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EX-32 - EXHIBIT 32 - CORPORATE PROPERTY ASSOCIATES 16 GLOBAL INC | c01047exv32.htm |
EX-31.1 - EXHIBIT 31.1 - CORPORATE PROPERTY ASSOCIATES 16 GLOBAL INC | c01047exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - CORPORATE PROPERTY ASSOCIATES 16 GLOBAL INC | c01047exv31w2.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
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 of incorporation) | (I.R.S. Employer Identification No.) | |
50 Rockefeller Plaza | ||
New York, New York | 10020 | |
(Address of principal executive office) | (Zip Code) |
Investor Relations (212) 492-8920
(212) 492-1100
(Registrants telephone numbers, including area code)
(212) 492-1100
(Registrants telephone numbers, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes 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 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
Exchange Act). Yes o No þ
Registrant had 124,284,461 shares of common stock, $.001 par value, outstanding at May 7, 2010.
INDEX
Page No. | ||||||||
PART I FINANCIAL INFORMATION |
||||||||
Item 1. Financial Statements (Unaudited) |
||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
19 | ||||||||
27 | ||||||||
29 | ||||||||
29 | ||||||||
30 | ||||||||
31 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 |
Forward Looking Statements
This Quarterly Report on Form 10-Q, including Managements Discussion and Analysis of Financial
Condition and Results of Operations in Item 2 of Part I 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 in Item 1A. Risk Factors in our Annual
Report on Form 10-K for the year ended December 31, 2009 as filed with the SEC on March 26, 2010
(the 2009 Annual 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 our 2009 Annual
Report. There has been no significant change in our critical accounting estimates.
CPA®:16
Global 3/31/2010 10-Q 1
Table of Contents
CORPORATE PROPERTY ASSOCIATES 16 GLOBAL INCORPORATED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
March 31, 2010 | December 31, 2009 | |||||||
Assets |
||||||||
Investments in real estate: |
||||||||
Real estate, at cost (inclusive of amounts attributable to consolidated variable interest
entities (VIEs) of $427,699 and $454,311) |
$ | 1,651,135 | $ | 1,696,872 | ||||
Operating real estate, at cost (inclusive of amounts attributable to VIEs of $29,219 for
both
periods presented) |
83,843 | 83,718 | ||||||
Accumulated depreciation (inclusive of amounts attributable to VIEs of $(31,346)
and $(30,292), respectively) |
(125,698 | ) | (118,833 | ) | ||||
Net investments in properties |
1,609,280 | 1,661,757 | ||||||
Real estate under construction |
65,256 | 61,588 | ||||||
Net investment in direct financing leases (inclusive of amounts attributable to VIEs
of $50,591 and $52,521, respectively) |
323,541 | 342,055 | ||||||
Equity investments in real estate |
153,300 | 158,149 | ||||||
Net investments in real estate |
2,151,377 | 2,223,549 | ||||||
Notes receivable (inclusive of amounts attributable to VIEs of $316,729
and $337,397, respectively) |
342,905 | 362,707 | ||||||
Cash and cash equivalents (inclusive of amounts attributable to VIEs of $14,669
and $14,199, respectively) |
75,940 | 83,985 | ||||||
Intangible assets, net (inclusive of amounts attributable to VIEs of $27,089
and $29,209, respectively) |
155,630 | 162,432 | ||||||
Funds in escrow (inclusive of amounts attributable to VIEs of $12,274
and $12,339, respectively) |
20,551 | 21,586 | ||||||
Other assets, net (inclusive of amounts attributable to VIEs of $5,823
and $7,908, respectively) |
32,153 | 34,746 | ||||||
Total assets |
$ | 2,778,556 | $ | 2,889,005 | ||||
Liabilities and Equity |
||||||||
Liabilities: |
||||||||
Non-recourse debt (inclusive of amounts attributable to VIