 602,138 | $ | 865,752 | ||||||||||||||
British pound sterling |
2,882 | 2,908 | 2,919 | 2,921 | 15,801 | 27,044 | 54,475 | |||||||||||||||||||||
Other foreign currencies (d) |
3,365 | 3,712 | 3,698 | 3,634 | | 27,484 | 41,893 | |||||||||||||||||||||
$ | 49,067 | $ | 50,360 | $ | 50,545 | $ | 51,453 | $ | 104,029 | $ | 656,666 | $ | 962,120 | |||||||||||||||
(a) | Based on the applicable exchange rate at December 31, 2009. Contractual rents and debt obligations are denominated in the functional currency of the country of each property. | |
(b) | Other currencies consist of the Canadian dollar, the Swedish krona, the Thai baht and the Malaysian ringgit. | |
(c) | Interest on unhedged variable rate debt obligations was calculated using the applicable annual interest rates and balances outstanding at December 31, 2009. | |
(d) | Other currencies consist of the Canadian dollar, the Swedish krona and the Thai baht. |
As a result of scheduled balloon payments on non-recourse mortgage loans, projected debt service
obligations exceed projected lease revenues in 2014. In 2014, balloon payments totaling $64.9
million are due on several non-recourse mortgage loans that are collateralized by properties. We
anticipate that, by 2014, we will seek to refinance certain of these loans or will use existing
cash resources to make these payments, if necessary.
Other
We own stock warrants that were granted to us by lessees in connection with structuring initial
lease transactions and that are defined as derivative instruments because they are readily
convertible to cash or provide for net settlement upon conversion. Changes in the fair value of
these derivative instruments are determined using an option pricing model and are recognized
currently in earnings as gains or losses. At December 31, 2009, warrants issued to us were
classified as derivative instruments and had an aggregate estimated fair value of $1.2 million.
CPA®:16 Global 2009 10-K 41
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Item 8. Financial Statements and Supplementary Data.
The following financial statements and schedules are filed as a part of this Report:
43 | ||||
44 | ||||
45 | ||||
46 | ||||
47 | ||||
48 | ||||
51 | ||||
83 | ||||
86 | ||||
87 | ||||
87 |
Financial statement schedules other than those listed above are omitted because the required
information is given in the financial statements, including the notes thereto, or because the
conditions requiring their filing do not exist.
CPA®:16 Global 2009 10-K 42
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Corporate Property Associates 16 Global
Incorporated:
In our opinion, the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of Corporate Property Associates 16 -
Global Incorporated and its subsidiaries (the Company) at December 31, 2009 and 2008, and the
results of their operations and their cash flows for each of the three years in the period ended
December 31, 2009 in conformity with accounting principles generally accepted in the United States
of America. In addition, in our opinion, the financial statement schedules listed in the
accompanying index present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements. These financial statements
and financial statement schedules are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and financial statement
schedules based on our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States). 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, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
/s/ PricewaterhouseCoopers LLP |
||
March 26, 2010 |
CPA®:16 Global 2009 10-K 43
Table of Contents
CORPORATE PROPERTY ASSOCIATES 16 GLOBAL INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31, | ||||||||
2009 | 2008 | |||||||
Assets |
||||||||
Investments in real estate: |
||||||||
Real estate, at cost |
$ | 1,696,872 | $ | 1,661,160 | ||||
Operating real estate, at cost |
83,718 | 82,776 | ||||||
Accumulated depreciation |
(118,833 | ) | (80,249 | ) | ||||
Net investments in properties |
1,661,757 | 1,663,687 | ||||||
Real estate under construction |
61,588 | 483 | ||||||
Net investment in direct financing leases |
342,055 | 341,335 | ||||||
Equity investments in real estate |
158,149 | 185,120 | ||||||
Net investments in real estate |
2,223,549 | 2,190,625 | ||||||
Notes receivable |
362,707 | 351,200 | ||||||
Cash and cash equivalents |
83,985 | 174,209 | ||||||
Intangible assets, net |
162,432 | 168,088 | ||||||
Funds in escrow |
21,586 | 52,163 | ||||||
Other assets, net |
34,746 | 30,918 | ||||||
Total assets |
$ | 2,889,005 | $ | 2,967,203 | ||||
Liabilities and Equity |
||||||||
Liabilities: |
||||||||
Non-recourse debt |
$ | 1,445,889 | $ | 1,438,226 | ||||
Accounts payable, accrued expenses and other liabilities |
36,290 | 52,836 | ||||||
Prepaid and deferred rental income and security deposits |
58,063 | 56,053 | ||||||
Due to affiliates |
14,193 | 21,502 | ||||||
Distributions payable |
20,346 | 20,140 | ||||||
Total liabilities |
1,574,781 | 1,588,757 | ||||||
Redeemable noncontrolling interests |
337,397 | 331,841 | ||||||
Commitments and contingencies (Note 13) |
||||||||
Equity: |
||||||||
CPA®:16 Global shareholders equity: |
||||||||
Common stock, $.001 par value; 250,000,000 shares authorized; 129,995,172 and 125,352,123
shares issued, respectively |
130 | 125 | ||||||
Additional paid-in capital |
1,174,230 | 1,130,135 | ||||||
Distributions in excess of accumulated earnings |
(225,462 | ) | (141,938 | ) | ||||
Accumulated other comprehensive income |
5,397 | 2,140 | ||||||
954,295 | 990,462 | |||||||
Less, treasury stock at cost, 7,134,071 and 3,286,473 shares, respectively |
(65,636 | ) | (30,566 | ) | ||||
Total CPA®:16 Global shareholders equity |
888,659 | 959,896 | ||||||
Noncontrolling interests |
88,168 | 86,709 | ||||||
Total equity |
976,827 | 1,046,605 | ||||||
Total liabilities and equity |
$ | 2,889,005 | $ | 2,967,203 | ||||
See Notes to Consolidated Financial Statements.
CPA®:16 Global 2009 10-K 44
Table of Contents
CORPORATE PROPERTY ASSOCIATES 16 GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
For the years ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Revenues |
||||||||||||
Rental income |
$ | 153,066 | $ | 149,982 | $ | 112,753 | ||||||
Interest income from direct financing leases |
27,448 | 28,864 | 24,134 | |||||||||
Interest income on notes receivable |
28,796 | 29,478 | 20,743 | |||||||||
Other real estate income |
23,660 | 23,375 | 3,565 | |||||||||
Other operating income |
3,587 | 3,310 | 1,835 | |||||||||
236,557 | 235,009 | 163,030 | ||||||||||
Operating Expenses |
||||||||||||
Depreciation and amortization |
(47,859 | ) | (45,709 | ) | (31,680 | ) | ||||||
Property expenses |
(35,786 | ) | (33,466 | ) | (20,718 | ) | ||||||
Other real estate expenses |
(18,064 | ) | (19,377 | ) | (3,250 | ) | ||||||
General and administrative |
(9,066 | ) | (12,532 | ) | (9,483 | ) | ||||||
Impairment charges |
(50,857 | ) | (890 | ) | | |||||||
(161,632 | ) | (111,974 | ) | (65,131 | ) | |||||||
Other Income and Expenses |
||||||||||||
Income from equity investments in real estate |
13,837 | 8,769 | 2,104 | |||||||||
Other interest income |
217 | 4,083 | 20,303 | |||||||||
Gain on extinguishment of debt |
6,512 | | | |||||||||
Other income and (expenses) |
(734 | ) | (1,822 | ) | 5,099 | |||||||
Interest expense |
(81,610 | ) | (83,837 | ) | (64,684 | ) | ||||||
(61,778 | ) | (72,807 | ) | (37,178 | ) | |||||||
Income before income taxes |
13,147 | 50,228 | 60,721 | |||||||||
Provision for income taxes |
(5,795 | ) | (4,210 | ) | (2,837 | ) | ||||||
Income from continuing operations |
7,352 | 46,018 | 57,884 | |||||||||
Discontinued Operations |
||||||||||||
Income from operations of discontinued properties |
3,074 | 1,342 | 714 | |||||||||
Gain on sale of real estate |
7,634 | | | |||||||||
Impairment charges |
(5,101 | ) | | | ||||||||
Income from discontinued operations |
5,607 | 1,342 | 714 | |||||||||
Net Income |
12,959 | 47,360 | 58,598 | |||||||||
Add: Net loss (income) attributable to noncontrolling interests |
8,050 | (339 | ) | (6,048 | ) | |||||||
Less: Net income attributable to redeemable noncontrolling interests |
(23,549 | ) | (26,774 | ) | (18,346 | ) | ||||||
Net (Loss) Income Attributable to CPA®16 Global Shareholders |
$ | (2,540 | ) | $ | 20,247 | $ | 34,204 | |||||
(Loss) Earnings Per Share |
||||||||||||
(Loss) Income from continuing operations attributable to CPA®16 Global shareholders |
$ | (0.07 | ) | $ | 0.16 | $ | 0.28 | |||||
Income from discontinued operations attributable to CPA®16 Global shareholders |
0.05 | 0.01 | 0.01 | |||||||||
Net (loss) income attributable to CPA®16 Global shareholders |
$ | (0.02 | ) | $ | 0.17 | $ | 0.29 | |||||
Weighted Average Shares Outstanding |
122,824,957 | 121,314,180 | 116,654,112 | |||||||||
Amounts Attributable to CPA®16 Global Shareholders |
||||||||||||
(Loss) income from continuing operations, net of tax |
(8,147 | ) | 18,905 | 33,490 | ||||||||
Income from discontinued operations, net of tax |
5,607 | 1,342 | 714 | |||||||||
Net (loss) income |
$ | (2,540 | ) | $ | 20,247 | $ | 34,204 | |||||
See Notes to Consolidated Financial Statements.
CPA®:16 Global 2009 10-K 45
Table of Contents
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(in thousands)
For the years ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Net Income |
$ | 12,959 | $ | 47,360 | $ | 58,598 | ||||||
Other Comprehensive Income (Loss): |
||||||||||||
Foreign currency translation adjustment |
11,613 | (44,188 | ) | (6,415 | ) | |||||||
Change in unrealized (loss) gain on derivative instruments |
(900 | ) | (3,968 | ) | 1,539 | |||||||
Change in unrealized (loss) gain on marketable securities |
(28 | ) | 55 | 12 | ||||||||
10,685 | (48,101 | ) | (4,864 | ) | ||||||||
Comprehensive income (loss) |
23,644 | (741 | ) | 53,734 | ||||||||
Amounts Attributable to Noncontrolling Interests: |
||||||||||||
Net loss (income) |
8,050 | (339 | ) | (6,048 | ) | |||||||
Foreign currency translation adjustment |
(1,860 | ) | 3,459 | (4,829 | ) | |||||||
Change in unrealized gain on derivative instruments |
(13 | ) | | | ||||||||
Comprehensive loss (income) attributable to noncontrolling interests |
6,177 | 3,120 | (10,877 | ) | ||||||||
Amounts Attributable to Redeemable Noncontrolling Interests: |
||||||||||||
Net income |
(23,549 | ) | (26,774 | ) | (18,346 | ) | ||||||
Foreign currency translation adjustment |
(5,555 | ) | 14,877 | 32,508 | ||||||||
Comprehensive (income) loss attributable to redeemable noncontrolling interests |
(29,104 | ) | (11,897 | ) | 14,162 | |||||||
Comprehensive Income (Loss) Attributable to CPA®16 Global Shareholders |
$ | 717 | $ | (9,518 | ) | $ | 57,019 | |||||
See Notes to Consolidated Financial Statements.
CPA®:16 Global 2009 10-K 46
Table of Contents
CORPORATE PROPERTY ASSOCIATES 16 GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF EQUITY
For the years ended December 31, 2009, 2008 and 2007
(in thousands, except share and per share amounts)
Distributions | Accumulated | Total | ||||||||||||||||||||||||||||||||||
Additional | in Excess of | Other | CPA®:16 | |||||||||||||||||||||||||||||||||
Common | Paid-in | Accumulated | Comprehensive | Treasury | Global | Noncontrolling | ||||||||||||||||||||||||||||||
Shares | Stock | Capital | Earnings | (Loss) Income | Stock | Shareholders | Interests | Total | ||||||||||||||||||||||||||||
Balance at January 1,
2007 |
113,988,048 | $ | 115 | $ | 1,028,933 | $ | (40,769 | ) | $ | 9,090 | $ | (6,638 | ) | $ | 990,731 | $ | 31,358 | $ | 1,022,089 | |||||||||||||||||
Shares issued $.001 par,
at $10
per share, net of
offering costs |
3,584,285 | 4 | 33,763 | 33,767 | 33,767 | |||||||||||||||||||||||||||||||
Shares, $.001 par,
issued to the
advisor at $10 per share |
2,281,172 | 2 | 22,810 | 22,812 | 22,812 | |||||||||||||||||||||||||||||||
Distributions declared
($0.6498
per share) |
(75,916 | ) | (75,916 | ) | (75,916 | ) | ||||||||||||||||||||||||||||||
Contributions |
| 330,387 | 330,387 | |||||||||||||||||||||||||||||||||
Distributions to
noncontrolling interests |
| (299,067 | ) | (299,067 | ) | |||||||||||||||||||||||||||||||
Net income |
34,204 | 34,204 | 6,048 | 40,252 | ||||||||||||||||||||||||||||||||
Other comprehensive
income
(loss): |
||||||||||||||||||||||||||||||||||||
Foreign currency
translation adjustment |
21,264 | 21,264 | 4,829 | 26,093 | ||||||||||||||||||||||||||||||||
Change in unrealized
loss on derivative
instruments |
1,539 | 1,539 | 1,539 | |||||||||||||||||||||||||||||||||
Change in unrealized
gain (loss) on
marketable securities |
12 | 12 | 12 | |||||||||||||||||||||||||||||||||
Repurchase of shares |
(786,395 | ) | (7,316 | ) | (7,316 | ) | (7,316 | ) | ||||||||||||||||||||||||||||
Balance at December 31,
2007 |
119,067,110 | 121 | 1,085,506 | (82,481 | ) | 31,905 | (13,954 | ) | 1,021,097 | 73,555 | $ | 1,094,652 | ||||||||||||||||||||||||
Shares issued $.001 par,
at $10
per share, net of
offering costs |
3,543,833 | 3 | 32,220 | 32,223 | 32,223 | |||||||||||||||||||||||||||||||
Shares, $.001 par,
issued to the
advisor at $10 per share |
1,240,982 | 1 | 12,409 | 12,410 | 12,410 | |||||||||||||||||||||||||||||||
Distributions declared
($0.6576
per share) |
(79,704 | ) | (79,704 | ) | (79,704 | ) | ||||||||||||||||||||||||||||||
Contributions |
| 24,396 | 24,396 | |||||||||||||||||||||||||||||||||
Distributions to
noncontrolling interests |
| (8,122 | ) | (8,122 | ) | |||||||||||||||||||||||||||||||
Net income |
20,247 | 20,247 | 339 | 20,586 | ||||||||||||||||||||||||||||||||
Other comprehensive
income
(loss): |
||||||||||||||||||||||||||||||||||||
Foreign currency
translation adjustment |
(25,852 | ) | (25,852 | ) | (3,459 | ) | (29,311 | ) | ||||||||||||||||||||||||||||
Change in unrealized
loss on derivative
instruments |
(3,968 | ) | (3,968 | ) | (3,968 | ) | ||||||||||||||||||||||||||||||
Change in unrealized
gain (loss) on
marketable securities |
55 | 55 | 55 | |||||||||||||||||||||||||||||||||
Repurchase of shares |
(1,786,275 | ) | (16,612 | ) | (16,612 | ) | (16,612 | ) | ||||||||||||||||||||||||||||
Balance at December 31,
2008 |
122,065,650 | 125 | 1,130,135 | (141,938 | ) | 2,140 | (30,566 | ) | 959,896 | 86,709 | 1,046,605 | |||||||||||||||||||||||||
Shares issued $.001 par,
at $9.80 and
$10.00 per share, net of
offering costs |
3,440,053 | 4 | 32,257 | 32,261 | 32,261 | |||||||||||||||||||||||||||||||
Shares, $.001 par,
issued to the
advisor at $9.80 per
share |
1,202,996 | 1 | 11,838 | 11,839 | 11,839 | |||||||||||||||||||||||||||||||
Distributions declared
($0.6621
per share) |
(80,984 | ) | (80,984 | ) | (80,984 | ) | ||||||||||||||||||||||||||||||
Contributions |
| 24,884 | 24,884 | |||||||||||||||||||||||||||||||||
Distributions to
noncontrolling interests |
| (17,248 | ) | (17,248 | ) | |||||||||||||||||||||||||||||||
Net income |
(2,540 | ) | (2,540 | ) | (8,050 | ) | (10,590 | ) | ||||||||||||||||||||||||||||
Other comprehensive
income
(loss): |
||||||||||||||||||||||||||||||||||||
Foreign currency
translation adjustment |
4,198 | 4,198 | 1,860 | 6,058 | ||||||||||||||||||||||||||||||||
Change in unrealized
loss on derivative
instruments |
(913 | ) | (913 | ) | 13 | (900 | ) | |||||||||||||||||||||||||||||
Change in unrealized
gain (loss) on
marketable securities |
(28 | ) | (28 | ) | (28 | ) | ||||||||||||||||||||||||||||||
Repurchase of shares |
(3,847,598 | ) | (35,070 | ) | (35,070 | ) | | (35,070 | ) | |||||||||||||||||||||||||||
Balance at December 31,
2009 |
122,861,101 | $ | 130 | $ | 1,174,230 | $ | (225,462 | ) | $ | 5,397 | $ | (65,636 | ) | $ | 888,659 | $ | 88,168 | $ | 976,827 | |||||||||||||||||
See Notes to Consolidated Financial Statements.
CPA®:16 Global 2009 10-K 47
Table of Contents
CORPORATE PROPERTY ASSOCIATES 16 GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the years ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Cash Flows Operating Activities |
||||||||||||
Net income |
$ | 12,959 | $ | 47,360 | $ | 58,598 | ||||||
Adjustments to net income: |
||||||||||||
Depreciation and amortization including intangible assets
and deferred financing costs |
49,348 | 47,800 | 33,180 | |||||||||
Straight-line rent adjustments, amortization of rent-related intangibles
and financing lease adjustments |
3,007 | 821 | 788 | |||||||||
Income from equity investments in real estate in excess of distributions received |
1,788 | 3,987 | 2,987 | |||||||||
Issuance of shares to affiliate in satisfaction of fees due |
11,839 | 12,410 | 25,175 | |||||||||
Realized loss (gain) on foreign currency transactions, net |
400 | (1,407 | ) | (2,360 | ) | |||||||
Unrealized loss (gain) on foreign currency and derivative transactions, net |
378 | 3,365 | (2,739 | ) | ||||||||
Realized gain on sale of real estate |
(7,634 | ) | (136 | ) | | |||||||
Gain on extinguishment of debt |
(8,825 | ) | | | ||||||||
Impairment charges |
55,958 | 890 | | |||||||||
Change in other operating assets and liabilities, net (a) |
661 | 2,345 | 5,356 | |||||||||
Net cash provided by operating activities |
119,879 | 117,435 | 120,985 | |||||||||
Cash Flows Investing Activities |
||||||||||||
Distributions from equity investments in real estate in excess of equity income |
46,959 | 12,064 | 4,256 | |||||||||
Contributions to equity investments in real estate |
(62,448 | ) | (8,274 | ) | (64,518 | ) | ||||||
Acquisition of real estate and other capital expenditures (b) |
(137,380 | ) | (150,219 | ) | (638,182 | ) | ||||||
Funding/purchases of note receivable |
(5,978 | ) | (7,291 | ) | (315,940 | ) | ||||||
Funds placed in escrow for future acquisition and construction of real estate |
| (18,843 | ) | (43,496 | ) | |||||||
Release of funds held in escrow for acquisition and construction of real estate |
11,122 | 39,072 | 5,349 | |||||||||
Proceeds from sale of real estate |
28,185 | 22,886 | | |||||||||
Payment of deferred acquisition fees to affiliate |
(9,082 | ) | (29,546 | ) | | |||||||
VAT taxes paid in connection with acquisition of real estate |
| | (885 | ) | ||||||||
VAT taxes recovered in connection with acquisition of real estate |
| 3,711 | | |||||||||
Proceeds from maturity of short-term investments |
| | 1,698 | |||||||||
Receipt of principal payment of mortgage note receivable |
| 301 | 288 | |||||||||
Net cash used in investing activities |
(128,622 | ) | (136,139 | ) | (1,051,430 | ) | ||||||
Cash Flows Financing Activities |
||||||||||||
Distributions paid |
(80,778 | ) | (79,011 | ) | (72,551 | ) | ||||||
Distributions paid to noncontrolling interests |
(44,447 | ) | (36,349 | ) | (300,107 | ) | ||||||
Contributions from noncontrolling interests |
24,884 | 747 | 313,081 | |||||||||
Proceeds from mortgages and notes payable |
78,516 | 102,124 | 731,574 | |||||||||
Scheduled payments of mortgage principal |
(18,747 | ) | (15,487 | ) | (18,053 | ) | ||||||
Prepayment of mortgages and note payable |
(34,781 | ) | (4,312 | ) | | |||||||
Deferred financing costs and mortgage deposits, net of deposits refunded |
(386 | ) | (688 | ) | (975 | ) | ||||||
Proceeds from issuance of shares, net of costs of raising capital |
32,261 | 32,223 | 31,404 | |||||||||
Purchase of treasury stock |
(35,070 | ) | (16,612 | ) | (7,316 | ) | ||||||
Net cash (used in) provided by financing activities |
(78,548 | ) | (17,365 | ) | 677,057 | |||||||
Change in Cash and Cash Equivalents During the Year |
||||||||||||
Effect of exchange rate changes on cash |
(2,933 | ) | (1,481 | ) | 924 | |||||||
Net decrease in cash and cash equivalents |
(90,224 | ) | (37,550 | ) | (252,464 | ) | ||||||
Cash and cash equivalents, beginning of year |
174,209 | 211,759 | 464,223 | |||||||||
Cash and cash equivalents, end of year |
$ | 83,985 | $ | 174,209 | $ | 211,759 | ||||||
(Continued)
CPA®:16 Global 2009 10-K 48
Table of Contents
CORPORATE PROPERTY ASSOCIATES 16 GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Non-cash investing and financing activities
(a) | Changes in due to affiliates and accounts payable, accrued expenses and other liabilities exclude amounts related to the raising of capital (financing activities) pursuant to our public offerings. At December 31, 2007, the amount due to the advisor for such costs was $1.5 million. At December 31, 2009, all costs related to the raising of capital have been paid to the advisor. | |
(b) | Included in the cost basis of real estate investments acquired in 2009, 2008 and 2007 are deferred acquisition fees payable of $2.4 million, $3.4 million and $13.9 million, respectively. |
Supplemental cash flow information (in thousands):
Years ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Interest paid, net of amounts capitalized |
$ | 81,620 | $ | 86,044 | $ | 58,924 | ||||||
Interest capitalized |
$ | 2,446 | $ | 2,419 | $ | 2,662 | ||||||
Income taxes paid |
$ | 3,880 | $ | 5,717 | $ | 1,409 | ||||||
See Notes to Consolidated Financial Statements.
CPA®:16 Global 2009 10-K 49
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business and Organization
Corporate Property Associates 16 Global Incorporated is a publicly owned, non-actively traded
REIT that invests in commercial properties leased to companies domestically and internationally. As
a REIT, we are not subject to U.S. federal income taxation as long as we satisfy certain
requirements, principally relating to the nature of our income, the level of our distributions and
other factors. We earn revenue principally by leasing the properties we own to single corporate
tenants, primarily on a triple-net leased basis, which requires the tenant to pay substantially all
of the costs associated with operating and maintaining the property. Revenue is subject to
fluctuation because of the timing of new lease transactions, lease terminations, lease expirations,
contractual rent increases, tenant defaults and sales of properties. At December 31, 2009, our
portfolio was comprised of our full or partial ownership interests in 386 properties, substantially
all of which were triple-net leased to 79 tenants, and totaled approximately 27 million square feet
(on a pro rata basis) with an occupancy rate of approximately 99%. We were formed as a Maryland
corporation in June 2003 and are managed by the advisor.
Note 2. Summary of Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements reflect all of our accounts including those of our
majority-owned and/or controlled subsidiaries. The portion of equity in a subsidiary that is not
attributable, directly or indirectly, to us is presented as noncontrolling interests. All
significant intercompany accounts and transactions have been eliminated.
When we obtain an economic interest in an entity, we evaluate the entity to determine if the entity
is deemed a variable interest entity, or VIE, and if we are deemed to be the primary beneficiary
under current authoritative accounting guidance. We consolidate (i) entities that are VIEs and of
which we are deemed to be the primary beneficiary and (ii) entities that are non-VIEs that we
control. Entities that we account for under the equity method (i.e., at cost, increased or
decreased by our share of earnings or losses, less distributions, plus fundings) include (i)
entities that are VIEs and of which we are not deemed to be the primary beneficiary and (ii)
entities that are non-VIEs that we do not control but over which we have the ability to exercise
significant influence. We will reconsider our determination of whether an entity is a VIE and who
the primary beneficiary is if certain events occur that are likely to cause a change in the
original determinations.
In determining whether we control a non-VIE, we consider that the general partners in a limited
partnership (or similar entity) are presumed to control the entity regardless of the level of their
ownership and, accordingly, may be required to consolidate the entity. This presumption may be
overcome if the agreements provide the limited partners with either (a) the substantive ability to
dissolve (liquidate) the limited partnership or otherwise remove the general partners without cause
or (b) substantive participating rights. If it is deemed that the limited partners rights overcome
the presumption of control by a general partner of the limited partnership, the general partner
must account for its investment in the limited partnership using the equity method of accounting.
We have an investment in a domestic tenant-in-common interest. Consolidation of this investment is
not required as it does not qualify as a VIE and does not meet the control requirement required for
consolidation. Accordingly, we account for this investment using the equity method of accounting.
We use the equity method of accounting because the shared decision-making involved in a
tenant-in-common interest investment creates an opportunity for us to have significant influence on
the operating and financial decision of this investment and thereby creates some responsibility by
us for a return on our investment.
Out-of-Period Adjustments
During the fourth quarter of 2008, we identified errors in the consolidated financial statements
for the years ended December 31, 2005 through 2008. These errors related to accounting for
pre-operating activities of certain hotel investments (aggregating $0.5 million in 2007 and $0.4
million, $0.2 million and $0.1 million for the three months ended March 31, 2008, June 30, 2008,
September 30, 2008, respectively) and minimum rent increases for a lessee (aggregating $1.8 million
over the period from 2005-2007 and $0.1 million in each of the first three quarters of 2008). In
addition, during the first quarter of 2007, we identified errors in the consolidated financial
statements for the years ended December 31, 2005 and 2006 related to accounting for foreign income
taxes (aggregating $0.4 million over the period from 2005-2006).
We concluded that these adjustments were not material to any prior periods consolidated financial
statements. We also concluded that the cumulative adjustment was not material to the year ended
December 31, 2008, nor was it material to the years ended 2007, 2006 and 2005. As such, this
cumulative effect was recorded in the consolidated statements of operations as out-of-period
adjustments in the periods the issues were identified. The effect of these adjustments was to
increase net income by $1.3 million for 2008 and decrease net income by $0.1 million, $0.4 million
and $0.4 million for the years ended December 31, 2007, 2006 and 2005, respectively.
CPA®:16 Global 2009 10-K 50
Table of Contents
Notes to Consolidated Financial Statements
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts
in our consolidated financial statements and the accompanying notes. Actual results could differ
from those estimates.
Reclassifications and Revisions
Certain prior year amounts have been reclassified to conform to the current year presentation. The
consolidated financial statements included in this Report have been retrospectively adjusted to
reflect the adoption of accounting guidance for noncontrolling interests during the year ended
December 31, 2009, as well as the disposition (or planned disposition) of certain properties as
discontinued operations for all periods presented.
Purchase Price Allocation
When we acquire properties accounted for as operating leases, we allocate the purchase costs to the
tangible and intangible assets and liabilities acquired based on their estimated fair values. We
determine the value of the tangible assets, consisting of land and buildings, as if vacant, and
record intangible assets, including the above-market and below-market value of leases, the value of
in-place leases and the value of tenant relationships, at their relative estimated fair values. See
Real Estate Leased to Others and Depreciation below for a discussion of our significant accounting
policies related to tangible assets. We include the value of below-market leases in Prepaid and
deferred rental income and security deposits in the consolidated financial statements.
We record above-market and below-market lease values for owned properties based on the present
value (using an interest rate reflecting the risks associated with the leases acquired) of the
difference between (i) the contractual amounts to be paid pursuant to the leases negotiated and in
place at the time of acquisition of the properties and (ii) our estimate of fair market lease rates
for the property or equivalent property, both of which are measured over a period equal to the
estimated market lease term. We amortize the capitalized above-market lease value as a reduction of
rental income over the estimated market lease term. We amortize the capitalized below-market lease
value as an increase to rental income over the initial term and any fixed rate renewal periods in
the respective leases.
We allocate the total amount of other intangibles to in-place lease values and tenant relationship
intangible values based on our evaluation of the specific characteristics of each tenants lease
and our overall relationship with each tenant. The characteristics we consider in allocating these
values include estimated market rent, the nature and extent of the existing relationship with the
tenant, the expectation of lease renewals, estimated carrying costs of the property if vacant and
estimated costs to execute a new lease, among other factors. We determine these values using third
party appraisals or our estimates. We amortize the capitalized value of in-place lease intangibles
to expense over the remaining initial term of each lease. We amortize the capitalized value of
tenant relationships to expense over the initial and expected renewal terms of the lease. No
amortization period for intangibles will exceed the remaining depreciable life of the building.
If a lease is terminated, we charge the unamortized portion of each intangible, including
above-market and below-market lease values, in-place lease values and tenant relationship values,
to expense.
Real Estate and Operating Real Estate
We carry land and buildings and personal property at cost less accumulated depreciation. We
capitalize renewals and improvements, while we expense as incurred replacements, maintenance and
repairs that do not improve or extend the lives of the respective assets.
Real Estate Under Construction and Redevelopment
For properties under construction, operating expenses including interest charges and other property
expenses, including real estate taxes, are capitalized rather than expensed and incidental revenue
is recorded as a reduction of capitalized project (i.e., construction) costs. We capitalize
interest by applying the interest rate applicable to outstanding borrowings to the average amount
of accumulated qualifying expenditures for properties under construction during the period.
Acquisition, Development and Construction Loans (ADC Equity Arrangements)
We evaluate mortgage loans where we participate in residual interests through loan provisions or
other contracts to ascertain whether we have the same risks and rewards as an owner or a venture
partner. Where we conclude that such arrangements are more appropriately treated as a hypothetical
investment in real estate, we reflect such investment as part of equity method investments in real
estate (Note 6). In these cases, our loan position is treated as preference capital in the
hypothetical partnership rather than a loan and no interest income is recorded.
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Notes to Consolidated Financial Statements
Notes Receivable
For investments in mortgage notes and loan participations, the loans are initially reflected at
acquisition cost which consists of the outstanding balance, net of the acquisition discount or
premium. We amortize any discount or premium as an adjustment to increase or decrease,
respectively, the yield realized on these loans using the effective interest method. As such,
differences between carrying value and principal balances outstanding do not represent embedded
losses or gains as we generally plan to hold such loans to maturity.
Cash and Cash Equivalents
We consider all short-term, highly liquid investments that are both readily convertible to cash and
have a maturity of 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. At December 31,
2009 and 2008, our cash and cash equivalents were held in the custody of several financial
institutions, and these balances, at times, exceeded federally insurable limits. We seek to
mitigate this risk by depositing funds only with major financial institutions.
Marketable Securities
Marketable securities, which consist of an interest-only participation in a mortgage note
receivable, are classified as available for sale securities and reported at fair value, with any
unrealized gains and losses on these securities reported as a component of other comprehensive
income (OCI) until realized.
Other Assets and Other Liabilities
We include interest receivable, tax receivable, stock warrants, marketable securities, deferred
charges and deferred rental income in Other assets. We include derivatives and miscellaneous
amounts held on behalf of tenants in Other liabilities. Deferred charges are costs incurred in
connection with mortgage financings and refinancings that are amortized over the terms of the
mortgages and included in Interest expense in the consolidated financial statements. Deferred
rental income is the aggregate cumulative difference for operating leases between scheduled rents
that vary during the lease term, and rent recognized on a straight-line basis.
Deferred Acquisition Fees Payable to Affiliate
Fees payable to the advisor for structuring and negotiating investments and related mortgage
financing on our behalf are included in Due to affiliates. A portion of these fees is payable in
equal annual installments each January of the three calendar years following the date a property
was purchased. Payment of such fees is subject to the performance criterion (Note 3).
Treasury Stock
Treasury stock is recorded at cost.
Real Estate Leased to Others
We lease real estate to others primarily on a triple-net leased basis, whereby the tenant is
generally responsible for all operating expenses relating to the property, including property
taxes, insurance, maintenance, repairs, renewals and improvements. We charge expenditures for
maintenance and repairs, including routine betterments, to operations as incurred. We capitalize
significant renovations that increase the useful life of the properties. For the years ended
December 31, 2009, 2008 and 2007, although we are legally obligated for the payment, pursuant to our lease
agreements with our tenants, lessees were responsible for the direct payment to the taxing
authorities of real estate taxes of $14.7 million, $14.0 million and $9.8 million, respectively.
We diversify our real estate investments among various corporate tenants engaged in different
industries, by property type and by geographic area (Note 10). Substantially all of our leases
provide for either scheduled rent increases, periodic rent adjustments based on formulas indexed to
changes in the CPI or similar indices or percentage rents. CPI-based adjustments are contingent on
future events and are therefore not included in straight-line rent calculations. We recognize rents
from percentage rents as reported by the lessees, which is after the level of sales requiring a
rental payment to us is reached.
We account for leases as operating or direct financing leases as described below:
Operating leases We record real estate at cost less accumulated depreciation; we recognize future
minimum rental revenue on a straight-line basis over the term of the related leases and charge
expenses (including depreciation) to operations as incurred (Note 4).
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Notes to Consolidated Financial Statements
Direct financing method We record leases accounted for under the direct financing method at their
net investment (Note 5). We defer and amortize unearned income to income over the lease term so as
to produce a constant periodic rate of return on our net investment in the lease.
On an ongoing basis, we assess our ability to collect rent and other tenant-based receivables and
determine an appropriate allowance for uncollected amounts. Because we have a limited number of
lessees (21 lessees represented 69% of lease revenues during 2009), we believe that it is necessary
to evaluate the collectability of these receivables based on the facts and circumstances of each
situation rather than solely using statistical methods. Therefore, in recognizing our provision for
uncollected rents and other tenant receivables, we evaluate actual past due amounts and make
subjective judgments as to the collectability of those amounts based on factors including, but not
limited to, our knowledge of a lessees circumstances, the age of the receivables, the tenants
credit profile and prior experience with the tenant. Even if a lessee has been making payments, we
may reserve for the entire receivable amount if we believe there has been significant or continuing
deterioration in the lessees ability to meet its lease obligations.
Acquisition Costs
The FASB has revised its guidance for business combinations. The revised guidance establishes
principles and requirements for how the acquirer in a business combination must recognize and
measure in its financial statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interests in the entity acquired, and goodwill acquired in a business combination.
Additionally, the revised guidance requires that an acquiring entity must immediately expense all
acquisition costs and fees associated with a business combination, while such costs are capitalized
for transactions deemed to be acquisitions of an asset. To the extent we make investments that are
deemed to be business combinations, our results of operations will be negatively impacted by the
immediate expensing of acquisition costs and fees incurred in accordance with the revised guidance,
whereas in the past such costs and fees would have been capitalized and allocated to the cost basis
of the acquisition. Post acquisition, there will be a subsequent positive impact on our results of
operations through a reduction in depreciation expense over the estimated life of the properties.
For those investments that are not deemed to be a business combination, the revised guidance is not
expected to have a material impact on our consolidated financial statements. Historically, we have
not acquired investments that would be deemed a business combination under the revised guidance.
During 2009, we made investments totaling $163.6 million, inclusive of amounts attributable to
noncontrolling interests of $45.9 million, that were deemed to be real estate asset acquisitions.
Costs and fees capitalized in connection with this investment activity totaled $7.8 million,
inclusive of amounts attributable to noncontrolling interests of $2.3 million. We did not make any
investments that were deemed to be business combinations during 2009.
Depreciation
We compute depreciation of building and related improvements using the straight-line method over
the estimated useful lives of the properties, or improvements, which range from 3 to 40 years. We
compute depreciation of tenant improvements using the straight-line method over the lesser of the
remaining term of the lease or the estimated useful life.
Impairments
We periodically assess whether there are any indicators that the value of our long-lived assets may
be impaired or that their carrying value may not be recoverable. These impairment indicators
include, but are not limited to, the vacancy of a property that is not subject to a lease; a lease
default by a tenant that is experiencing financial difficulty; the termination of a lease by a
tenant or the rejection of a lease in a bankruptcy proceeding. Impairment charges do not
necessarily reflect the true economic loss caused by the default of the tenant, which may be
greater or less than the impairment amount. In addition, we use non-recourse debt to finance our acquisitions,
and to the extent that the value of an asset is written down to below the value of its debt, there is
an unrealized gain that will be triggered when we turn the asset back to the lender in satisfaction
of the debt. We may incur impairment charges on long-lived assets, including real estate, direct
financing leases, assets held for sale and equity investments in real estate. We may also incur
impairment charges on marketable securities. Our policies for evaluating whether these assets are
impaired are presented below.
Real Estate
For real estate assets in which an impairment indicator is identified, we follow a two-step process
to determine whether an asset is impaired and to determine the amount of the charge. First, we
compare the carrying value of the property to the future net undiscounted cash flow that we expect
the property will generate, including any estimated proceeds from the eventual sale of the
property. The undiscounted cash flow analysis requires us to make our best estimate of market
rents, residual values and holding periods. Depending on the assumptions made and estimates used,
the future cash flow projected in the evaluation of long-lived assets can vary within a range of
outcomes. We consider the likelihood of possible outcomes in determining the best possible estimate
of future cash flows. If the future net undiscounted cash flow of the property is less than the
carrying value, the property is considered to be impaired. We then measure the loss as the excess
of the carrying value of the property over its estimated fair value, as determined using market
information. In cases where the available market information is not deemed appropriate, we perform
a future net cash flow analysis discounted for inherent risk associated with each asset to
determine an estimated fair value.
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Notes to Consolidated Financial Statements
Direct Financing Leases
We review our direct financing leases at least annually to determine whether there has been an
other-than-temporary decline in the current estimate of residual value of the property. The
residual value is our estimate of what we could realize upon the sale of the property at the end of
the lease term, based on market information. If this review indicates that a decline in residual
value has occurred that is other-than-temporary, we recognize an impairment charge and revise the
accounting for the direct financing lease to reflect a portion of the future cash flow from the
lessee as a return of principal rather than as revenue. While we evaluate direct financing leases
if there are any indicators that the residual value may be impaired, the evaluation of a direct
financing lease can be affected by changes in long-term market conditions even though the
obligations of the lessee are being met.
Assets Held for Sale
We classify assets that are accounted for as operating leases as held for sale when we have entered
into a contract to sell the property, all material due diligence requirements have been satisfied
and we believe it is probable that the disposition will occur within one year. When we classify an
asset as held for sale, we calculate its estimated fair value as the expected sale price, less
expected selling costs. We then compare the assets estimated fair value to its carrying value, and
if the estimated fair value is less than the propertys carrying value, we reduce the carrying
value to the estimated fair value. We will continue to review the property for subsequent changes
in the estimated fair value, and may recognize an additional impairment charge if warranted.
If circumstances arise that we previously considered unlikely and, as a result, we decide not to
sell a property previously classified as held for sale, we reclassify the property as held and
used. We record a property that is reclassified as held and used at the lower of (a)
its carrying amount before the property was classified as held for sale, adjusted for any
depreciation expense that would have been recognized had the property been continuously classified
as held and used, or (b) the estimated fair value at the date of the subsequent decision not to
sell.
Equity Investments in Real Estate
We evaluate our equity investments in real estate on a periodic basis to determine if there are any
indicators that the value of our equity investment may be impaired and whether or not that
impairment is other-than-temporary. To the extent impairment has occurred, we measure the charge as
the excess of the carrying value of our investment over its estimated fair value, which is
determined by multiplying the estimated fair value of the underlying ventures net assets by our
ownership interest percentage.
Marketable Securities
We evaluate our marketable securities for impairment if a decline in estimated fair value below
cost basis is significant and/or has lasted for an extended period of time. We review the
underlying cause of the decline in value and the estimated recovery period, as well as the severity
and duration of the decline, to determine if the decline is other-than-temporary. In our
evaluation, we consider our ability and intent to hold these investments for a reasonable period of
time sufficient for us to recover our cost basis. We also evaluate the near-term prospects for each
of these investments in relation to the severity and duration of the decline. If we determine that
the decline is other-than-temporary, we record an impairment charge to reduce our cost basis to the
estimated fair value of the security.
Assets Held for Sale
We classify assets that are accounted for as operating leases as held for sale when we have entered
into a contract to sell the property, all material due diligence requirements have been satisfied
and we believe it is probable that the disposition will occur within one year. Assets held for sale
are recorded at the lower of carrying value or estimated fair value, which is generally calculated
as the expected sale price, less expected selling costs. The results of operations and the related
gain or loss on sale of properties that have been sold or that are classified as held for sale are
included in discontinued operations (Note 17).
If circumstances arise that we previously considered unlikely and, as a result, we decide not to
sell a property previously classified as held for sale, we reclassify the property as held and
used. We record a property that is reclassified as held and used at the
lower of (a) its carrying amount before the property was classified as held for sale, adjusted for
any depreciation expense that would have been recognized had the property been continuously
classified as held and used or (b) the estimated fair value at the date of the subsequent decision
not to sell.
We recognize gains and losses on the sale of properties when, among other criteria, the parties are
bound by the terms of the contract, all consideration has been exchanged and all conditions
precedent to closing have been performed. At the time the sale is consummated, a gain or loss is
recognized as the difference between the sale price, less any selling costs, and the carrying value
of the property.
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Notes to Consolidated Financial Statements
Foreign Currency Translation
We have interests in real estate investments in the European Union, Canada, Malaysia, Mexico and
Thailand and own interests in properties in the European Union. The functional currencies for these
investments are primarily the Euro and the British Pound Sterling and, to a lesser extent, the
Swedish krona, the Canadian dollar, the Thai baht, and the Malaysian ringgit. We perform the
translation from these local currencies to the U.S. dollar for assets and liabilities using current
exchange rates in effect at the balance sheet date and for revenue and expense accounts using a
weighted average exchange rate during the period. We report the gains and losses resulting from
this translation as a component of OCI in equity. At December 31, 2009 and 2008, the cumulative
foreign currency translation adjustment gain was $7.8 million and $3.6 million, respectively.
Foreign currency transactions may produce receivables or payables that are fixed in terms of the
amount of foreign currency that will be received or paid. A change in the exchange rates between
the functional currency and the currency in which a transaction is denominated increases or
decreases the expected amount of functional currency cash flows upon settlement of that
transaction. That increase or decrease in the expected functional currency cash flows is an
unrealized foreign currency transaction gain or loss that generally will be included in determining
net income for the period in which the exchange rate changes. Likewise, a transaction gain or loss
(measured from the transaction date or the most recent intervening balance sheet date, whichever is
later), realized upon settlement of a foreign currency transaction generally will be included in
net income for the period in which the transaction is settled. Foreign currency transactions that
are (i) designated as, and are effective as, economic hedges of a net investment and (ii)
intercompany foreign currency transactions that are of a long-term nature (that is, settlement is
not planned or anticipated in the foreseeable future), when the entities to the transactions are
consolidated or accounted for by the equity method in our financial statements are not included in
determining net income are accounted for in the same manner as foreign currency translation
adjustments and reported as a component of OCI in equity. Investments in international equity
investments in real estate are funded in part through subordinated intercompany debt.
Foreign currency intercompany transactions that are scheduled for settlement, consisting primarily
of accrued interest and the translation to the reporting currency of intercompany subordinated debt
with scheduled principal repayments, are included in the determination of net income. We recognized
an unrealized gain of $0.4 million, an unrealized loss of $0.2 million and an unrealized gain of
less than $0.1 million from such transactions for the years ended December 31, 2009, 2008 and 2007,
respectively. For the years ended December 31, 2009, 2008, and 2007, we recognized a realized loss
of $0.4 million and realized gains of $1.4 million and $2.0 million, respectively, on foreign
currency transactions in connection with the transfer of cash from foreign operations of
subsidiaries to the parent company.
Derivative Instruments
We measure derivative instruments at fair value and record them as assets or liabilities, depending
on our rights or obligations under the applicable derivative contract. Derivatives that are not
designated as hedges must be adjusted to fair value through earnings. If a derivative is
designated as a hedge, depending on the nature of the hedge, changes in the fair value of the
derivative will either be offset against the change in fair value of the hedged asset, liability,
or firm commitment through earnings, or recognized in OCI until the hedged item is recognized in
earnings. The ineffective portion of a derivatives change in fair value will be immediately
recognized in earnings.
Income Taxes
We have elected to be taxed as a REIT under Sections 856 through 860 of the Code. In order to
maintain our qualification as a REIT, we are required, among other things, to distribute at least
90% of our REIT net taxable income to our shareholders and meet certain tests regarding the nature
of our income and assets. As a REIT, we are not subject to federal income tax with respect to the
portion of our income that meets certain criteria and is distributed annually to shareholders.
Accordingly, no provision for federal income taxes is included in the consolidated financial
statements with respect to these operations. We believe we have operated, and we intend to continue
to operate, in a manner that allows us to continue to meet the requirements for taxation as a REIT.
We conduct business in various states and municipalities within the U.S. and the European Union
and, as a result, we or one or more of our subsidiaries file income tax returns in the U.S. federal
jurisdiction and various state and certain foreign jurisdictions. As a result, we are subject to
certain foreign, state and local taxes and a provision for such taxes is included in the
consolidated financial statements.
Significant judgment is required in determining our tax provision and in evaluating our tax
positions. We establish tax reserves based on a benefit recognition model, which we believe could
result in a greater amount of benefit (and a lower amount of reserve) being initially recognized in
certain circumstances. Provided that the tax position is deemed more likely than not of being
sustained, we recognize the largest amount of tax benefit that is greater than 50 percent likely of
being ultimately realized upon settlement. We derecognize the tax position when it is no longer
more likely than not of being sustained.
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Notes to Consolidated Financial Statements
We elected to treat certain of our corporate subsidiaries as a taxable REIT subsidiary (TRS). In
general, a TRS may perform additional services for our tenants and generally may engage in any real
estate or non-real estate related business (except for the operation or management of health care
facilities or lodging facilities or providing to any person, under a franchise, license or
otherwise, rights to any brand name under which any lodging facility or health care facility is
operated). A TRS is subject to corporate federal income tax. Our TRS subsidiaries own hotels that
are managed on our behalf by third party hotel management companies.
Our earnings and profits, which determine the taxability of dividends to shareholders, differ from
net income reported for financial reporting purposes due primarily to differences in depreciation,
including hotel properties, for federal income tax purposes. Deferred income taxes relate primarily
to our TRSs and are accounted for using the asset and liability method. Under this method, deferred
income taxes are recognized for temporary differences between the financial reporting bases of
assets and liabilities of our TRSs and their respective tax bases and for their operating loss and
tax credit carry forwards based on enacted tax rates expected to be in effect when such amounts are
realized or settled. However, deferred tax assets are recognized only to the extent that it is more
likely than not that they will be realized based on consideration of available evidence, including
tax planning strategies and other factors.
Although our TRSs may operate at a profit for federal income tax purposes in future periods, we
cannot quantify the value of our deferred tax assets with certainty. Therefore, any deferred tax
assets have been reserved as we have not concluded that it is more likely than not that these
deferred tax assets will be realizable.
(Loss) Earnings Per Share
We have a simple equity capital structure with only common stock outstanding. As a result, (loss)
earnings per share, as presented, represents both basic and dilutive per-share amounts for all
periods presented in the consolidated financial statements.
Subsequent Events
In May 2009, the FASB issued authoritative guidance for subsequent events, which we adopted as
required in the second quarter of 2009. The guidance establishes general standards of accounting
for and disclosures of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued.
Future Accounting Requirements
In June 2009, the FASB issued amended guidance related to the consolidation of VIEs. These
amendments require an enterprise to qualitatively assess the determination of the primary
beneficiary of a VIE based on whether the entity (1) has the power to direct matters that most
significantly impact the activities of the VIE, and (2) has the obligation to absorb losses or the
right to receive benefits of the VIE that could potentially be significant to the VIE. The
amendments change the consideration of kick-out rights in determining if an entity is a VIE, which
may cause certain additional entities to now be considered VIEs. Additionally, they require an
ongoing reconsideration of the primary beneficiary and provide a framework for the events that
trigger a reassessment of whether an entity is a VIE. This guidance is effective for us beginning
January 1, 2010. We are currently assessing the potential impact that the adoption of the new
guidance will have on our financial position and results of operations.
Note 3. Agreements and Transactions with Related Parties
We have an advisory agreement with the advisor whereby the advisor performs certain services for us
for a fee. Under the terms of this agreement, which was amended and renewed effective October 1,
2009, the advisor manages our day-to-day operations, for which we pay the advisor asset management
and performance fees, and structures and negotiates the purchase and sale of investments and debt
placement transactions for us, for which we pay the advisor structuring and subordinated
disposition fees. In addition, we reimburse the advisor for certain administrative duties
performed on our behalf. We also have certain agreements with joint ventures. These transactions
are described below.
Asset Management and Performance Fees
Under the advisory agreement, we pay the advisor asset management and performance fees, each of
which are 1/2 of 1% per annum of our average invested assets and are computed as provided for in
the advisory agreement. The performance fees are subordinated to the performance criterion, a
non-compounded cumulative annual distribution return of 6% per annum. The asset management and
performance fees are payable in cash or restricted shares of our common stock at the advisors
option. If the advisor elects to receive all or a portion of its fees in restricted shares, the
number of restricted shares issued is determined by dividing the dollar amount of fees by our most
recently published estimated net asset value per share as approved by our board of directors. For
2009 and 2008, the advisor elected to receive its asset management fees in cash and its performance
fees in restricted shares of our common stock. For 2007, the advisor elected to receive both its
asset management and performance fees in restricted shares of our common stock. We incurred base
asset management fees of $11.7 million, $12.0 million and $9.0 million in 2009, 2008 and 2007,
respectively, with performance fees in like amounts, both of which are included in Property
expenses in the consolidated financial statements. At December 31, 2009, the advisor owned
5,738,582 shares (4.7%) of our common stock.
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Notes to Consolidated Financial Statements
Transaction Fees
Under the advisory agreement, we also pay the advisor acquisition fees for structuring and
negotiating investments and related mortgage financing on our behalf. Acquisition fees average 4.5%
or less of the aggregate cost of investments acquired and are comprised of a current portion of
2.5%, which is paid at the date the property is purchased, and a deferred portion of 2%, which is
payable in equal annual installments each January of the three calendar years following the date a
property was purchased, subject to satisfying the 6% performance criterion. Interest on unpaid
installments is 5% per year. During 2009, 2008 and 2007, we incurred current acquisition fees of
$3.0 million, $4.2 million and $17.2 million, respectively, and deferred acquisition fees of $2.4
million, $3.4 million and $13.9 million, respectively. In addition, in May 2008,
CPA®:17 Global purchased from us an additional interest in a venture as described
below. In connection with this purchase, CPA®:17 Global assumed from us deferred
acquisition fees payable totaling $0.6 million. Unpaid installments of deferred acquisition fees
totaled $9.0 million and $15.7 million at December 31, 2009 and 2008, respectively, and are
included in Due to affiliates in the consolidated financial statements. We paid annual deferred
acquisition fee installments of $9.1 million and $29.5 million in cash to the advisor in January
2009 and 2008, respectively. We paid our first installment in January 2008.
We also pay fees to the advisor for services provided to us in connection with the disposition of
investments. These fees, which are subordinated to the performance criterion and certain other
provisions included in the advisory agreement, are deferred and are payable to the advisor only in
connection with a liquidity event. Subordinated disposition fees totaled $1.0 million at December
31, 2009. There were no subordinated disposition fees at December 31, 2008 as we did not sell any
assets in 2008.
Other Expenses
We reimburse the advisor for various expenses it incurs in the course of providing services to us.
We reimburse certain third-party expenses paid by the advisor on our behalf, including
property-specific costs, professional fees, office expenses and business development expenses. In
addition, we reimburse the advisor for the allocated costs of personnel and overhead in providing
management of our day-to-day operations, including accounting services, shareholder services,
corporate management, and property management and operations. We do not reimburse the advisor for
the cost of personnel if these personnel provide services for transactions for which the advisor
receives a transaction fee, such as acquisitions, dispositions and refinancings. We incurred
personnel reimbursements of $3.1 million, $3.1 million and $2.3 million for 2009, 2008 and 2007,
respectively, which are included in General and administrative expenses in the consolidated
financial statements.
The advisor is obligated to reimburse us for the amount by which our operating expenses exceeds the
2%/25% guidelines (the greater of 2% of average invested assets or 25% of net income) as defined in
the advisory agreement for any twelve-month period. If in any year our operating expenses exceed
the 2%/25% guidelines, the advisor will have an obligation to reimburse us for such excess, subject
to certain conditions. If our independent directors find that the excess expenses were justified
based on any unusual and nonrecurring factors that they deem sufficient, the advisor may be paid in
future years for the full amount or any portion of such excess expenses, but only to the extent
that the reimbursement would not cause our operating expenses to exceed this limit in any such
year. We will record any reimbursement of operating expenses as a liability until any contingencies
are resolved and will record the reimbursement as a reduction of asset management and performance
fees at such time that a reimbursement is fixed, determinable and irrevocable. Our operating
expenses have not exceeded the amount that would require the advisor to reimburse us.
Joint Ventures and Other Transactions with Affiliates
Together with certain affiliates, we participate in an entity that leases office space used for the
administration of real estate entities. Under the terms of an agreement among the participants in
this entity, rental, occupancy and leasehold improvement costs are allocated among the participants
based on gross revenues and are adjusted quarterly. Our share of expenses incurred was $0.8
million, $0.8 million and $0.5 million in 2009, 2008 and 2007, respectively. Based on gross
revenues through December 31, 2009, our current share of future annual minimum lease payments under
this agreement would be $0.7 million annually through 2016.
We own interests in entities ranging from 25% to 70%, as well as a jointly-controlled
tenant-in-common interest in a property, with the remaining interests held by affiliates. We
consolidate certain of these entities (Note 2) and account for the remainder under the equity
method of accounting (Note 6).
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Notes to Consolidated Financial Statements
In June 2008, our affiliate, CPA®:17 Global, exercised its option to purchase an
additional 49.99% interest in a domestic venture in which we and CPA®:17 Global
previously held 99.99% and 0.01% interests, respectively. In connection with this transaction, we
recognized a gain of $0.1 million as a result of the sale of our interest in the venture. We
continue to consolidate this investment because, in our capacity as the managing member, we have
the right to control operations as well as the ability to dissolve the venture or otherwise
purchase the interest of the other member.
In June 2007, we met our performance criterion, and as a result, amounts included in Due to
affiliates in the consolidated balance sheets totaling $45.9 million at June 30, 2007, consisting
of performance fees of $11.9 million, deferred acquisition fees of $31.7 million and interest
thereon of $2.3 million, became payable to the advisor. We paid the previously deferred performance
fees totaling $11.9 million to the advisor in July 2007 in the form of 1,194,549 restricted shares
of our common stock. The deferred acquisition fees of $31.7 million and interest thereon of $2.3
million were payable to the advisor in cash beginning in January 2008. We paid installments of
$28.3 million and $4.7 million in January 2008 and 2009, respectively, and paid the remaining
installment of $1.1 million in January 2010. These amounts are exclusive of deferred acquisition
fees and interest thereon incurred in connection with transactions completed subsequent to meeting
the performance criterion.
Note 4. Net Investments in Properties
Real Estate
Real estate, which consists of land and buildings leased to others, at cost, and accounted for as
operating leases, is summarized as follows (in thousands):
December 31, | ||||||||
2009 | 2008 | |||||||
Land |
$ | 345,347 | $ | 340,216 | ||||
Buildings |
1,351,525 | 1,320,944 | ||||||
Less: Accumulated depreciation |
(112,385 | ) | (76,943 | ) | ||||
$ | 1,584,487 | $ | 1,584,217 | |||||
Operating Real Estate
Operating real estate, which consists primarily of our hotel operations, at cost, is summarized as
follows (in thousands):
December 31, | ||||||||
2009 | 2008 | |||||||
Land |
$ | 8,296 | $ | 8,296 | ||||
Buildings |
75,422 | 74,480 | ||||||
Less: Accumulated depreciation |
(6,448 | ) | (3,306 | ) | ||||
$ | 77,270 | $ | 79,470 | |||||
Acquisitions of Real Estate
2009 In July 2009, a venture in which we and an affiliate hold 51% and 49% interests,
respectively, and which we consolidate, entered into an investment in Hungary for a total cost of
approximately $93.6 million, inclusive of noncontrolling interest of $45.9 million and acquisition
fees payable to the advisor. In connection with this investment, which was deemed to be a real
estate asset acquisition, we capitalized acquisition-related costs and fees totaling $4.6 million,
inclusive of amounts attributable to noncontrolling interests of $2.3 million.
2008 During 2008, we acquired six investments in properties located in the United States,
Finland, France and Germany at a total cost of $125.4 million.
Real Estate Under Construction
2009 As of September 30, 2009, we consolidated a domestic build-to-suit project that was
previously accounted for under the equity method of accounting (Note 6). During 2008, we entered
into this domestic build-to-suit project for a total cost of up to $61.2 million that we accounted
for under the equity method of accounting as it constituted an ADC equity arrangement (Note 2). Total
estimated construction costs for this project were increased to $63.0 million during 2009. The
ADC equity arrangement provided for a fixed annual interest rate of 5.8% and was scheduled to
mature in April 2010. We were committed to purchase the property at a fixed price upon completion,
and the borrower had little or no equity in the transaction. Costs incurred on this project through
December 31, 2009 of $61.6 million have been presented as Real estate under construction in the
consolidated balance sheet.
CPA®:16 Global 2009 10-K 58
Table of Contents
Notes to Consolidated Financial Statements
Additionally, during 2009, we entered into and completed a domestic expansion project for an
existing tenant totaling $4.5 million. Capitalized acquisition-related costs and fees related to
this project totaled $0.2 million. Upon completion of this expansion, we sold the property to an
affiliate of our tenant for $50.6 million, net of selling costs (Note 17).
2008 During 2008, we entered into two domestic build-to-suit projects for a total cost of up to
$12.2 million, based on estimated construction costs. Costs incurred on these projects through
December 31, 2008 of $0.5 million have been presented as Real estate under construction in the
consolidated balance sheet.
Scheduled future minimum rents, exclusive of renewals and expenses paid by tenants, percentage of
sales rents and future CPI based adjustments, under non-cancelable operating leases are as
follows (in thousands):
Years ending December 31, | ||||
2010 |
$ | 160,135 | ||
2011 |
160,640 | |||
2012 |
161,007 | |||
2013 |
161,308 | |||
2014 |
161,713 | |||
Thereafter through 2031 |
1,789,242 |
There were no percentage rents for operating leases in 2009, 2008 and 2007.
Note 5. Net Investment in Direct Financing Leases
Net investment in direct financing leases is summarized as follows (in thousands):
December 31, | ||||||||
2009 | 2008 | |||||||
Minimum lease payments receivable |
$ | 546,606 | $ | 564,513 | ||||
Unguaranteed residual value |
263,380 | 259,506 | ||||||
809,986 | 824,019 | |||||||
Less: unearned income |
(467,931 | ) | (482,684 | ) | ||||
$ | 342,055 | $ | 341,335 | |||||
See Note 11 for a discussion of impairment charges incurred during 2009 and 2008, respectively.
Scheduled future minimum rents, exclusive of renewals and expenses paid by tenants, percentage of
sales rents and future CPI based adjustments, under non-cancelable direct financing leases are as
follows (in thousands):
Years ending December 31, | ||||
2010 |
$ | 31,261 | ||
2011 |
31,314 | |||
2012 |
31,375 | |||
2013 |
31,429 | |||
2014 |
31,487 | |||
Thereafter through 2031 |
389,740 |
There were no percentage rents for direct financing leases in 2009, 2008 and 2007.
CPA®:16 Global 2009 10-K 59
Table of Contents
Notes to Consolidated Financial Statements
Note 6. Equity Investments in Real Estate
We own interests in single-tenant net leased properties leased to corporations through
noncontrolling interests in (i) partnerships and limited liability companies in which our ownership
interests are 50% or less but over which we exercise significant influence, and (ii) as
tenants-in-common subject to common control (Note 2). All of the underlying investments are owned
with affiliates. We account for these investments under the equity method of accounting (i.e., at
cost, increased or decreased by our share of earnings or losses, less distributions, plus
fundings).
Our equity investments in real estate included an investment in a mortgage loan (an Acquisition,
Development and Construction, or ADC, arrangement) where we participated in residual interests
through the loan provisions or other contracts and which we concluded was more appropriately
treated as a hypothetical investment in real estate. This investment was reflected as part of
equity method investments in real estate and our loan position was treated as preference capital to
the hypothetical partnership rather than a loan, with no interest income recorded. We acquired the
equity interest and consolidated this investment in our financial statements at September 30, 2009.
The acquisition of this interest did not have a material impact on our financial position and
results of operations.
During 2009, we incurred impairment charges in Income from continuing operations totaling $50.9
million on several of our consolidated investments. Primarily as a result of these impairment
charges, our 2009 results reflect a loss from continuing operations before income taxes
attributable to CPA®:16 Global shareholders. Because of the loss reflected in our 2009
results, we have provided disaggregated summarized financial information for our unconsolidated
ventures in the tables below.
The following table sets forth our ownership interests in our equity investments in real estate and
their respective carrying values. The carrying value of these ventures is affected by the timing
and nature of distributions (dollars in thousands):
Ownership | Carrying Value at | |||||||||||||
Interest at | December 31, | |||||||||||||
Lessee | Subsidiary Name(s) | December 31, 2009 | 2009 | 2008 | ||||||||||
Equity Investments in Real Estate: |
||||||||||||||
U-Haul Moving Partners, Inc. and Mercury Partners, LP |
UH Storage (DE) LP | 31 | % | $ | 33,834 | $ | 34,817 | |||||||
The New York Times Company |
620 Eighth NYT (NY) LP & 620 Eighth Lender NYT LP | 27 | % | 33,195 | | |||||||||
Schuler A.G. (a) |
Property in Göppingen, Germany (b) | 33 | % | 23,469 | 22,982 | |||||||||
Hellweg Die Profi-Baumarkte GmbH & Co. KG (Hellweg 1) (a) |
Wegell GMBH | 25 | % | 18,934 | 16,058 | |||||||||
TietoEnator Plc (a) |
Finit (FI) LLC | 40 | % | 8,488 | 8,385 | |||||||||
Police Prefecture, French Government (a) (c) |
Tissue SARL | 50 | % | 8,268 | 13,310 | |||||||||
OBI A.G. (a) (c) |
Pol Beaver LLC | 25 | % | 6,794 | 8,829 | |||||||||
Pohjola Non-life Insurance Company (a) (c) |
Pohj Landlord (Finland) LLC | 40 | % | 6,632 | 7,696 | |||||||||
Frontier Spinning Mills, Inc. |
FRO SPIN (NC) LLC | 40 | % | 6,077 | 15,551 | |||||||||
Actebis Peacock GmbH. (a) |
Tech Landlord (GER) LLC | 30 | % | 5,644 | 5,833 | |||||||||
Actuant Corporation (a) |
GB-ACT (GER) LP | 50 | % | 2,758 | 2,845 | |||||||||
Consolidated Systems, Inc. |
Property in Columbia, South Carolina (b) | 40 | % | 2,131 | 2,164 | |||||||||
Lindenmaier A.G. (a) |
Linden (GER) LLC | 33 | % | 1,569 | 4,565 | |||||||||
Thales S.A. (a) |
BBA I Invest SARL | 35 | % | 356 | | |||||||||
158,149 | 143,035 | |||||||||||||
ADC Equity Arrangement: |
||||||||||||||
Soho House Beach House LLC |
Carey 16 Lending Corp. | N/A | | 42,085 | ||||||||||
$ | 158,149 | $ | 185,120 | |||||||||||
(a) | Carrying value of investment is affected by the impact of fluctuations in the exchange rate of the Euro. |
CPA®:16 Global 2009 10-K 60
Table of Contents
Notes to Consolidated Financial Statements
(b) | We own an interest in this property through a tenant-in-common interest. | |
(c) | The decrease in carrying value was primarily due to cash distributions made to us by the venture. |
The New York Times Company
In March 2009, 620 Eighth NYT (NY) LP and 620 Eighth Lender NYT LP completed a net lease financing
transaction with respect to a leasehold condominium interest, encompassing approximately
750,000 rentable square feet, in the office headquarters of The New York Times Company for
approximately $233.7 million, inclusive of acquisition fees payable to the advisor. We, our advisor
and another affiliate, CPA®:17 Global, hold 27.25% 17.75% and 55% interests,
respectively, in both 620 Eighth NYT (NY) LP and 620 Eighth Lender NYT LP. Our share of the
purchase price was approximately $64.2 million, which we funded with our existing cash resources.
We account for this investment under the equity method of accounting as we do not have a
controlling interest in the entity but exercise significant influence over it. In connection with
this investment, which was deemed a direct financing lease, 620 Eighth NYT (NY) LP and 620 Eighth
Lender NYT LP capitalized acquisition-related costs and fees totaling $8.7 million. In August
2009, 620 Eighth NYT (NY) LP and 620 Eighth Lender NYT LP obtained mortgage financing on the New
York Times property of $119.8 million at an annual interest rate of LIBOR plus 4.75% that has been
capped at 8.75% through the use of an interest rate cap. This new financing has a term of five
years.
Schuler A.G.
In 2007, we and an affiliate obtained 33% and 67% tenant-in-common interests in a property in
Göppingen, Germany leased to Schuler, A.G. for a total cost of $73.8 million.
Hellweg Die Profi-Baumarkte GmbH & Co. KG
During 2009, Wegell GmbH prepaid $7.4 million of its non-recourse mortgage obligation in exchange
for the lenders agreement to amend certain loan covenants related to the tenant. Wegell GmbH
subsequently placed $5.3 million into escrow to be used for an expansion of a property and received
additional proceeds of $3.5 million from the same mortgage loan to partially finance the expansion.
OBI A.G.
At December 31, 2009, the carrying value of this investment included our share of the net loss on
interest rate swap derivative instruments recognized by the venture during 2009.
Frontier Spinning Mills, Inc.
In 2008, we and an affiliate obtained 40% and 60% interests, respectively, in FRO SPIN (NC) LLC, a
domestic venture that leases properties to Frontier Spinning Mills, Inc., at a total cost of $38.9
million. In July 2009, FRO SPIN (NC) LLC obtained mortgage financing of $23.4 million and
distributed the proceeds to the venture partners.
Actebis Peacock GmbH
In 2008,
we and an affiliate obtained 30% and 70% interests, respectively, in a German venture that
leases properties to Actebis Peacock GmbH at a total cost of $69.4 million, including a commitment
to construct an expansion for a total cost of up to $11.1 million. The venture obtained
non-recourse mortgage financing of $36.1 million, with a fixed annual interest rate of 6.5% and a
term of 7 years. The venture also obtained a commitment for additional financing of up to $7.8
million for the purpose of constructing the expansion. No costs had been incurred and no mortgage
proceeds had been drawn down in connection with the proposed expansion at December 31, 2009.
Lindenmaier A.G.
In 2007, we and an affiliate obtained 33% and 67% interests, respectively, in Linden (GER) LLC, a
German venture that leases properties to Lindenmaier A.G., at a total cost of $30.8 million. Linden
(GER) LLC simultaneously obtained mortgage financing of $12.8 million and distributed the proceeds
to the venture partners. Amounts are based on the exchange rate of the Euro at the date of
acquisition and financing.
In April 2009, Lindenmaier A.G. filed for bankruptcy in Germany. In July 2009, the venture entered
into an interim lease agreement with Lindenmaier that expired in February 2010 and was then
converted to a month-to-month lease. This interim agreement provides for substantially lower rental
income than the original lease. We recognized other-than-temporary impairment charges of $2.7
million and $1.4 million during 2009 and 2008, respectively, in connection with this venture. (Note
11).
CPA®:16 Global 2009 10-K 61
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Notes to Consolidated Financial Statements
During 2009 and 2008, Linden (GER) LLC incurred impairment charges of $12.3 million and less than
$0.1 million to reduce its carrying value in the properties to the properties estimated fair
value. Other-than-temporary impairment charges on equity investments in real estate are calculated
using a different method than impairment charges related to net investments in properties and net
investments in direct financing leases, and therefore the other-than-temporary impairment charges
recognized by us during 2009 and 2008 are not comparable to the impairment charges recognized by
Linden (GER) LLC. See Impairments in Note 2 for an explanation of each method.
Thales S.A.
In July 2009, this venture sold four of its five properties back to the tenant for $46.6 million
and recognized a gain on sale of $11.1 million. The proceeds were used to partially repay the
existing non-recourse mortgage loan on these properties, which had an outstanding balance of $74.7
million at the date of the sale. The remaining loan balance of $28.1 million is collateralized by
the unsold fifth property. We recognized net other-than-temporary impairment charges of $0.9
million and $1.7 million during 2009 and 2008, respectively in connection with this venture (Note
11). At December 31, 2008, our proportionate share of losses at the equity investment level,
including impairment charges, was greater than our investment basis, and as such, the carrying
value of our equity investment was reduced to zero.
During 2009 and 2008, the venture that owns the Thales, S.A. properties incurred impairment charges
of $0.8 million and $35.4 million to reduce its carrying value in several of the properties to
their estimated fair value. Other-than-temporary impairment charges recognized by us during 2009
and 2008 are not comparable to the impairment charges recognized by the venture. See Impairments in
Note 2 for an explanation of each method.
Soho House Beach House LLC
In 2008, we entered into a domestic build-to-suit project for a total cost of up to $61.2 million
that we accounted for under the equity method of accounting as it constituted an ADC equity
arrangement (Note 2). Total estimated construction costs were increased to $63.0 million during
2009. The ADC equity arrangement provided for a fixed annual interest rate of 5.8%
and was scheduled to mature in April 2010. We were committed to purchase the property at a fixed
price upon completion, and the borrower had little or no equity in the transaction. At December 31,
2008, we had funded $37.0 million of our total commitment of $63.0 million. We consolidated this
investment in our financial statements from September 30, 2009.
The following tables present summarized balance sheet information for our equity investments in
real estate. Amounts provided are the total amounts attributable to the ventures and do not
represent our proportionate share (in thousands):
December 31, 2009 | ||||||||||||||||||||||||||||||||||||||||||||
620 Eighth NYT | ||||||||||||||||||||||||||||||||||||||||||||
(NY) LP & 620 | Property in | |||||||||||||||||||||||||||||||||||||||||||
Eighth Lender | FRO SPIN (NC) | Linden (GER) | Pohj Landlord | UH Storage (DE) | Göppingen, | |||||||||||||||||||||||||||||||||||||||
Total | NYT LP (d) | Finit (FI) LLC | LLC | LLC | (Finland) LLC | Tissue SARL | LP | Wegell GMBH | Germany | All Others (e) | ||||||||||||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||||||||||||||
Net investments in real estate (a) |
$ | 1,336,512 | $ | 235,608 | $ | 87,261 | $ | 38,809 | $ | 16,965 | $ | 92,431 | $ | 92,398 | $ | 231,202 | $ | 183,588 | $ | 73,868 | $ | 284,382 | ||||||||||||||||||||||
Intangible assets |
109,472 | | 8,401 | | | 10,018 | 14,993 | 39,457 | | | 36,603 | |||||||||||||||||||||||||||||||||
Other assets, net (b) |
58,391 | 6,151 | 3,130 | 335 | 1,089 | 1,828 | 1,954 | 23,442 | 12,293 | 442 | 7,727 | |||||||||||||||||||||||||||||||||
Total assets |
$ | 1,504,375 | $ | 241,759 | $ | 98,792 | $ | 39,144 | $ | 18,054 | $ | 104,277 | $ | 109,345 | $ | 294,101 | $ | 195,881 | $ | 74,310 | $ | 328,712 | ||||||||||||||||||||||
Liabilities and Equity |
||||||||||||||||||||||||||||||||||||||||||||
Debt |
$ | 932,778 | $ | 119,154 | $ | 75,785 | $ | 23,300 | $ | 12,656 | $ | 85,729 | $ | 90,602 | $ | 164,328 | $ | 106,937 | $ | | $ | 254,287 | ||||||||||||||||||||||
Other liabilities (c) |
70,533 | 2,520 | 1,421 | 538 | 909 | 2,000 | 2,571 | 20,234 | 14,008 | 6,108 | 20,224 | |||||||||||||||||||||||||||||||||
Total liabilities |
1,003,311 | 121,674 | 77,206 | 23,838 | 13,565 | 87,729 | 93,173 | 184,562 | 120,945 | 6,108 | 274,511 | |||||||||||||||||||||||||||||||||
Partners/ members equity |
501,064 | 120,085 | 21,586 | 15,306 | 4,489 | 16,548 | 16,172 | 109,539 | 74,936 | 68,202 | 54,201 | |||||||||||||||||||||||||||||||||
Total liabilities and equity |
$ | 1,504,375 | $ | 241,759 | $ | 98,792 | $ | 39,144 | $ | 18,054 | $ | 104,277 | $ | 109,345 | $ | 294,101 | $ | 195,881 | $ | 74,310 | $ | 328,712 | ||||||||||||||||||||||
CPA®:16 Global 2009 10-K 62
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Notes to Consolidated Financial Statements
December 31, 2008 | ||||||||||||||||||||||||||||||||||||||||
Property in | ||||||||||||||||||||||||||||||||||||||||
FRO SPIN (NC) | Linden (GER) | Pohj Landlord | UH Storage (DE) | Göppingen, | ||||||||||||||||||||||||||||||||||||
Total | Finit (FI) LLC | LLC | LLC | (Finland) LLC | Tissue SARL | LP | Wegell GMBH | Germany | All Others (e) | |||||||||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||||||||||
Net investments in real estate (a) |
$ | 1,150,415 | $ | 87,825 | $ | 38,866 | $ | 29,136 | $ | 92,851 | $ | 92,710 | $ | 235,930 | $ | 181,261 | $ | 73,254 | $ | 318,582 | ||||||||||||||||||||
Intangible assets |
125,698 | 9,437 | | 1,122 | 11,482 | 16,292 | 42,108 | | | 45,257 | ||||||||||||||||||||||||||||||
Other assets, net (b) |
102,773 | 1,777 | 373 | 739 | 2,175 | 9,051 | 22,066 | 7,220 | 14 | 59,358 | ||||||||||||||||||||||||||||||
Total assets |
$ | 1,378,886 | $ | 99,039 | $ | 39,239 | $ | 30,997 | $ | 106,508 | $ | 118,053 | $ | 300,104 | $ | 188,481 | $ | 73,268 | $ | 423,197 | ||||||||||||||||||||
Liabilities and Equity |
||||||||||||||||||||||||||||||||||||||||
Debt |
$ | 850,125 | $ | 76,170 | $ | | $ | 12,574 | $ | 85,419 | $ | 89,924 | $ | 168,202 | $ | 113,754 | $ | | $ | 304,082 | ||||||||||||||||||||
Other liabilities (c) |
61,110 | 1,442 | 361 | 691 | 1,955 | 1,855 | 19,302 | 11,390 | 6,434 | 17,680 | ||||||||||||||||||||||||||||||
Total liabilities |
911,235 | 77,612 | 361 | 13,265 | 87,374 | 91,779 | 187,504 | 125,144 | 6,434 | 321,762 | ||||||||||||||||||||||||||||||
Partners/ members equity |
467,651 | 21,427 | 38,878 | 17,732 | 19,134 | 26,274 | 112,600 | 63,337 | 66,834 | 101,435 | ||||||||||||||||||||||||||||||
Total liabilities and equity |
$ | 1,378,886 | $ | 99,039 | $ | 39,239 | $ | 30,997 | $ | 106,508 | $ | 118,053 | $ | 300,104 | $ | 188,481 | $ | 73,268 | $ | 423,197 | ||||||||||||||||||||
(a) | Net investments in real estate consists of net investments in properties and net investments in direct financing leases. | |
(b) | Other assets, net consisted primarily of escrow balances, tenant security deposits held by lenders and restricted cash balances aggregating $31.2 million and $25.9 million at December 31, 2009 and 2008, respectively, and cash and cash equivalents balances aggregating $18.3 million and $23.0 million at December 31, 2009 and 2008, respectively. At December 31, 2008, Other assets, net also included contributions aggregating $51.8 million related to the Soho House Beach House ADC arrangement and a related note receivable. | |
(c) | Other liabilities consists primarily of miscellaneous amounts held on behalf of tenants and prepaid and deferred rent and security deposits. | |
(d) | We acquired our interest in 620 Eighth NYT (NY) LP and 620 Eighth Lender NYT LP in 2009 (see The New York Times Company above). | |
(e) | All Others includes unconsolidated ventures that were not significant to the consolidated financial statements. |
CPA®:16 Global 2009 10-K 63
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Notes to Consolidated Financial Statements
The following tables present summarized income statement information for our equity investments in
real estate. Amounts provided are the total amounts attributable to the ventures and do not
represent our proportionate share (in thousands):
Year ended December 31, 2009 | ||||||||||||||||||||||||||||||||||||||||||||
620 Eighth NYT | ||||||||||||||||||||||||||||||||||||||||||||
(NY) LP & 620 | Property in | |||||||||||||||||||||||||||||||||||||||||||
Eighth Lender | FRO SPIN (NC) | Linden (GER) | Pohj Landlord | UH Storage (DE) | Göppingen, | |||||||||||||||||||||||||||||||||||||||
Total | NYT LP (e) | Finit (FI) LLC | LLC (f) | LLC | (Finland) LLC | Tissue SARL | LP | Wegell GMBH | Germany | All Others (g) | ||||||||||||||||||||||||||||||||||
Revenues |
||||||||||||||||||||||||||||||||||||||||||||
Lease revenues (a) |
$ | 140,230 | $ | 21,751 | $ | 8,636 | $ | 4,469 | $ | 2,000 | $ | 9,240 | $ | 8,272 | $ | 30,589 | $ | 14,881 | $ | 6,568 | $ | 33,824 | ||||||||||||||||||||||
Other operating income |
2,731 | | 6 | | | | 255 | 12 | | | 2,458 | |||||||||||||||||||||||||||||||||
142,961 | 21,751 | 8,642 | 4,469 | 2,000 | 9,240 | 8,527 | 30,601 | 14,881 | 6,568 | 36,282 | ||||||||||||||||||||||||||||||||||
Operating Expenses |
||||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization |
(28,015 | ) | | (2,994 | ) | | (953 | ) | (3,461 | ) | (2,683 | ) | (7,379 | ) | | | (10,545 | ) | ||||||||||||||||||||||||||
Impairment charges (b) |
(13,118 | ) | | | | (12,340 | ) | | | | | | (778 | ) | ||||||||||||||||||||||||||||||
Other operating expenses (c) |
(10,475 | ) | (24 | ) | (740 | ) | (2 | ) | (1,555 | ) | (476 | ) | (804 | ) | (241 | ) | (1,476 | ) | | (5,157 | ) | |||||||||||||||||||||||
(51,608 | ) | (24 | ) | (3,734 | ) | (2 | ) | (14,848 | ) | (3,937 | ) | (3,487 | ) | (7,620 | ) | (1,476 | ) | | (16,480 | ) | ||||||||||||||||||||||||
Other Income and Expenses |
||||||||||||||||||||||||||||||||||||||||||||
Other income and (expenses), net (d) |
9,749 | 1 | 48 | | (4 | ) | (13 | ) | 12 | 8 | 20 | 310 | 9,367 | |||||||||||||||||||||||||||||||
Interest expense |
(46,937 | ) | (2,042 | ) | (3,901 | ) | (845 | ) | (738 | ) | (3,845 | ) | (3,991 | ) | (10,861 | ) | (5,104 | ) | | (15,610 | ) | |||||||||||||||||||||||
(37,188 | ) | (2,041 | ) | (3,853 | ) | (845 | ) | (742 | ) | (3,858 | ) | (3,979 | ) | (10,853 | ) | (5,084 | ) | 310 | (6,243 | ) | ||||||||||||||||||||||||
Net Income (Loss) |
$ | 54,165 | $ | 19,686 | $ | 1,055 | $ | 3,622 | $ | (13,590 | ) | $ | 1,445 | $ | 1,061 | $ | 12,128 | $ | 8,321 | $ | 6,878 | $ | 13,559 | |||||||||||||||||||||
CPA®:16 Global 2009 10-K 64
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Year ended December 31, 2008 | ||||||||||||||||||||||||||||||||||||||||
Property in | ||||||||||||||||||||||||||||||||||||||||
FRO SPIN (NC) | Linden (GER) | Pohj Landlord | UH Storage (DE) | Göppingen, | ||||||||||||||||||||||||||||||||||||
Total | Finit (FI) LLC | LLC (f) | LLC | (Finland) LLC | Tissue SARL | LP | Wegell GMBH | Germany | All Others (g) | |||||||||||||||||||||||||||||||
Revenues |
||||||||||||||||||||||||||||||||||||||||
Lease revenues (a) |
$ | 116,813 | $ | 8,790 | $ | 12 | $ | 2,703 | $ | 9,343 | $ | 8,109 | $ | 28,541 | $ | 15,155 | $ | 6,802 | $ | 37,358 | ||||||||||||||||||||
Other operating income |
4,756 | 278 | | 7 | | 130 | 5 | | | 4,336 | ||||||||||||||||||||||||||||||
121,569 | 9,068 | 12 | 2,710 | 9,343 | 8,239 | 28,546 | 15,155 | 6,802 | 41,694 | |||||||||||||||||||||||||||||||
Operating Expenses |
||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization |
(30,151 | ) | (3,148 | ) | | (148 | ) | (3,638 | ) | (2,819 | ) | (7,379 | ) | | | (13,019 | ) | |||||||||||||||||||||||
Impairment charges (b) |
(35,422 | ) | | | (30 | ) | | | | | | (35,392 | ) | |||||||||||||||||||||||||||
Other operating expenses (c) |
(14,383 | ) | (840 | ) | | (409 | ) | (469 | ) | (766 | ) | (135 | ) | (1,753 | ) | (453 | ) | (9,558 | ) | |||||||||||||||||||||
(79,956 | ) | (3,988 | ) | | (587 | ) | (4,107 | ) | (3,585 | ) | (7,514 | ) | (1,753 | ) | (453 | ) | (57,969 | ) | ||||||||||||||||||||||
Other Income and Expenses |
||||||||||||||||||||||||||||||||||||||||
Other income and (expenses), net (d) |
2,203 | 69 | | (131 | ) | 133 | 302 | 13 | 162 | 8 | 1,647 | |||||||||||||||||||||||||||||
Interest expense |
(46,059 | ) | (4,197 | ) | | (791 | ) | (4,107 | ) | (4,230 | ) | (11,137 | ) | (5,455 | ) | | (16,142 | ) | ||||||||||||||||||||||
(43,856 | ) | (4,128 | ) | | (922 | ) | (3,974 | ) | (3,928 | ) | (11,124 | ) | (5,293 | ) | 8 | (14,495 | ) | |||||||||||||||||||||||
Net (Loss) Income |
$ | (2,243 | ) | $ | 952 | $ | 12 | $ | 1,201 | $ | 1,262 | $ | 726 | $ | 9,908 | $ | 8,109 | $ | 6,357 | $ | (30,770 | ) | ||||||||||||||||||
Year ended December 31, 2007 | ||||||||||||||||||||||||||||||||||||
Property in | ||||||||||||||||||||||||||||||||||||
Linden (GER) | Pohj Landlord | UH Storage (DE) | Göppingen, | |||||||||||||||||||||||||||||||||
Total | Finit (FI) LLC | LLC | (Finland) LLC | Tissue SARL | LP | Wegell GMBH | Germany | All Others (g) | ||||||||||||||||||||||||||||
Revenues |
||||||||||||||||||||||||||||||||||||
Lease revenues (a) |
$ | 100,553 | $ | 7,963 | $ | 510 | $ | 8,454 | $ | 7,109 | $ | 28,541 | $ | 14,115 | $ | 1,808 | $ | 32,053 | ||||||||||||||||||
Other operating income |
5,018 | 550 | | | 594 | 1 | 2 | | 3,871 | |||||||||||||||||||||||||||
105,571 | 8,513 | 510 | 8,454 | 7,703 | 28,542 | 14,117 | 1,808 | 35,924 | ||||||||||||||||||||||||||||
Operating Expenses |
||||||||||||||||||||||||||||||||||||
Depreciation and amortization |
(27,804 | ) | (2,940 | ) | (34 | ) | (3,399 | ) | (2,634 | ) | (7,379 | ) | | | (11,418 | ) | ||||||||||||||||||||
Other operating expenses (c) |
(9,292 | ) | (993 | ) | (1 | ) | (7 | ) | (603 | ) | (83 | ) | (1,256 | ) | (3 | ) | (6,346 | ) | ||||||||||||||||||
(37,096 | ) | (3,933 | ) | (35 | ) | (3,406 | ) | (3,237 | ) | (7,462 | ) | (1,256 | ) | (3 | ) | (17,764 | ) | |||||||||||||||||||
Other Income and Expenses |
||||||||||||||||||||||||||||||||||||
Other income and (expenses), net (d) |
1,571 | 275 | 87 | 104 | 119 | 25 | 149 | | 812 | |||||||||||||||||||||||||||
Interest expense |
(42,625 | ) | (3,974 | ) | (172 | ) | (3,866 | ) | (3,906 | ) | (11,335 | ) | (5,196 | ) | | (14,176 | ) | |||||||||||||||||||
(41,054 | ) | (3,699 | ) | (85 | ) | (3,762 | ) | (3,787 | ) | (11,310 | ) | (5,047 | ) | | (13,364 | ) | ||||||||||||||||||||
Net Income |
$ | 27,421 | $ | 881 | $ | 390 | $ | 1,286 | $ | 679 | $ | 9,770 | $ | 7,814 | $ | 1,805 | $ | 4,796 | ||||||||||||||||||
CPA®:16 Global 2009 10-K 65
Table of Contents
Notes to Consolidated Financial Statements
(a) | Lease revenues consists of rental income and interest income from direct financing leases. | |
(b) | For the years ended December 31, 2009 and 2008, All Other included impairment charges totaling $0.8 million and $35.4 million recognized by the venture that leases properties to Thales, S.A. (see Thales S.A. above). | |
(c) | Other operating expenses consists of property expenses, general and administrative expenses and provision for foreign, state and local income taxes. | |
(d) | Other income and (expenses), net consists primarily of gains (losses) on foreign currency transactions and derivative instruments and other interest income. Included in All Others for the year ended December 31, 2009 was a gain of $11.3 million recognized by a venture in connection with the sale of several properties (see Thales S.A. above). | |
(e) | We acquired our interest in 620 Eighth NYT (NY) LP and 620 Eighth Lender NYT LP in 2009 (see The New York Times Company above). | |
(f) | We acquired our interest in FRO SPIN (NC) LLC in 2008 (see Frontier Spinning Mills, Inc. above). | |
(g) | All Others includes unconsolidated ventures that were not significant to the consolidated financial statements. |
The following tables present summarized cash flow information for certain of our equity investments
in real estate. Amounts provided are the total amounts attributable to the ventures and do not
represent our proportionate share (in thousands):
Year ended December 31, 2009 | ||||||||||||||||||||||||||||||||||||
620 Eighth NYT | ||||||||||||||||||||||||||||||||||||
(NY) LP & 620 | Property in | |||||||||||||||||||||||||||||||||||
Eighth Lender | FRO SPIN (NC) | Linden (GER) | Pohj Landlord | UH Storage (DE) | Göppingen, | |||||||||||||||||||||||||||||||
NYT LP (a) | Finit (FI) LLC | LLC (b) | LLC | (Finland) LLC | Tissue SARL | LP | Wegell GMBH | Germany | ||||||||||||||||||||||||||||
Net cash provided by (used in): |
||||||||||||||||||||||||||||||||||||
Operating activities |
$ | 17,213 | $ | 1,292 | $ | 3,877 | $ | (640 | ) | $ | 2,473 | $ | 2,979 | $ | 20,061 | $ | 7,448 | $ | 7,358 | |||||||||||||||||
Investing activities |
(233,720 | ) | | | | | | | (5,576 | ) | | |||||||||||||||||||||||||
Financing activities |
216,566 | (170 | ) | (4,240 | ) | 1,177 | (2,840 | ) | (9,907 | ) | (19,065 | ) | (2,299 | ) | (6,714 | ) | ||||||||||||||||||||
Effect of exchange rate
changes on cash |
| 103 | | 46 | 26 | (576 | ) | | 10 | (217 | ) | |||||||||||||||||||||||||
Net (decrease) increase in
cash and cash equivalents |
59 | 1,225 | (363 | ) | 583 | (341 | ) | (7,504 | ) | 996 | (417 | ) | 427 | |||||||||||||||||||||||
Cash and cash equivalents,
beginning of year |
| 1,252 | 373 | 376 | 2,128 | 8,770 | 3,447 | 3,475 | 3 | |||||||||||||||||||||||||||
Cash and cash equivalents,
end of year |
$ | 59 | $ | 2,477 | $ | 10 | $ | 959 | $ | 1,787 | $ | 1,266 | $ | 4,443 | $ | 3,058 | $ | 430 | ||||||||||||||||||
CPA®:16 Global 2009 10-K 66
Table of Contents
Notes to Consolidated Financial Statements
Year ended December 31, 2008 | ||||||||||||||||||||||||||||||||
Property in | ||||||||||||||||||||||||||||||||
FRO SPIN (NC) | Linden (GER) | Pohj Landlord | UH Storage (DE) | Göppingen, | ||||||||||||||||||||||||||||
Finit (FI) LLC | LLC (b) | LLC | (Finland) LLC | Tissue SARL | LP | Wegell GMBH | Germany | |||||||||||||||||||||||||
Net cash provided by (used in): |
||||||||||||||||||||||||||||||||
Operating activities |
$ | 1,575 | $ | 373 | $ | 764 | $ | 1,946 | $ | 2,388 | $ | 17,266 | $ | 6,526 | $ | 6,455 | ||||||||||||||||
Investing activities |
| (38,866 | ) | (20 | ) | | | | | (1 | ) | |||||||||||||||||||||
Financing activities |
(3,337 | ) | 38,866 | (867 | ) | (4,960 | ) | (363 | ) | (13,822 | ) | (15,108 | ) | (6,788 | ) | |||||||||||||||||
Effect of exchange rate
changes on cash |
(350 | ) | | 1 | (377 | ) | (1,147 | ) | | (1,183 | ) | 337 | ||||||||||||||||||||
Net (decrease) increase in
cash and cash equivalents |
(2,112 | ) | 373 | (122 | ) | (3,391 | ) | 878 | 3,444 | (9,765 | ) | 3 | ||||||||||||||||||||
Cash and cash equivalents,
beginning of year |
3,364 | | 498 | 5,519 | 7,892 | 3 | 13,240 | | ||||||||||||||||||||||||
Cash and cash equivalents,
end of year |
$ | 1,252 | $ | 373 | $ | 376 | $ | 2,128 | $ | 8,770 | $ | 3,447 | $ | 3,475 | $ | 3 | ||||||||||||||||
Year ended December 31, 2007 | ||||||||||||||||||||||||||||
Property in | ||||||||||||||||||||||||||||
Linden (GER) | Pohj Landlord | UH Storage (DE) | Göppingen, | |||||||||||||||||||||||||
Finit (FI) LLC | LLC | (Finland) LLC | Tissue SARL | LP | Wegell GMBH | Germany | ||||||||||||||||||||||
Net cash provided by (used in): |
||||||||||||||||||||||||||||
Operating activities |
$ | 708 | $ | 897 | $ | 1,918 | $ | 1,992 | $ | 17,097 | $ | 7,811 | $ | 7,813 | ||||||||||||||
Investing activities |
| (30,778 | ) | | | | | (73,817 | ) | |||||||||||||||||||
Financing activities |
240 | 30,396 | (427 | ) | (282 | ) | (17,094 | ) | (2,018 | ) | 66,012 | |||||||||||||||||
Effect of exchange rate
changes on cash |
337 | (17 | ) | 121 | 589 | | 810 | (8 | ) | |||||||||||||||||||
Net increase in cash and
cash equivalents |
1,285 | 498 | 1,612 | 2,299 | 3 | 6,603 | | |||||||||||||||||||||
Cash and cash equivalents,
beginning of year |
2,079 | | 3,907 | 5,593 | | 6,637 | | |||||||||||||||||||||
Cash and cash equivalents,
end of year |
$ | 3,364 | $ | 498 | $ | 5,519 | $ | 7,892 | $ | 3 | $ | 13,240 | $ | | ||||||||||||||
(a) | We acquired our interest in 620 Eighth NYT (NY) LP and 620 Eighth Lender NYT LP in 2009 (see The New York Times Company above). | |
(b) | We acquired our interest in FRO SPIN (NC) LLC in 2008 (see Frontier Spinning Mills, Inc. above). |
CPA®:16 Global 2009 10-K 67
Table of Contents
Notes to Consolidated Financial Statements
The following table presents scheduled debt principal payments during each of the next five years
following December 31, 2009 and thereafter for certain of our equity investments in real estate (in
thousands):
620 Eighth NYT | ||||||||||||||||||||||||||||||||
(NY) LP & 620 | ||||||||||||||||||||||||||||||||
Eighth Lender | FRO SPIN (NC) | Linden (GER) | Pohj Landlord | UH Storage (DE) | ||||||||||||||||||||||||||||
Years ending December 31, | NYT LP | Finit (FI) LLC | LLC | LLC | (Finland) LLC | Tissue SARL | LP | Wegell GMBH | ||||||||||||||||||||||||
2010 |
$ | 2,498 | $ | 1,896 | $ | 315 | $ | 129 | $ | 1,299 | $ | 966 | $ | 4,136 | $ | 3,507 | ||||||||||||||||
2011 |
2,626 | 2,101 | 341 | 129 | 1,523 | 1,106 | 4,415 | 4,676 | ||||||||||||||||||||||||
2012 |
2,761 | 2,306 | 369 | 129 | 1,702 | 1,246 | 4,683 | 4,676 | ||||||||||||||||||||||||
2013 |
2,902 | 2,511 | 399 | 129 | 1,881 | 1,386 | 5,028 | 4,676 | ||||||||||||||||||||||||
2014 |
108,367 | 66,971 | 433 | 129 | 1,971 | 1,584 | 146,066 | 4,676 | ||||||||||||||||||||||||
Thereafter |
| | 21,443 | 12,011 | 77,353 | 84,314 | | 84,726 | ||||||||||||||||||||||||
Total |
$ | 119,154 | $ | 75,785 | $ | 23,300 | $ | 12,656 | $ | 85,729 | $ | 90,602 | $ | 164,328 | $ | 106,937 | ||||||||||||||||
We recognized income from our equity investments in real estate of $13.8 million, $8.8 million and
$2.1 million for the years ended December 31, 2009, 2008 and 2007, respectively. These amounts
represent our share of the income or losses of these ventures as well as certain depreciation and
amortization adjustments related to purchase accounting and other-than-temporary impairment
charges.
CPA®:16 Global 2009 10-K 68
Table of Contents
Notes to Consolidated Financial Statements
Note 7. Notes Receivable
At December 31, 2009 and 2008, notes receivable totaled $363.6 million and $351.2 million,
respectively.
Hellweg 2
In April 2007, we and our affiliates acquired a venture (the property venture) that in turn
acquired a 24.7% ownership interest in a limited partnership. We and our affiliates also acquired a
second venture (the lending venture), which made a loan (the note receivable) to the holder of
the remaining 75.3% interests in the limited partnership (the partner). We refer to this
transaction as the Hellweg 2 transaction. At December 31, 2009 and 2008, the note receivable
totaled $337.4 million and $331.8 million, respectively, inclusive of amounts attributable to
noncontrolling interests of $250.9 million and $246.7 million, respectively.
Under the terms of the note receivable, the lending venture will receive interest at a fixed annual
rate of 8%.
The note receivable matures in April 2017.
In connection with this transaction, the property venture agreed to an option agreement which gives
the property venture the right to purchase, from the partner, an additional 75% interest in the
limited partnership no later than December 2010 at a price which will equal the principal amount of
the note receivable at the time of purchase. Upon exercise of this purchase option, the property
venture would own 99.7% of the limited partnership. The property venture has also agreed to a
second assignable option agreement to acquire the remaining 0.3% interest in the limited
partnership by December 2012. If the property venture does not exercise its option agreements, the
partner has option agreements to put its remaining interests in the limited partnership to the
property venture during 2014 at a price which will equal the principal amount of the note
receivable at the time of purchase.
We have
presented the note receivable on a gross basis and have classified the partners corresponding 75.3
% interest in the limited partnership as redeemable noncontrolling interest in the consolidated
financial statements.
Other
In June 2007, we entered into an agreement to provide a developer with a construction loan of up to
$14.8 million that provides for a variable annual interest rate of LIBOR plus 2.5% and matures in
April 2010. In November 2008, we amended this agreement to provide for a construction loan of up to
$15.8 million at a variable annual interest rate of LIBOR plus 2.5% that matures in June 2010. At
December 31, 2009 and 2008, the balance of the construction loan receivable was $15.6 million and
$9.7 million, respectively, which included amounts funded of $14.8 million and $9.0 million,
respectively.
In addition, we had a note receivable which totaled $9.6 million at both December 31, 2009 and
2008, with a fixed annual interest rate of 6.3% and a maturity date of February 2015.
CPA®:16 Global 2009 10-K 69
Table of Contents
Notes to Consolidated Financial Statements
Note 8. Intangibles
In connection with our acquisition of properties, we have recorded net lease intangibles of $151.0
million, which are being amortized over periods ranging from three years to 40 years. Amortization
of below-market and above-market rent intangibles is recorded as an adjustment to lease revenue,
while amortization of in-place lease and tenant relationship intangibles is included in
depreciation and amortization. Below-market rent intangibles are included in Prepaid and deferred
rental income and security deposits in the consolidated financial statements. Intangibles are
summarized as follows:
December 31, | ||||||||
2009 | 2008 | |||||||
Amortized Intangibles Assets |
||||||||
Management contract |
$ | 874 | $ | 874 | ||||
Franchise agreement |
2,240 | 2,240 | ||||||
Less: accumulated amortization |
(785 | ) | (436 | ) | ||||
2,329 | 2,678 | |||||||
Lease intangibles: |
||||||||
In-place lease |
115,437 | 110,104 | ||||||
Tenant relationship |
34,674 | 31,997 | ||||||
Above-market rent |
44,433 | 48,318 | ||||||
Less: accumulated amortization |
(34,441 | ) | (25,009 | ) | ||||
160,103 | 165,410 | |||||||
162,432 | 168,088 | |||||||
Amortized Below-Market Rent Intangible |
||||||||
Below-market rent |
(43,541 | ) | (40,713 | ) | ||||
Less: accumulated amortization |
5,331 | 3,774 | ||||||
$ | (38,210 | ) | $ | (36,939 | ) | |||
Net amortization of intangibles, including the effect of foreign currency translation, was $8.5
million, $8.4 million and $6.8 million for 2009, 2008 and 2007, respectively. Based on the
intangibles recorded at December 31, 2009, scheduled net annual amortization of intangibles for
each of the next five years is expected to be $8.4 million annually between 2010 and 2014.
Note 9. Fair Value Measurements
In September 2007, the FASB issued authoritative guidance for using fair value to measure assets
and liabilities, which we adopted as required on January 1, 2008, with the exception of
nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value
on a recurring basis, which we adopted as required on January 1, 2009. In April 2009, the FASB
provided additional guidance for estimating fair value when the volume and level of activity for
the asset or liability have significantly decreased, which we adopted as required in the second
quarter of 2009. Fair value is defined as the exit price, or the amount that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. The guidance also establishes a three-tier fair value hierarchy based on
the inputs used in measuring fair value. These tiers are: Level 1, for which quoted market prices
for identical instruments are available in active markets, such as money market funds, equity
securities and U.S. Treasury securities; Level 2, for which there are inputs other than quoted
prices included within Level 1 that are observable for the instrument, such as certain derivative
instruments including interest rate caps and swaps; and Level 3, for which little or no market data
exists, therefore requiring us to develop our own assumptions, such as certain marketable
securities.
CPA®:16 Global 2009 10-K 70
Table of Contents
Notes to Consolidated Financial Statements
Items Measured at Fair Value on a Recurring Basis
The following tables set forth our assets and liabilities that were accounted for at fair value on
a recurring basis at December 31, 2009 and 2008 (in thousands):
Fair Value Measurements at Reporting Date Using: | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||||||
Identical Assets | Observable Inputs | Inputs | ||||||||||||||
Description | December 31, 2009 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Assets: |
||||||||||||||||
Money market funds |
$ | 49,261 | $ | 49,261 | $ | | $ | | ||||||||
Marketable securities |
1,851 | | | 1,851 | ||||||||||||
Derivative assets |
2,228 | | 50 | 2,178 | ||||||||||||
$ | 53,340 | $ | 49,261 | $ | 50 | $ | 4,029 | |||||||||
Liabilities: |
||||||||||||||||
Derivative liabilities |
$ | (380 | ) | $ | | $ | (380 | ) | $ | | ||||||
Fair Value Measurements at Reporting Date Using: | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||||||
Identical Assets | Observable Inputs | Inputs | ||||||||||||||
Description | December 31, 2008 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Assets: |
||||||||||||||||
Money market funds |
$ | 137,203 | $ | 137,203 | $ | | $ | | ||||||||
Marketable securities |
2,192 | | | 2,192 | ||||||||||||
Derivative assets |
2,973 | | | 2,973 | ||||||||||||
$ | 142,368 | $ | 137,203 | $ | | $ | 5,165 | |||||||||
Liabilities: |
||||||||||||||||
Derivative liabilities |
$ | (520 | ) | $ | | $ | (520 | ) | $ | | ||||||
Assets and liabilities presented above exclude assets and liabilities owned by unconsolidated
ventures.
Unobservable Inputs (Level 3 only) | ||||||||||||||||||||||||
Marketable | Derivative | Marketable | Derivative | |||||||||||||||||||||
Securities | Assets | Total Assets | Securities | Assets | Total Assets | |||||||||||||||||||
Year ended December 31, 2009 | Year ended December 31, 2008 | |||||||||||||||||||||||
Beginning balance |
$ | 2,192 | $ | 2,973 | $ | 5,165 | $ | 2,438 | $ | 6,246 | $ | 8,684 | ||||||||||||
Total gains or losses (realized and
unrealized): |
||||||||||||||||||||||||
Included in earnings |
| (799 | ) | (799 | ) | | (3,176 | ) | (3,176 | ) | ||||||||||||||
Included in other comprehensive income |
(28 | ) | 4 | (24 | ) | 55 | (97 | ) | (42 | ) | ||||||||||||||
Amortization and accretion |
(313 | ) | | (313 | ) | (301 | ) | | (301 | ) | ||||||||||||||
Ending balance |
$ | 1,851 | $ | 2,178 | $ | 4,029 | $ | 2,192 | $ | 2,973 | $ | 5,165 | ||||||||||||
The amount of total gains or losses for the
period included in earnings attributable to
the change in unrealized gains or losses
relating to assets still held at the
reporting date |
$ | | $ | (799 | ) | $ | (799 | ) | $ | | $ | (3,176 | ) | $ | (3,176 | ) | ||||||||
CPA®:16 Global 2009 10-K 71
Table of Contents
Notes to Consolidated Financial Statements
Gains and losses (realized and unrealized) included in earnings are reported in Other income and
expenses in the consolidated financial statements.
Our financial instruments had the following carrying value and fair value (in thousands):
December 31, 2009 | December 31, 2008 | |||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
Non-recourse debt |
$ | 1,445,889 | $ | 1,286,300 | $ | 1,438,226 | $ | 1,202,552 | ||||||||
Notes receivable |
362,707 | 363,389 | 351,200 | 341,238 | ||||||||||||
Marketable securities (a) |
1,839 | 1,851 | 2,153 | 2,192 |
(a) | Carrying value represents historical cost for marketable securities. |
We determine the estimated fair value of our debt instruments and notes receivable using a
discounted cash flow model with rates that take into account the credit of the tenants and interest
rate risk. We estimate that our other financial assets and liabilities (excluding net investments
in direct financing leases) had fair values that approximated their carrying values at both
December 31, 2009 and 2008.
Items Measured at Fair Value on a Non-Recurring Basis
At December 31, 2009, we performed our quarterly assessment of the value of our real estate
investments in accordance with current authoritative accounting guidance. We determined the
valuation of these assets using widely accepted valuation techniques, including discounted cash
flow on the expected cash flows of each asset as well as the income capitalization approach, which
considers prevailing market capitalization rates. We reviewed each investment based on the highest
and best use of the investment and market participation assumptions. We determined that the
significant inputs used to value these investments fall within Level 3. Actual results may differ
materially if market conditions or the underlying assumptions change. See Note 11 for a discussion
of impairment charges incurred in 2009.
The following table presents information about our nonfinancial assets that were measured on a fair
value basis for the years ended December 31, 2009 and 2008, respectively. All of the impairment
charges were measured using unobservable inputs (Level 3) (in thousands):
Year ended December 31, 2009 | Year ended December 31, 2008 | |||||||||||||||||||
Total Fair Value | Total Impairment | Total Fair Value | Total Impairment | |||||||||||||||||
Measurements | Charges | Measurements | Charges | |||||||||||||||||
Assets: |
||||||||||||||||||||
Net investments in properties |
$ | 135,541 | $ | 46,152 | $ | | $ | | ||||||||||||
Net investments in direct
financing leases |
167,752 | 2,279 | 55,977 | 890 | ||||||||||||||||
Equity investments in real estate |
1,925 | 3,598 | 4,583 | 3,085 | ||||||||||||||||
Intangible assets |
8,170 | 7,564 | | | ||||||||||||||||
$ | 313,388 | $ | 59,593 | $ | 60,560 | $ | 3,975 | |||||||||||||
Liabilities: |
$ | (1,394 | ) | $ | (37 | ) | $ | | $ | | ||||||||||
Intangible liabilities |
$ | (1,394 | ) | $ | (37 | ) | $ | | $ | | ||||||||||
Note 10. Risk Management and Use of Derivative Financial Instruments
Risk Management
In the normal course of our on-going business operations, we encounter economic risk. There are
three main components of economic risk: interest rate risk, credit risk and market risk. We are
subject to interest rate risk on our interest-bearing liabilities. Credit risk is the risk of
default on our operations and tenants inability or unwillingness to make contractually required
payments. Market risk includes changes in the value of our properties and related loans as well as
changes in the value of our marketable securities due to changes in interest rates or other market
factors. In addition, we own investments in the European Union, Canada, Mexico, Malaysia and
Thailand and are subject to the risks associated with changing foreign currency exchange rates.
CPA®:16 Global 2009 10-K 72
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Notes to Consolidated Financial Statements
Foreign Currency Exchange
We are exposed to foreign currency exchange rate movements, primarily in the Euro and the British
Pound Sterling and, to a lesser extent, certain other currencies. We manage foreign currency
exchange rate movements by generally placing both our debt obligation to the lender and the
tenants rental obligation to us in the same currency, but we are subject to foreign currency
exchange rate movements to the extent of the difference in the timing and amount of the rental
obligation and the debt service. We also face challenges with repatriating cash from our foreign
investments. We may encounter instances where it is difficult to repatriate cash because of
jurisdictional restrictions or because repatriating cash may result in current or future tax
liabilities. Realized and unrealized gains and losses recognized in earnings related to foreign
currency transactions are included in Other income and expenses in the consolidated financial
statements.
Use of Derivative Financial Instruments
When we use derivative instruments, it is generally to reduce our exposure to fluctuations in
interest rates on foreign currency. We have not entered, and do not plan to enter into financial
instruments for trading or speculative purposes. In addition to derivative instruments that we
enter into on our own behalf, we may also be a party to derivative instruments that are embedded in
other contracts, and we may own common stock warrants, granted to us by lessees when structuring
lease transactions, that are considered to be derivative instruments. The primary risks related to
our use of derivative instruments are that a counterparty to a hedging arrangement could default on
its obligation or that the credit quality of the counterparty may be downgraded to such an extent
that it impairs our ability to sell or assign our side of the hedging transaction. While we seek to
mitigate these risks by entering into hedging arrangements with counterparties that are large
financial institutions that we deem to be credit worthy, it is possible that our hedging
transactions, which are intended to limit losses, could adversely affect our earnings.
Furthermore, if we terminate a hedging arrangement, we may be obligated to pay certain costs, such
as transaction or breakage fees. We have established policies and procedures for risk assessment
and the approval, reporting and monitoring of derivative financial instrument activities.
In March 2008, the FASB amended the existing guidance for accounting for derivative instruments and
hedging activities to require additional disclosures that are intended to help investors better
understand how derivative instruments and hedging activities affect an entitys financial position,
financial performance and cash flows. The enhanced disclosure requirements primarily surround the
objectives and strategies for using derivative instruments by their underlying risk as well as a
tabular format of the fair values of the derivative instruments and their gains and losses. The
required additional disclosures are presented below.
The following table sets forth our derivative instruments at December 31, 2009 and 2008 (in
thousands):
Asset Derivatives | Liability Derivatives | |||||||||||||||||
Balance Sheet | Fair Value at December 31, | Fair Value at December 31, | ||||||||||||||||
Location | 2009 | 2008 | 2009 | 2008 | ||||||||||||||
Derivatives designated as
hedging instruments |
||||||||||||||||||
Interest rate caps |
Other assets | $ | 50 | $ | | $ | | $ | | |||||||||
Foreign exchange contracts |
Other liabilities | | | (143 | ) | | ||||||||||||
Interest rate swaps |
Other liabilities | | | (236 | ) | (520 | ) | |||||||||||
50 | | (379 | ) | (520 | ) | |||||||||||||
Derivatives not designated as
hedging instruments |
||||||||||||||||||
Embedded credit derivatives |
Other assets | 963 | 2,095 | | | |||||||||||||
Stock warrants |
Other assets | 1,215 | 878 | | | |||||||||||||
2,178 | 2,973 | | | |||||||||||||||
Total derivatives |
$ | 2,228 | $ | 2,973 | $ | (379 | ) | $ | (520 | ) | ||||||||
CPA®:16 Global 2009 10-K 73
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Notes to Consolidated Financial Statements
The following tables present the impact of derivative instruments on, and their location within,
the consolidated financial statements (in thousands):
Amount of Gain (Loss) | Amount of Gain (Loss) | |||||||||||||||||||||||
Recognized in OCI on Derivative | Reclassified from OCI into Income | |||||||||||||||||||||||
(Effective Portion) | (Effective Portion) | |||||||||||||||||||||||
Derivatives in Cash Flow | Years ended December 31, | Years ended December 31, | ||||||||||||||||||||||
Hedging Relationships | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||
Interest rate caps (a) (b) |
$ | 26 | $ | | $ | | $ | | $ | | $ | | ||||||||||||
Interest rate swaps (a) |
284 | (520 | ) | | | | | |||||||||||||||||
Foreign currency forward contracts (a) (c) |
(143 | ) | | | 27 | | | |||||||||||||||||
Total |
$ | 167 | $ | (520 | ) | $ | | $ | 27 | $ | | $ | | |||||||||||
(a) | During the years ended December 31, 2009, 2008 and 2007, no gains or losses were reclassified from OCI into income related to ineffective portions of hedging relationships or to amounts excluded from effectiveness testing. | |
(b) | Includes gains attributable to noncontrolling interests totaling less than $0.1 million for the year ended December 31, 2009. We obtained this interest rate cap in March 2009. | |
(c) | Gains (losses) reclassified from OCI into income for contracts which have matured are included in Other income and expenses. |
Amount of Gain (Loss) Recognized | ||||||||||||||
in Income on Derivatives | ||||||||||||||
Derivatives not in Cash Flow | Location of Gain (Loss) | Years ended December 31, | ||||||||||||
Hedging Relationships | Recognized in Income | 2009 | 2008 | 2007 | ||||||||||
Embedded credit derivatives (a) |
Other income and (expenses) | $ | (1,136 | ) | $ | (3,406 | ) | $ | 2,741 | |||||
Stock warrants |
Other income and (expenses) | 338 | 230 | | ||||||||||
Total |
$ | (798 | ) | $ | (3,176 | ) | $ | 2,741 | ||||||
(a) | Includes losses attributable to noncontrolling interests totaling $0.8 million and $2.7 million for the years ended December 31, 2009 and 2008, respectively, and a gain attributable to noncontrolling interests totaling $1.4 million for the year ended December 31, 2007. |
See below for information on our purposes for entering into derivative instruments, including those
not designated as hedging instruments, and for information on derivative instruments owned by
unconsolidated ventures, which are excluded from the tables above.
Interest Rate Swaps and Caps
We are exposed to the impact of interest rate changes primarily through our borrowing activities.
To limit this exposure, we attempt to obtain mortgage financing on a long-term, fixed-rate basis.
However, from time to time, we or our venture partners may obtain variable rate non-recourse
mortgage loans and, as a result, may enter into interest rate swap agreements or interest rate cap
agreements with counterparties. Interest rate swaps, which effectively convert the variable rate
debt service obligations of the loan to a fixed rate, are agreements in which one party exchanges a
stream of interest payments for a counterpartys stream of cash flow over a specific period. The
notional, or face, amount on which the swaps are based is not exchanged. Interest rate caps limit
the effective borrowing rate of variable rate debt obligations while allowing participants to share
in downward shifts in interest rates. Our objective in using these derivatives is to limit our
exposure to interest rate movements.
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Notes to Consolidated Financial Statements
The interest rate swap and interest rate cap derivative instruments that we had outstanding at
December 31, 2009 were designated as cash flow hedges and are summarized as follows (dollars in
thousands):
Notional | Effective | Effective | Expiration | Fair Value at | ||||||||||||||
Type | Amount | Interest Rate | Date | Date | December 31, 2009 | |||||||||||||
1-Month LIBOR |
Pay-fixed swap | $ | 3,880 | 6.7 | % | 2/2008 | 2/2018 | $ | (236 | ) | ||||||||
1-Month LIBOR |
Interest rate cap (a) | 29,000 | 6.6 | % | 3/2009 | 3/2012 | 50 | |||||||||||
$ | (186 | ) | ||||||||||||||||
(a) | In February 2009, a venture in which we own a 50% interest, and which we consolidate, repaid a $39.0 million outstanding balance on a non-recourse mortgage loan at a discount for $32.5 million and recognized a corresponding gain of $6.5 million. In connection with this transaction, the venture obtained new non-recourse mortgage financing of approximately $29.0 million. The new debt has an annual interest rate of LIBOR plus 5%, with a minimum rate of 6% and a maximum rate that has been capped at 10% through the use of an interest rate cap. This financing has a term of three years, with two one-year extensions. The applicable interest rate of the related debt was 6.6% at December 31, 2009, and therefore the interest rate cap was not being utilized at that date. |
An unconsolidated venture in which we hold a 25% ownership interest had a non-recourse mortgage
with a total carrying value of $171.2 million and $171.4 million at December 31, 2009 and 2008,
respectively. The mortgage, which was obtained in two tranches, effectively bears interest at
annual interest rates that have been fixed at rates ranging from 5.0% to 5.6% through the use of
interest rate swaps designated as cash flow hedges. The interest rate swaps expire between October
2015 and July 2016 and had a total net fair value liability of $8.3 million and $4.2 million at
December 31, 2009 and 2008.
In April 2008, this venture unwound a swap with a notional value of $31.6 million at the date of
termination and obtained a new interest rate swap with a notional value of $26.5 million. The new
swap, which is designated as a cash flow hedge, effectively fixed the annual interest rate for this
portion of the debt at 5.6% and expires in October 2015. In connection with the interest rate swap
termination, the venture received a settlement payment of $1.1 million and recognized a realized
gain of $1.1 million which is included in the determination of the ventures net income.
In addition, an unconsolidated venture in which we hold a 27.25% ownership interest had a
non-recourse mortgage with a total carrying value of $119.2 million at December 31, 2009. The
mortgage bears interest at an annual interest rate of LIBOR plus 4.8% that has been capped at 8.8%
through the use of an interest rate cap designated as a cash flow hedge. The applicable interest
rate of the related debt was 5.0% at December 31, 2009, and therefore the interest rate cap was not
being utilized at that date. The interest rate cap expires in August 2014 and had an estimated
total fair value of $3.0 million at December 31, 2009.
Our share of changes in the fair value of these interest rate caps and swaps is included in
Accumulated other comprehensive income in equity and reflected unrealized losses of $1.1 million
and $4.0 million for the years ended December 31, 2009 and 2008, respectively.
Foreign Currency Forward Contracts
We have entered into foreign currency forward contracts to hedge certain of our foreign currency
cash flow exposures. A foreign currency forward contract is a commitment to deliver a certain
amount of currency at a certain price on a specific date in the future. By entering into these
contracts, we are locked into a future currency exchange rate, which limits our exposure to the
movement in foreign currency exchange rates.
In January 2009, we entered into foreign currency forward contracts with a total notional amount of
$4.2 million, based on the exchange rate of the Euro at December 31, 2009. These contracts fixed
the exchange rate of the Euro to rates ranging from $1.3307 to $1.3436 with maturity dates between
March 2009 and December 2010.
Embedded Credit Derivatives
In connection with our April 2007 investment in a portfolio of German properties through a venture
in which we have a total effective ownership interest of 26% and which we consolidate, we obtained
non-recourse mortgage financing for which the interest rate has both fixed and variable components.
In connection with providing the financing, the lender entered into an interest rate swap agreement
on its own behalf through which the fixed interest rate component on the financing was converted
into a variable interest rate instrument. Through the venture, we have the right, at our sole
discretion, to prepay this debt at any time and to participate in any realized gain or loss on the
interest rate swap at that time. These participation rights are deemed to be embedded credit
derivatives.
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Notes to Consolidated Financial Statements
Stock Warrants
We own stock warrants that were generally granted to us by lessees in connection with structuring
the initial lease transactions. These warrants are defined as derivative instruments because they
are readily convertible to cash or provide for net cash settlement upon conversion.
Other
Amounts reported in OCI related to derivatives will be reclassified to interest expense as interest
payments are made on our non-recourse variable-rate debt. At December 31, 2009, we estimate that an
additional $0.2 million will be reclassified as interest expense during the next twelve months.
We have agreements with certain of our derivative counterparties that contain certain credit
contingent provisions that could result in a declaration of default against us regarding our
derivative obligations if we either default or are capable of being declared in default on any of
our indebtedness. At December 31, 2009, we have not been declared in default on any of our
derivative obligations. The estimated fair value of our derivatives that were in a net liability
position was $0.4 million at December 31, 2009, which includes accrued interest but excludes any
adjustment for nonperformance risk. If we had breached any of these provisions at December 31,
2009, we could have been required to settle our obligations under these agreements at their
termination value of $0.4 million.
Portfolio Concentration Risk
Concentrations of credit risk arise when a group of tenants is engaged in similar business
activities or is subject to similar economic risks or conditions that could cause them to default
on their lease obligations to us. We regularly monitor our portfolio to assess potential
concentrations of credit risk. While we believe our portfolio is reasonably well diversified, it
does contain concentrations in excess of 10% of current annualized lease revenues in certain areas,
as described below. Although we view our exposure from properties that we purchased together with
our affiliates based on our ownership percentage in these properties, the percentages below are
based on our consolidated ownership and not on our actual ownership percentage in these
investments.
At December 31, 2009, 56% of our directly owned real estate properties were located in the U.S.,
with the majority of our directly owned international properties located in the European Union
(38%), with Germany (27%) representing the only international concentration. In addition, Hellweg
2, which is located in Germany, represented 20% of lease revenue in 2009, inclusive of
noncontrolling interest. At December 31, 2009, our directly owned real estate properties contained
significant concentrations in the following asset types: industrial (46%), retail (19%),
warehouse/distribution (19%) and office (12%); and in the following tenant industries: retail
(29%), chemicals, plastics, rubber and glass (10%) and automobile (10%).
Many companies in automotive related industries (manufacturing, parts, services, etc.) have been
experiencing increasing difficulties for several years, which has resulted in several companies
filing for bankruptcy. At December 31, 2009, we had eight tenants in automotive related industries,
four of which have filed for bankruptcy protection (see below). These eight tenants accounted for
lease revenues, inclusive of noncontrolling interests, and net loss or income from equity
investments as follows: lease revenues from these tenants were $18.0 million, $19.9 million and
$15.4 million for the years ended December 31, 2009, 2008 and 2007, respectively. For our equity
investments in real estate, we recognized net losses of $3.2 million and $0.8 million for the years
ended December 31, 2009 and 2008, respectively and net income of $0.1 million for the year ended
December 31, 2007. These investments had an aggregate carrying value of $152.0 million and $180.3
million at December 31, 2009 and December 31, 2008, respectively. Based on their carrying values at
December 31, 2009, 53% of these investments were international (in the European Union, Canada and
Mexico).
At December 31, 2009, five tenants, four of which operate in the automotive industry, were in
various stages of the bankruptcy process. These five tenants accounted for lease revenues and loss
from equity investments of $5.4 million,
inclusive of amounts attributable to noncontrolling interests of $1.9 million and $3.2 million, respectively, for 2009 and had an
aggregate carrying value of $19.6 million at December 31, 2009. For the years ended December 31,
2009 and 2008, we incurred impairment charges totaling $35.3 million and $1.4 million,
respectively, inclusive of noncontrolling interest of $12.7 million in 2009,on properties leased to
these tenants (Note 11). As a result of these corporate defaults, during 2009 we suspended debt
service on three non-recourse mortgage loans, which had an aggregate outstanding balance of $27.2
million at December 31, 2009, inclusive of amounts attributable to noncontrolling interests of
$11.6 million.
CPA®:16 Global 2009 10-K 76
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Notes to Consolidated Financial Statements
Note 11. Impairment Charges
The following table summarizes impairment charges recognized on our consolidated and unconsolidated
real estate investments during 2009 and 2008 (in thousands):
Years ended December 31, | ||||||||
2009 | 2008 | |||||||
Net investments in properties (a) |
$ | 48,578 | $ | | ||||
Net investments in direct financing leases |
2,279 | 890 | ||||||
Equity investments in real estate (b) |
3,598 | 3,085 | ||||||
Total impairment charges included in income from continuing operations |
54,455 | 3,975 | ||||||
Impairment charges included in discontinued operations |
5,101 | | ||||||
Total impairment charges |
$ | 59,556 | $ | 3,975 | ||||
(a) | Includes charges recognized on intangible assets and liabilities related to net investments in properties (Note 10). | |
(b) | Impairment charges on our equity investments are included in Income from equity investments in real estate in our consolidated statements of operations. |
No impairment charges were recognized during 2007.
Impairment charges recognized during 2009 and 2008 were as follows:
Görtz & Schiele GmbH & Co. and Goertz & Schiele Corp.
During 2009, we recognized impairment charges totaling $25.4 million on properties leased to Görtz
& Schiele GmbH & Co. and Goertz & Schiele Corp., which filed for bankruptcy in November 2008 and
September 2009, respectively. We calculated the estimated fair values of these properties based on
discounted cash flow analyses and market information obtained from outside sources. Both tenants
ceased making rent payments during the second quarter of 2009 and, as a result, we suspended the
debt service payments on the related mortgage loans beginning in July 2009. In January 2010, Goertz
& Schiele Corp. terminated its lease with us in bankruptcy proceedings and in March 2010, a
successor tenant to Görtz & Schiele GmbH & Co. signed a new lease with us on substantially the same
terms. At December 31, 2009, these properties were classified as Net investments in properties in
the consolidated financial statements.
Foss Manufacturing Company, LLC
During 2009, we incurred an impairment charge of $16.0 million on a property leased to Foss
Manufacturing Company, LLC as a result of a significant deterioration in the tenants financial
outlook. We calculated the estimated fair value of this property based on a discounted cash flow
analysis. During the second quarter of 2009, we entered into an amended lease agreement with Foss
Manufacturing that substantially reduced annual contractual rent and provides for us to receive
additional rent based on a percentage of sales. At December 31, 2009, these properties were
classified as Net investments in properties in the consolidated financial statements.
John McGavigan Limited
During 2009, we incurred an impairment charge of $5.3 million on a property in the United Kingdom
where the tenant, John McGavigan Limited, filed for bankruptcy in September 2009. We calculated
the estimated fair value of this property based on a discounted cash flow analysis. At December 31,
2009, this property was classified as Net investment in properties in the consolidated financial
statements.
MetalsAmerica, Inc.
During 2009, we recognized an impairment charge of $5.1 million related to a domestic property
formerly leased to MetalsAmerica, Inc., which filed for bankruptcy in July 2009. We reduced the
propertys carrying value of $6.6 million to its estimated selling price of $1.5 million and sold
the property in August 2009. At December 31, 2009, the results of operations of this property are
included in Income from discontinued operations in the consolidated financial statements.
Lindenmaier A.G.
During 2009 and 2008, we recognized other-than-temporary impairment charges of $2.7 million and
$1.4 million, respectively, to reduce the carrying value of a venture to the estimated fair value
of its underlying net assets, which we assessed using a discounted cash flow analysis and market
information obtained from outside sources. The venture leases property to Lindenmaier A.G., which
filed for bankruptcy in the second quarter of 2009. At December 31, 2009, this venture is
classified as Equity investment in real estate in the consolidated financial statements.
CPA®:16 Global 2009 10-K 77
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Notes to Consolidated Financial Statements
Thales
During 2009, we recognized net other-than-temporary impairment charges of $0.9 million. In July
2009, a venture that owned a portfolio of five French properties leased to Thales S.A. sold four
properties back to Thales. The outstanding debt balance on the four properties sold was allocated
to the remaining property. An impairment charge was incurred to reduce the carrying value of the
venture to the estimated fair value of its underlying net assets, which we assessed using a
discounted cash flow analysis.
During 2008, we recognized an other-than-temporary impairment charge of $1.7 million to reduce the
carrying value of the venture to the estimated fair value of its underlying net assets, which we
assessed using a discounted cash flow analysis. At December 31, 2009, this venture is classified as
Equity investment in real estate in the consolidated financial statements.
Valley Diagnostic
During 2009, we incurred an impairment charge of $1.9 million in connection with a domestic
property where the tenant, Valley Diagnostic, entered liquidation proceedings. We calculated the
estimated fair value of this property using third party broker quotes. At December 31, 2009, this
property was classified as Net investment in properties in the consolidated financial statements.
Other
During 2009 and 2008, we recognized impairment charges totaling $2.3 million and $0.9 million on
several properties accounted for as net investments in direct financing leases in connection with
other-than-temporary declines in the estimated fair value of the properties residual values, as
determined by our annual third party valuation of our real estate.
Note 12. Debt
Non-recourse debt consists of mortgage notes payable, which are collateralized by an assignment of
real property and direct financing leases with an aggregate carrying value of $1.9 billion at
December 31, 2009. Our mortgage notes payable bore interest at fixed annual rates ranging from 4.4%
to 7.7% and variable annual rates ranging from 5.2% to 6.7%, with maturity dates ranging from 2014
to 2031 at December 31, 2009.
Scheduled debt principal payments during each of the next five years following December 31, 2009
and thereafter are as follows (in thousands):
Years ending December 31, | Total | |||
2010 |
$ | 21,958 | ||
2011 |
25,433 | |||
2012 |
56,507 | |||
2013 |
30,693 | |||
2014 |
97,301 | |||
Thereafter through 2031 |
1,211,630 | |||
1,443,522 | ||||
Unamortized discount |
2,367 | |||
Total |
$ | 1,445,889 | ||
In February 2009, a venture in which we own a 50% interest, and which we consolidate, repaid a
$39.0 million outstanding balance on a non-recourse mortgage loan at a discount for $32.5 million
and recognized a corresponding gain of $6.5 million. In connection with this transaction, the
venture obtained new non-recourse mortgage financing of approximately $29.0 million. The new debt
has an annual interest rate of LIBOR plus 5%, with a minimum rate of 6% and a maximum rate that has
been capped at 10% through the use of an interest rate cap. This financing has a term of three
years, with two one-year extensions. The applicable interest rate of the related debt was 6.6% at
December 31, 2009, and therefore the interest rate cap was not being utilized at that date.
In July 2009, we obtained non-recourse mortgage financing on a venture in which we and an affiliate
hold 51% and 49% interests, respectively, and which we consolidate, related to an investment
entered into in Hungary. This financing totaled $49.5 million, inclusive of noncontrolling interest
of $24.3 million, and has an annual fixed interest rate and term of 5.9% and seven years,
respectively.
CPA®:16 Global 2009 10-K 78
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Notes to Consolidated Financial Statements
During 2008, in connection with our investment activity, we obtained non-recourse mortgage
financing totaling $100.1 million, inclusive of noncontrolling interest of $19.7 million, at a
weighted average annual interest rate and term of 6.5% and 10 years, respectively. One of these
loans bears interest at a variable rate that has been effectively converted to a fixed rate through
the use of an interest rate swap agreement (Note 10).
Note 13. Commitments and Contingencies
Various claims and lawsuits arising in the normal course of business are pending against us. The
results of these proceedings are not expected to have a material adverse effect on our consolidated
financial position or results of operations.
Note 14. Equity
Distributions
Distributions paid to shareholders consist of ordinary income, capital gains, return of capital or
a combination thereof for income tax purposes. The following table presents distributions per share
reported for tax purposes:
2009 | 2008 | 2007 | ||||||||||
Ordinary income (a) |
$ | 0.18 | $ | 0.16 | $ | 0.45 | ||||||
Return of capital |
0.48 | 0.50 | 0.20 | |||||||||
Total distributions |
$ | 0.66 | $ | 0.66 | $ | 0.65 | ||||||
(a) | Decrease in per share amount in 2008 was primarily due to fees paid to the advisor and deducted for income tax purposes in 2008 as a result of meeting our performance criterion in June 2007. |
We declared a quarterly distribution of $0.1656 per share in December 2009, which was paid in
January 2010 to shareholders of record at December 31, 2009.
Accumulated Other Comprehensive Income
The following table presents Accumulated OCI in equity. Amounts include our proportionate share of
other comprehensive income or loss from our unconsolidated investments (in thousands):
December 31, | ||||||||
2009 | 2008 | |||||||
Unrealized gain (loss) on marketable securities |
$ | 10 | $ | 38 | ||||
Foreign currency translation adjustment |
7,836 | 3,638 | ||||||
Unrealized (loss) gain on derivative instrument |
(2,449 | ) | (1,536 | ) | ||||
Accumulated other comprehensive income |
$ | 5,397 | $ | 2,140 | ||||
Note 15. Noncontrolling Interests
Noncontrolling interest is the portion of equity in a subsidiary not attributable, directly or
indirectly, to a parent. In December 2007, the FASB amended the existing authoritative guidance for
accounting for noncontrolling interests in consolidated financial statements, which we adopted as
required on January 1, 2009. The new guidance establishes and expands accounting and reporting
standards for noncontrolling interests and, if applicable, for the deconsolidation of a subsidiary.
There were no changes in our ownership interest in any of our consolidated subsidiaries for the
year ended December 31, 2009.
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Notes to Consolidated Financial Statements
Redeemable Noncontrolling Interests
Under the current authoritative accounting guidance, we account for the noncontrolling interests in
a note receivable recorded in connection with a German transaction in 2007 as redeemable
noncontrolling interests because the transaction contains put options that, if exercised, would
obligate the partners to settle in cash. The partners interests are reflected at estimated
redemption value for all periods presented.
Balance at January 1, 2007 |
$ | | ||
Contributions |
314,211 | |||
Foreign currency translation adjustment |
32,508 | |||
Balance at January 1, 2008 |
$ | 346,719 | ||
Foreign currency translation adjustment |
(14,877 | ) | ||
Balance at January 1, 2009 |
331,842 | |||
Foreign currency translation adjustment |
5,555 | |||
Balance at December 31, 2009 |
$ | 337,397 | ||
Note 16. Income Taxes
We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code
of 1986, as amended. We believe we have operated, and we intend to continue to operate, in a manner
that allows us to continue to qualify as a REIT. Under the REIT operating structure, we are
permitted to deduct distributions paid to our shareholders and generally will not be required to
pay U.S. federal income taxes. Accordingly, no provision has been made for U.S. federal income
taxes in the consolidated financial statements
We conduct business in various states and municipalities within the U.S. and in the European
Union, Canada, Mexico, Malaysia and Thailand and, as a result, we or one or more of our
subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and certain
foreign jurisdictions. As a result, we are subject to certain foreign, state and local taxes. Taxes
on our foreign investments, primarily in Germany, comprised a significant portion of our tax
provision for both 2009 and 2008, with 2009 reflecting the full year impact of certain investments.
In addition, we recognized impairment charges totaling $54.5 million (Note 11) for the year ended
December 31, 2009, for which we did not recognize a tax benefit, resulting in a higher effective
income tax rate for 2009 as compared to the prior years.
We account for uncertain tax positions in accordance with current authoritative accounting
guidance. The following table presents a reconciliation of the beginning and ending amount of
unrecognized tax benefits (in thousands):
December 31, | ||||||||
2009 | 2008 | |||||||
Balance at January 1, |
$ | 473 | $ | 424 | ||||
Additions based on tax positions related to the current year |
29 | 170 | ||||||
Additions for tax positions of prior years |
| | ||||||
Reductions for tax positions of prior years |
| | ||||||
Settlements |
| | ||||||
Reductions for expiration of statute of limitations |
(161 | ) | (121 | ) | ||||
Balance at December 31, |
$ | 341 | $ | 473 | ||||
At December 31, 2009, we had unrecognized tax benefits as presented in the table above that, if
recognized, would have a favorable impact on the effective income tax rate in future periods. We
recognize interest and penalties related to uncertain tax positions in income tax expense. At
December 31, 2009, 2008, and 2007, we had less than $0.1 million of accrued interest related to
uncertain tax positions.
Our tax returns are subject to audit by taxing authorities. Such audits can often take years to
complete and settle. The tax years 2006-2009 remain open to examination by the major taxing
jurisdictions to which we are subject.
We have elected to treat two of our corporate subsidiaries, which engage in hotel operations, as
taxable REIT subsidiaries (TRSs). These subsidiaries own hotels that are managed on our behalf by
third party hotel management companies. A TRS is subject to corporate federal income taxes and we
provide for income taxes in accordance with current authoritative guidance. These entities have
operated since inception at losses for federal income taxes purposes and a full valuation allowance
with respect to net deferred tax assets including net operating loss carryforwards.
CPA®:16 Global 2009 10-K 80
Table of Contents
Notes to Consolidated Financial Statements
Note 17. Discontinued Operations
From time to time, tenants may vacate space due to lease buy-outs, elections not to renew their
leases, company insolvencies or lease rejections in the bankruptcy process. In these cases, we
assess whether we can obtain the highest value from the property by re-leasing or selling it. In
addition, in certain cases, we may elect to sell a property that is occupied if selling the
property yields the highest value. When it is appropriate to do so under current accounting
guidance for the disposal of long-lived assets, we reclassify the property as an asset held for
sale and the current and prior period results of operations of the property are reclassified as
discontinued operations.
In July 2009, we sold a domestic property for $50.6 million, net of selling costs, which was
comprised of cash consideration of $26.1 million and the assumption of a non-recourse mortgage loan
that had an outstanding balance of $24.5 million at the date of sale. We recognized a gain of $8.0
million in connection with this sale.
In August 2009, we sold a domestic property for $1.3 million, net of selling costs, and recognized
a loss on the sale of $0.3 million, excluding an impairment charge recognized in 2009 of $5.1
million (Note 11). This property was encumbered by a non-recourse mortgage loan of $3.6 million.
Concurrent with the closing of this sale, the lender agreed to release all the liens on the
property in exchange for the $1.3 million proceeds. As a result of the release of the liens, we
recognized a net gain on extinguishment of debt of $2.3 million.
The results of operations for properties that are held for sale or have been sold are reflected in
the consolidated financial statements as discontinued operations for all periods presented and are
summarized as follows (in thousands):
Years ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Revenues |
$ | 2,643 | $ | 4,446 | $ | 3,157 | ||||||
Expenses |
(1,882 | ) | (3,104 | ) | (2,443 | ) | ||||||
Gain on sale of assets |
7,634 | | | |||||||||
Gain on extinguishment of debt |
2,313 | | | |||||||||
Impairment charges |
(5,101 | ) | | | ||||||||
Income from discontinued operations |
$ | 5,607 | $ | 1,342 | $ | 714 | ||||||
Note 18. Segment Information
We have determined that we operate in one business segment, real estate ownership, with domestic
and foreign investments. Geographic information for this segment is as follows (in thousands):
2009 | Domestic | Foreign (a) | Total Company | |||||||||
Revenues |
$ | 132,610 | $ | 103,947 | $ | 236,557 | ||||||
Total long-lived assets (b) |
1,235,053 | 988,496 | 2,223,549 |
2008 | Domestic | Foreign (a) | Total Company | |||||||||
Revenues |
$ | 131,370 | $ | 103,639 | $ | 235,009 | ||||||
Total long-lived assets (b) |
1,287,160 | 903,465 | 2,190,625 |
2007 | Domestic | Foreign (a) | Total Company | |||||||||
Revenues |
$ | 87,575 | $ | 75,455 | $ | 163,030 | ||||||
Total long-lived assets (b) |
1,218,908 | 951,071 | 2,169,979 |
(a) | Consists of operations in the European Union, Mexico, Canada and Asia. | |
(b) | Consists of real estate, net; net investment in direct financing leases; equity investments in real estate and real estate under construction. |
CPA®:16 Global 2009 10-K 81
Table of Contents
Notes to Consolidated Financial Statements
Note 19. Selected Quarterly Financial Data (unaudited)
(Dollars in thousands, except per share amounts)
Three months ended | ||||||||||||||||
March 31, 2009 | June 30, 2009 | September 30, 2009 (b) | December 31, 2009 (c) | |||||||||||||
Revenues (a) |
$ | 56,263 | $ | 58,382 | $ | 60,672 | $ | 61,240 | ||||||||
Operating expenses (a) |
(43,184 | ) | (27,336 | ) | (52,058 | ) | (39,054 | ) | ||||||||
Net income (loss) |
2,565 | 12,331 | (2,734 | ) | 797 | |||||||||||
Less: Net (income) loss attributable to noncontrolling interests |
(4,183 | ) | (1,244 | ) | 9,100 | 4,377 | ||||||||||
Less: Net income attributable to redeemable noncontrolling interests |
(6,027 | ) | (5,738 | ) | (4,530 | ) | (7,254 | ) | ||||||||
Net (Loss) Income Attributable to CPA®16 Global Shareholders |
(7,645 | ) | 5,349 | 1,836 | (2,080 | ) | ||||||||||
(Loss) earnings per share attributable to
CPA®:16 Global shareholders |
(0.06 | ) | 0.04 | 0.02 | (0.02 | ) | ||||||||||
Distributions declared per share |
0.1653 | 0.1656 | 0.1656 | 0.1656 | ||||||||||||
Three months ended | ||||||||||||||||
March 31, 2008 | June 30, 2008 | September 30, 2008 | December 31, 2008 (d) | |||||||||||||
Revenues (a) |
$ | 55,204 | $ | 60,474 | $ | 60,270 | $ | 59,061 | ||||||||
Operating expenses (a) |
(25,660 | ) | (26,903 | ) | (29,062 | ) | (30,349 | ) | ||||||||
Net income |
14,358 | 15,969 | 9,718 | 7,315 | ||||||||||||
Less: Net (income) loss attributable to noncontrolling interests |
(1,887 | ) | (981 | ) | 2,192 | 337 | ||||||||||
Less: Net income attributable to redeemable noncontrolling interests |
(6,659 | ) | (7,155 | ) | (6,906 | ) | (6,054 | ) | ||||||||
Net Income Attributable to CPA®16 Global Shareholders |
5,812 | 7,833 | 5,004 | 1,598 | ||||||||||||
Earnings per share attributable to
CPA®:16 Global shareholders |
0.05 | 0.06 | 0.04 | 0.02 | ||||||||||||
Distributions declared per share |
0.1637 | 0.1642 | 0.1647 | 0.1650 |
(a) | Certain amounts from previous quarters have been retrospectively adjusted as discontinued operations (Note 17). | |
(b) | Net income for the third quarter of 2009 includes impairment charges totaling $25.4 million in connection with several properties and equity investments in real estate (Note 11). | |
(c) | Net income for the fourth quarter of 2009 includes impairment charges totaling $14.0 million in connection with several properties and equity investments in real estate (Note 11). | |
(d) | Net income for the fourth quarter of 2008 includes impairment charges totaling $4.0 million in connection with several properties and equity investments in real estate (Note 11). |
CPA®:16 Global 2009 10-K 82
Table of Contents
SCHEDULE III REAL ESTATE and ACCUMULATED DEPRECIATION
at December 31, 2009
(in thousands)
at December 31, 2009
(in thousands)
Life on which | ||||||||||||||||||||||||||||||||||||||||||||
Depreciation | ||||||||||||||||||||||||||||||||||||||||||||
in Latest | ||||||||||||||||||||||||||||||||||||||||||||
Costs Capitalized | Increase | Gross Amount at which Carried | Statement of | |||||||||||||||||||||||||||||||||||||||||
Initial Cost to Company | Subsequent to | (Decrease) in Net | at Close of Period (d) | Accumulated | Date | Income is | ||||||||||||||||||||||||||||||||||||||
Description | Encumbrances (a) | Land | Buildings | Acquisition (b) | Investments (c) | Land | Buildings | Total | Depreciation (d) | Acquired | Computed | |||||||||||||||||||||||||||||||||
Real Estate Under Operating Leases: |
||||||||||||||||||||||||||||||||||||||||||||
Industrial, warehouse/distribution and office facilities in Englewood,
California and industrial facility in Chandler, AZ |
$ | 7,846 | $ | 3,380 | $ | 8,885 | $ | | $ | 3 | $ | 3,380 | $ | 8,888 | $ | 12,268 | $ | 1,231 | Jun. 2004 | 40 yrs. | ||||||||||||||||||||||||
Industrial and office facilities in Hampton, NH |
14,434 | 9,800 | 19,960 | | (14,952 | ) | 4,454 | 10,354 | 14,808 | 2,519 | Jul. 2004 | 40 yrs. | ||||||||||||||||||||||||||||||||
Land in Alberta, Calgary, Canada |
1,443 | 2,247 | | | 552 | 2,799 | | 2,799 | | Aug. 2004 | N/A | |||||||||||||||||||||||||||||||||
Office facility in Tinton Falls, NJ |
8,972 | 1,700 | 12,934 | | | 1,700 | 12,934 | 14,634 | 1,711 | Sep. 2004 | 40 yrs. | |||||||||||||||||||||||||||||||||
Industrial facility in The Woodlands, TX |
24,635 | 6,280 | 3,551 | 27,331 | | 6,280 | 30,882 | 37,162 | 3,319 | Sep. 2004 | 40 yrs. | |||||||||||||||||||||||||||||||||
Office facility in Southfield, MI |
8,219 | 1,750 | 14,384 | | | 1,750 | 14,384 | 16,134 | 1,783 | Jan. 2005 | 40 yrs. | |||||||||||||||||||||||||||||||||
Industrial facility in Cynthiana, KY |
3,914 | 760 | 6,885 | | 2 | 760 | 6,887 | 7,647 | 854 | Jan. 2005 | 40 yrs. | |||||||||||||||||||||||||||||||||
Industrial facility in Buffalo Grove, IL |
9,272 | 2,120 | 12,468 | | | 2,120 | 12,468 | 14,588 | 1,545 | Jan. 2005 | 40 yrs. | |||||||||||||||||||||||||||||||||
Office and industrial facilities in Lumlukka, Thailand and
warehouse/distribution and office facilities in Udom Soayudh Road,
Thailand |
16,424 | 8,942 | 10,547 | 6,174 | 4,124 | 10,280 | 19,507 | 29,787 | 2,275 | Jan. 2005 | 40 yrs. | |||||||||||||||||||||||||||||||||
Industrial facility in Allen TX and office facility in Sunnyvale, CA |
14,651 | 10,960 | 9,933 | | | 10,960 | 9,933 | 20,893 | 1,211 | Feb. 2005 | 40 yrs. | |||||||||||||||||||||||||||||||||
Industrial facilities in Sandersville, GA; Fernley, NV; Erwin, TN and
Gainsville, TX |
4,335 | 1,190 | 5,961 | | | 1,190 | 5,961 | 7,151 | 727 | Feb. 2005 | 40 yrs. | |||||||||||||||||||||||||||||||||
Office facility in Piscataway, NJ |
76,431 | 19,000 | 70,490 | | | 19,000 | 70,490 | 89,490 | 8,444 | Mar. 2005 | 40 yrs. | |||||||||||||||||||||||||||||||||
Land in Stuart, FL; Trenton and Southwest Harbor, ME and Portsmouth, RI |
10,791 | 20,130 | | | | 20,130 | | 20,130 | | May. 2005 | N/A | |||||||||||||||||||||||||||||||||
Industrial facilities in Peru, IL, Huber Heights, Lima and Sheffield,
OH and Lebanon, TN and office facility in Lima, OH |
17,800 | 1,720 | 23,439 | | | 1,720 | 23,439 | 25,159 | 2,710 | May. 2005 | 40 yrs. | |||||||||||||||||||||||||||||||||
Industrial facility in Cambridge, Canada |
6,479 | 800 | 8,158 | | 1,768 | 966 | 9,760 | 10,726 | 1,128 | May. 2005 | 40 yrs. | |||||||||||||||||||||||||||||||||
Education facility in Nashville, TN |
6,203 | 200 | 8,485 | 9 | | 200 | 8,494 | 8,694 | 964 | Jun. 2005 | 40 yrs. | |||||||||||||||||||||||||||||||||
Industrial facility in Ramos Arizpe, Mexico |
| 390 | 3,227 | 6 | 2 | 390 | 3,235 | 3,625 | 360 | Jul. 2005 | 40 yrs. | |||||||||||||||||||||||||||||||||
Warehouse/distribution facility in Norwich, CT |
14,543 | 1,400 | 6,698 | 28,357 | 2 | 2,600 | 33,857 | 36,457 | 2,992 | Aug. 2005 | 40 yrs. | |||||||||||||||||||||||||||||||||
Industrial facility in Glasgow, Scotland |
6,402 | 1,264 | 7,885 | | (5,186 | ) | 483 | 3,480 | 3,963 | 733 | Aug. 2005 | 40 yrs. | ||||||||||||||||||||||||||||||||
Industrial facility in Aurora, CO |
3,251 | 460 | 4,314 | | (728 | ) | 460 | 3,586 | 4,046 | 385 | Sep. 2005 | 40 yrs. | ||||||||||||||||||||||||||||||||
Warehouse/distribution facility in Kotka, Finland |
7,402 | | 12,266 | | 2,205 | | 14,471 | 14,471 | 2,004 | Oct. 2005 | 29 yrs. | |||||||||||||||||||||||||||||||||
Warehouse/distribution facility in Plainfield, IN |
22,185 | 1,600 | 8,638 | 18,185 | | 4,200 | 24,223 | 28,423 | 2,053 | Nov. 2005 | 40 yrs. | |||||||||||||||||||||||||||||||||
Residential facility in Blairsville, PA (e) |
15,945 | 648 | 2,896 | 23,295 | | 1,046 | 25,793 | 26,839 | 1,678 | Dec. 2005 | 40 yrs. | |||||||||||||||||||||||||||||||||
Residential facility in Laramie, WY (e) |
17,187 | 1,650 | 1,601 | 21,450 | | 1,650 | 23,051 | 24,701 | 1,578 | Jan. 2006 | 40 yrs. | |||||||||||||||||||||||||||||||||
Warehouse/distribution and industrial facilities in Houston, Weimar,
Conroe and Odessa, TX |
8,124 | 2,457 | 9,958 | | 190 | 2,457 | 10,148 | 12,605 | 1,407 | Mar. 2006 | 20 30 yrs. | |||||||||||||||||||||||||||||||||
Office facility in Greenville, SC |
10,213 | 925 | 11,095 | | 57 | 925 | 11,152 | 12,077 | 1,268 | Mar. 2006 | 33 yrs. | |||||||||||||||||||||||||||||||||
Retail facilities in Maplewood, Creekskill, Morristown, Summit and
Livingston, NJ |
27,713 | 10,750 | 32,292 | | 98 | 10,750 | 32,390 | 43,140 | 3,329 | Apr. 2006 | 35 39 yrs. | |||||||||||||||||||||||||||||||||
Warehouse/distribution facilities in Alameda, CA and Ringwood, NJ |
5,782 | 1,900 | 5,882 | | | 1,900 | 5,882 | 7,782 | 515 | Jun. 2006 | 40 yrs. | |||||||||||||||||||||||||||||||||
Industrial facility in Amherst, NY |
9,939 | 500 | 14,651 | | | 500 | 14,651 | 15,151 | 1,669 | Aug. 2006 | 30 yrs. | |||||||||||||||||||||||||||||||||
Industrial facility in Shah Alam, Malaysia (1) |
| 5,740 | 3,927 | 21 | 610 | 6,127 | 4,171 | 10,298 | 387 | Sep. 2006 | 35 yrs. | |||||||||||||||||||||||||||||||||
Warehouse/distribution facility in Spanish Fork, UT |
8,515 | 1,100 | 9,448 | | | 1,100 | 9,448 | 10,548 | 748 | Oct. 2006 | 40 yrs. | |||||||||||||||||||||||||||||||||
Industrial facilities in Georgetown, TX and Woodland, WA |
3,615 | 800 | 4,368 | 3,693 | 2,570 | 1,737 | 9,694 | 11,431 | 387 | Oct. 2006 | 40 yrs. |
CPA®:16 Global 2009 10-K 83
Table of Contents
SCHEDULE III REAL ESTATE and ACCUMULATED DEPRECIATION
at December 31, 2009
(in thousands)
at December 31, 2009
(in thousands)
Life on which | ||||||||||||||||||||||||||||||||||||||||||||
Depreciation | ||||||||||||||||||||||||||||||||||||||||||||
in Latest | ||||||||||||||||||||||||||||||||||||||||||||
Costs Capitalized | Increase | Gross Amount at which Carried | Statement of | |||||||||||||||||||||||||||||||||||||||||
Initial Cost to Company | Subsequent to | (Decrease) in Net | at Close of Period (d) | Accumulated | Date | Income is | ||||||||||||||||||||||||||||||||||||||
Description | Encumbrances (a) | Land | Buildings | Acquisition (b) | Investments (c) | Land | Buildings | Total | Depreciation (d) | Acquired | Computed | |||||||||||||||||||||||||||||||||
Real Estate Under Operating Leases (Continued): |
||||||||||||||||||||||||||||||||||||||||||||
Industrial facility in Auburn Hills, MI |
13,336 | 3,780 | 17,434 | | (13,943 | ) | 1,133 | 6,138 | 7,271 | 1,341 | Nov. 2006 | 40 yrs. | ||||||||||||||||||||||||||||||||
Office facility in Washington, MI |
30,022 | 7,500 | 38,094 | | | 7,500 | 38,094 | 45,594 | 2,936 | Nov. 2006 | 40 yrs. | |||||||||||||||||||||||||||||||||
Office and industrial facilities in St. Ingbert and Puttlingen, Germany |
9,788 | 1,248 | 10,921 | | (5,990 | ) | 560 | 5,619 | 6,179 | 860 | Dec. 2006 | 40 yrs. | ||||||||||||||||||||||||||||||||
Warehouse/distribution facilities in Flora, MS and Muskogee, OK |
3,809 | 335 | 5,816 | | | 335 | 5,816 | 6,151 | 448 | Dec. 2006 | 40 yrs. | |||||||||||||||||||||||||||||||||
Various transportation and warehouse facilities in France |
33,648 | 4,341 | 6,254 | 4,520 | 28,831 | 35,042 | 8,904 | 43,946 | 768 | Dec. 2006, Mar. 2007 |
30 yrs. | |||||||||||||||||||||||||||||||||
Industrial facility in Fort Collins, CO |
8,661 | 1,660 | 9,464 | | | 1,660 | 9,464 | 11,124 | 710 | Dec. 2006 | 40 yrs. | |||||||||||||||||||||||||||||||||
Industrial facility in St. Charles, MO |
13,717 | 2,300 | 15,433 | | | 2,300 | 15,433 | 17,733 | 1,157 | Dec. 2006 | 40 yrs. | |||||||||||||||||||||||||||||||||
Industrial facilities in Salt Lake City, UT |
5,304 | 2,575 | 5,683 | | | 2,575 | 5,683 | 8,258 | 443 | Dec. 2006 | 38 40 yrs. | |||||||||||||||||||||||||||||||||
Warehouse/distribution facilities in Atlanta, Doraville and Rockmart, GA |
57,867 | 10,060 | 72,000 | 6,816 | | 10,060 | 78,816 | 88,876 | 5,954 | Feb. 2007 | 30 40 yrs. | |||||||||||||||||||||||||||||||||
Industrial facility in Tuusula, Finland |
16,807 | 1,000 | 16,779 | 8 | 1,289 | 1,075 | 18,001 | 19,076 | 1,527 | Mar. 2007 | 32 yrs. | |||||||||||||||||||||||||||||||||
36 Retail facilities throughout Germany |
399,176 | 83,345 | 313,770 | 20,909 | 21,817 | 89,343 | 350,498 | 439,841 | 26,288 | Apr. 2007 | 30 40 yrs. | |||||||||||||||||||||||||||||||||
Warehouse/distribution facilities in Phoenix, AZ; Hayward, Vernon and South Gate, CA; Bedford Park, IL;
Rock Hill, SC and Houston, TX |
39,000 | 26,457 | 25,593 | | 9 | 26,457 | 25,602 | 52,059 | 2,228 | Jun. 2007 | 30 yrs. | |||||||||||||||||||||||||||||||||
Industrial facilities in Denver, CO and Nashville, TN |
10,081 | 1,872 | 14,665 | | | 1,872 | 14,665 | 16,537 | 1,178 | Jun. 2007, Jul. 2007 |
28 35 yrs. | |||||||||||||||||||||||||||||||||
Industrial facility in Sacramento, CA |
30,565 | | 42,478 | 3 | | | 42,481 | 42,481 | 2,567 | Jul. 2007 | 40 yrs. | |||||||||||||||||||||||||||||||||
Industrial facilities in Guelph and Lagley, Canada |
6,246 | 4,592 | 3,657 | | (25 | ) | 4,574 | 3,650 | 8,224 | 220 | Jul. 2007 | 40 yrs. | ||||||||||||||||||||||||||||||||
Retail facilities in Wichita, KS and Oklahoma City, OK and warehouse/distribution facility in Wichita, KS |
7,800 | 2,090 | 9,128 | 8 | | 2,090 | 9,136 | 11,226 | 736 | Jul. 2007 | 30 yrs. | |||||||||||||||||||||||||||||||||
Office facility in Harlingen, TX |
4,050 | 700 | 5,115 | | (1,868 | ) | 461 | 3,486 | 3,947 | 369 | Oct. 2007 | 30 yrs. | ||||||||||||||||||||||||||||||||
Industrial facility in Beaverton, MI |
2,173 | 70 | 3,608 | | 16 | 70 | 3,624 | 3,694 | 272 | Oct. 2007 | 30 yrs. | |||||||||||||||||||||||||||||||||
Industrial facilities in Evansville, IN; Lawrence, KS and Baltimore, MD |
29,000 | 4,770 | 78,288 | | (120 | ) | 4,650 | 78,288 | 82,938 | 5,219 | Dec. 2007 | 30 yrs. | ||||||||||||||||||||||||||||||||
Warehouse/distribution facility in Suwanee, GA |
16,500 | 1,950 | 20,975 | | | 1,950 | 20,975 | 22,925 | 1,049 | Dec. 2007 | 40 yrs. | |||||||||||||||||||||||||||||||||
Industrial facilities in Colton, CA; Bonner Springs, KS and Dallas, TX and land in Eagan, MN |
23,773 | 10,430 | 32,063 | | (764 | ) | 10,430 | 31,299 | 41,729 | 1,540 | Mar. 2008 | 30 40 yrs. | ||||||||||||||||||||||||||||||||
Industrial facility in Ylamylly, Finland |
10,195 | 58 | 14,220 | | (1,201 | ) | 53 | 13,024 | 13,077 | 570 | Apr. 2008 | 40 yrs. | ||||||||||||||||||||||||||||||||
Industrial facility in Nurieux-Volognat, France |
| 1,478 | 15,528 | | (5,626 | ) | 1,362 | 10,018 | 11,380 | 395 | Jun. 2008 | 38 yrs. | ||||||||||||||||||||||||||||||||
Industrial facility in Windsor, CT |
| 425 | 1,160 | | (188 | ) | 425 | 972 | 1,397 | 37 | Jun. 2008 | 39 yrs. | ||||||||||||||||||||||||||||||||
Office and industrial facilities in Wolfach, Bunde and Dransfeld, Germany |
| 2,554 | 13,492 | | (5,493 | ) | 2,349 | 8,204 | 10,553 | 410 | Jun. 2008 | 30 yrs. | ||||||||||||||||||||||||||||||||
Warehouse/distribution facilities in Gyal and Herceghalom, Hungary |
49,894 | 12,802 | 68,993 | | 1,234 | 12,999 | 70,030 | 83,029 | 1,249 | Jul. 2009 | 25 yrs. | |||||||||||||||||||||||||||||||||
$ | 1,214,077 | $ | 310,955 | $ | 1,215,837 | $ | 160,785 | $ | 9,295 | $ | 345,339 | $ | 1,351,533 | $ | 1,696,872 | $ | 112,385 | |||||||||||||||||||||||||||
CPA®:16 Global 2009 10-K 84
Table of Contents
SCHEDULE III REAL ESTATE and ACCUMULATED DEPRECIATION
at December 31, 2009
(in thousands)
at December 31, 2009
(in thousands)
Gross Amount at | ||||||||||||||||||||||||||||
Costs Capitalized | Increase | which Carried | ||||||||||||||||||||||||||
Initial Cost to Company | Subsequent to | (Decrease) in Net | at Close of | Date | ||||||||||||||||||||||||
Description | Encumbrances | Land | Buildings | Acquisition (b) | Investments (c) | Period Total | Acquired | |||||||||||||||||||||
Direct Financing Method: |
||||||||||||||||||||||||||||
Office and industrial facilities in Leeds, United Kingdom |
$ | 15,629 | $ | 6,908 | $ | 21,012 | $ | | $ | (1,766 | ) | $ | 26,154 | May. 2004 | ||||||||||||||
Industrial facility in Alberta, Calgary, Canada |
2,215 | | 3,468 | 41 | 788 | 4,297 | Aug. 2004 | |||||||||||||||||||||
Industrial facilities in Kearney, MO; Fair Bluff, NC; York, NE; Walbridge,
OH; Middlesex Township, PA; Rocky Mount, VA; Martinsburg, WV;
warehouse/distribution facility in Fair Bluff, NC |
15,053 | 2,980 | 29,191 | | (838 | ) | 31,333 | Aug. 2004 | ||||||||||||||||||||
Retail facilities in Vantaa, Finland and Linkoping, Sweden |
18,074 | 4,279 | 26,628 | 49 | (1,409 | ) | 29,547 | Dec. 2004 | ||||||||||||||||||||
Industrial and office facilities in Stuart, FL and industrial facilities in
Trenton and Southwest Harbor, ME and Portsmouth, RI |
19,800 | | 38,189 | | (1,253 | ) | 36,936 | May. 2005 | ||||||||||||||||||||
Warehouse and distribution and office facilities in Newbridge, United Kingdom |
14,481 | 3,602 | 21,641 | 2 | (3,003 | ) | 22,242 | Dec. 2005 | ||||||||||||||||||||
Office facility in Marktheidenfeld, Germany |
16,036 | 1,534 | 22,809 | | 1,560 | 25,903 | May. 2006 | |||||||||||||||||||||
Retail facilities in Socorro, El Paso and Fabens, TX |
14,274 | 3,890 | 19,603 | 31 | (1,364 | ) | 22,160 | Jul. 2006 | ||||||||||||||||||||
Various transportation and warehouse facilities in France |
28,102 | 23,524 | 33,889 | 6,814 | (28,165 | ) | 36,062 | Dec. 2006 | ||||||||||||||||||||
Industrial facility in Bad Hersfeld, Germany |
27,460 | 13,291 | 26,417 | 68 | 1,737 | 41,513 | Dec. 2006 | |||||||||||||||||||||
Retail facility in Gronau, Germany |
4,308 | 414 | 3,789 | | 257 | 4,460 | Apr. 2007 | |||||||||||||||||||||
Industrial facility in St. Ingbert, Germany |
18,109 | 1,610 | 29,466 | | 1,053 | 32,129 | Aug. 2007 | |||||||||||||||||||||
Industrial facility in Mt. Carmel, IL |
2,301 | 56 | 3,528 | | 39 | 3,623 | Oct. 2007 | |||||||||||||||||||||
Industrial facility in Elma, WA |
3,880 | 1,300 | 5,261 | | (262 | ) | 6,299 | Feb. 2008 | ||||||||||||||||||||
Industrial facility in Eagan, MN |
4,690 | | 8,267 | | (338 | ) | 7,929 | Mar. 2008 | ||||||||||||||||||||
Industrial facility in Monheim, Germany |
| 2,210 | 10,654 | | (1,396 | ) | 11,468 | Jun. 2008 | ||||||||||||||||||||
$ | 204,412 | $ | 65,598 | $ | 303,812 | $ | 7,005 | $ | (34,360 | ) | $ | 342,055 | ||||||||||||||||
Life on which | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation | ||||||||||||||||||||||||||||||||||||||||||||||||||||
in Latest | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Cost Capitalized | Increase | Statement of | ||||||||||||||||||||||||||||||||||||||||||||||||||
Initial Cost to Company | Subsequent to | (Decrease) in Net | Gross Amount at which Carried at Close of Period (d) | Accumulated | Date | Income is | ||||||||||||||||||||||||||||||||||||||||||||||
Description | Encumbrances | Land | Buildings | Personal Property | Acquisition (a) | Investments (b) | Land | Buildings | Personal Property | Total | Depreciation (d) | Acquired | Computed | |||||||||||||||||||||||||||||||||||||||
Operating Real Estate: |
||||||||||||||||||||||||||||||||||||||||||||||||||||
Hotel in Bloomington, MN |
$ | | $ | 3,976 | $ | 7,492 | $ | | $ | 35,904 | $ | | $ | 3,976 | $ | 38,456 | $ | 4,940 | $ | 47,372 | $ | 3,339 | Sep. 2006 | 40 yrs. | ||||||||||||||||||||||||||||
Hotel in Memphis, TN |
27,400 | 4,320 | 29,929 | 3,274 | 1,938 | (3,115 | ) | 4,320 | 28,752 | 3,274 | 36,346 | 3,109 | Sep. 2007 | 30 yrs. | ||||||||||||||||||||||||||||||||||||||
$ | 27,400 | $ | 8,296 | $ | 37,421 | $ | 3,274 | $ | 37,842 | $ | (3,115 | ) | $ | 8,296 | $ | 67,208 | $ | 8,214 | $ | 83,718 | $ | 6,448 | ||||||||||||||||||||||||||||||
CPA®:16 Global 2009 10-K 85
Table of Contents
NOTES to SCHEDULE III REAL ESTATE and ACCUMULATED DEPRECIATION
(in thousands)
(in thousands)
(a) | Includes unamortized discount on a mortgage note. | |
(b) | Consists of the costs of improvements subsequent to purchase and acquisition costs including construction costs on build-to-suit transactions, legal fees, appraisal fees, title costs and other related professional fees. | |
(c) | The increase (decrease) in net investment is primarily due to (i) the amortization of unearned income from net investment in direct financing leases, which produces a periodic rate of return that at times may be greater or less than lease payments received, (ii) sales of properties, (iii) impairment charges, and (iv) changes in foreign currency exchange rates. | |
(d) | Reconciliation of real estate and accumulated depreciation (see below): | |
(e) | Represents a triple net lease to a tenant for student housing. |
Reconciliation of Real Estate Accounted for | ||||||||||||
Under the Operating Method | ||||||||||||
December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Balance at beginning of year |
$ | 1,661,160 | $ | 1,602,512 | $ | 663,810 | ||||||
Additions |
102,303 | 102,864 | 773,065 | |||||||||
Reclassification from real estate under construction |
8,525 | 7,515 | 82,637 | |||||||||
Reclassification from (to) net investment in direct financing leases, operating rea |
1,073 | (14,274 | ) | 25,788 | ||||||||
Impairment charges |
(46,531 | ) | | | ||||||||
Dispositions |
(45,139 | ) | | | ||||||||
Foreign currency translation adjustment |
15,481 | (37,457 | ) | 57,212 | ||||||||
Balance at close of year |
$ | 1,696,872 | $ | 1,661,160 | $ | 1,602,512 | ||||||
Reconciliation of Accumulated Depreciation | ||||||||||||
December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Balance at beginning of year |
$ | 76,943 | $ | 42,238 | $ | 15,217 | ||||||
Depreciation expense |
36,719 | 36,094 | 26,171 | |||||||||
Dispositions |
(2,007 | ) | | | ||||||||
Foreign currency translation adjustment |
730 | (1,389 | ) | 850 | ||||||||
Balance at close of year |
$ | 112,385 | $ | 76,943 | $ | 42,238 | ||||||
Reconciliation for Operating | ||||||||||||
Real Estate | ||||||||||||
December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Balance at beginning of year |
$ | 82,667 | $ | 37,522 | $ | | ||||||
Reclassification from real estate under construction |
| 47,329 | | |||||||||
Reclassification to intangible assets |
| (3,114 | ) | | ||||||||
Additions |
1,051 | 930 | 37,522 | |||||||||
Balance at close of year |
$ | 83,718 | $ | 82,667 | $ | 37,522 | ||||||
Reconciliation for Accumulated | ||||||||||||
Depreciation for Operating | ||||||||||||
Real Estate | ||||||||||||
December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Balance at beginning of year |
$ | 3,306 | $ | 339 | $ | | ||||||
Depreciation expense |
3,142 | 2,967 | 339 | |||||||||
Balance at close of year |
$ | 6,448 | $ | 3,306 | $ | 339 | ||||||
CPA®:16 Global 2009 10-K 86
Table of Contents
At December 31, 2009, the aggregate cost of real estate, net of accumulated depreciation and
accounted for as operating leases, owned by us and our consolidated subsidiaries for federal income
tax purposes was $1.7 billion.
SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE
at December 31, 2009
(dollars in thousands)
at December 31, 2009
(dollars in thousands)
Final | Face | Carrying | ||||||||||||||
Interest | Maturity | Amount of | Amount of | |||||||||||||
Description | Rate | Date | Mortgage | Mortgage | ||||||||||||
Note receivable issued to venture partner Hellweg 2 transaction (a) (c) |
8.0 | % | Apr. 2017 | $ | 337,397 | $ | 337,397 | |||||||||
Construction line of credit provided to Ryder Properties, LLC (b) (c) |
7.0 | % | Jun. 2010 | 15,612 | 15,612 | |||||||||||
Subordinated mortgage collateralized by properties occupied by
Reyes Holding, LLC (c) |
6.3 | % | Feb. 2015 | 9,567 | 9,698 | |||||||||||
$ | 362,576 | $ | 362,707 | |||||||||||||
(a) | Amounts are based on the exchange rate of the local currencies at December 31, 2009. | |
(b) | Applicable annual interest rate at December 31, 2009. Mortgage face and carrying values represent amounts funded on total commitment of $15.8 million and interest accrued on the outstanding balance to date. | |
(c) | Balloon payments equal to the face amount of the loan are due at maturity. |
NOTES TO SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE
(in thousands)
(in thousands)
Reconciliation of Mortgage Loans on Real Estate | ||||||||||||
December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Balance at beginning of year |
$ | 351,200 | $ | 358,079 | $ | 9,603 | ||||||
Additions |
5,917 | 7,965 | 315,940 | |||||||||
Repayment |
| | | |||||||||
Accretion of principal |
41 | 39 | 33 | |||||||||
Amortization of premium |
(6 | ) | (6 | ) | (6 | ) | ||||||
Writeoff of unamortized premium |
| | | |||||||||
Foreign currency translation adjustment |
5,555 | (14,877 | ) | 32,509 | ||||||||
Balance at December 31, |
$ | 362,707 | $ | 351,200 | $ | 358,079 | ||||||
CPA®:16 Global 2009 10-K 87
Table of Contents
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
Item 9A(T). | Controls and Procedures. |
Disclosure Controls and Procedures
Our disclosure controls and procedures include our controls and other procedures designed to
provide reasonable assurance that information required to be disclosed in this and other reports
filed under the Securities Exchange Act of 1934 (the Exchange Act) is recorded, processed,
summarized and reported within the required time periods specified in the SECs rules and forms and
that such information is accumulated and communicated to management, including our chief executive
officer and acting chief financial officer to allow timely decisions regarding required
disclosures.
Our chief executive officer and acting chief financial officer, after conducting an evaluation,
together with members of our management, of the effectiveness of the design and operation of our
disclosure controls and procedures as of December 31, 2009, have concluded that our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective as of
December 31, 2009 at a reasonable level of assurance.
Managements Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial
reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act). Internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in
accordance with U.S. GAAP.
Our internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with U.S.
GAAP, and that our receipts and expenditures are being made only in accordance with authorizations
of our management and directors; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of our assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with policies or procedures may deteriorate.
We assessed the effectiveness of our internal control over financial reporting as of December 31,
2009. In making this assessment, we used criteria set forth in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on our assessment, we concluded that, as of December 31, 2009, our internal control over
financial reporting is effective based on those criteria.
This Annual Report does not include an attestation report of our independent registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by our independent registered public accounting firm pursuant to temporary
rules of the SEC that permit us to provide only managements report in this Annual Report.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during our most
recently completed fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Item 9B. | Other Information. |
None.
CPA®:16 Global 2009 10-K 88
Table of Contents
PART III
Item 10. | Directors, Executive Officers and Corporate Governance. |
This information will be contained in our definitive proxy statement for the 2010 Annual Meeting of
Shareholders, to be filed within 120 days following the end of our fiscal year, and is incorporated
by reference.
Item 11. | Executive Compensation. |
This information will be contained in our definitive proxy statement for the 2010 Annual Meeting of
Shareholders, to be filed within 120 days following the end of our fiscal year, and is incorporated
by reference.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
This information will be contained in our definitive proxy statement for the 2010 Annual Meeting of
Shareholders, to be filed within 120 days following the end of our fiscal year, and is incorporated
by reference.
Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
This information will be contained in our definitive proxy statement for the 2010 Annual Meeting of
Shareholders, to be filed within 120 days following the end of our fiscal year, and is incorporated
by reference.
Item 14. | Principal Accountant Fees and Services. |
This information will be contained in our definitive proxy statement for the 2010 Annual Meeting of
Shareholders, to be filed within 120 days following the end of our fiscal year, and is incorporated
by reference.
PART IV
Item 15. | Exhibits, Financial Statement Schedules. |
(a)
|
(1) and (2) | Financial statements and schedules see index to financial statements and schedules included in Item 8. |
(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.
Exhibit No. | Description | Method of Filing | ||||
3.1 | Articles of Incorporation of Registrant
|
Incorporated by reference to Pre-effective Amendment No. 2 to Registration Statement on Form S-11 (No. 333-106838) filed December 10, 2003 | ||||
3.2 | Amended and Restated Bylaws of Registrant
|
Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 filed August 14, 2009 | ||||
4.1 | Amended and Restated 2003 Distribution
Reinvestment and Stock Purchase Plan of
Registrant
|
Incorporated by reference to Post-Effective Amendment No. 8 to Registration Statement on Form S-11 (No. 333-106838) filed November 4, 2005 | ||||
10.1 | Amended and Restated Advisory Agreement dates
as of October 1, 2009 between Corporate
Property Associates 16 Global Incorporated
and Carey Asset Management Corp.
|
Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 filed November 13, 2009 | ||||
10.2 | Asset Management Agreement dated as of July 1,
2008 between Corporate Property Associates 16
- Global Incorporated and W. P. Carey & Co.
B.V.
|
Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 filed August 14, 2008 |
CPA®:16 Global 2009 10-K 89
Table of Contents
Exhibit No. | Description | Method of Filing | ||||
21.1 | Subsidiaries of Registrant
|
Filed herewith | ||||
23.1 | Consent of PricewaterhouseCoopers LLP
|
Filed herewith | ||||
31.1 | Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
Filed herewith | ||||
31.2 | Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
Filed herewith | ||||
32 | Certifications pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
Filed herewith |
CPA®:16 Global 2009 10-K 90
Table of Contents
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.
Corporate Property Associates 16 Global Incorporated |
||||
Date 3/26/2010 | By: | /s/ Mark J. DeCesaris | ||
Mark J. DeCesaris | ||||
Managing Director and Acting Chief 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.
Signature | Title | Date | ||
/s/ Wm. Polk Carey
|
Chairman of the Board and Director | 3/26/2010 | ||
Wm. Polk Carey |
||||
/s/ Gordon F. DuGan
|
Chief Executive Officer | 3/26/2010 | ||
Gordon F. DuGan
|
(Principal Executive Officer) | |||
/s/ Mark J. DeCesaris
|
Managing Director and Acting Chief Financial Officer | 3/26/2010 | ||
Mark J. DeCesaris
|
(Principal Financial Officer) | |||
/s/ Thomas J. Ridings, Jr.
|
Executive Director and Chief Accounting Officer | 3/26/2010 | ||
Thomas J. Ridings, Jr.
|
(Principal Accounting Officer) | |||
/s/ Marshall E. Blume
|
Director | 3/26/2010 | ||
Marshall E. Blume |
||||
/s/ Elizabeth P. Munson
|
Director | 3/26/2010 | ||
Elizabeth P. Munson |
||||
/s/ Richard J. Pinola
|
Director | 3/26/2010 | ||
Richard J. Pinola |
CPA®:16 Global 2009 10-K 91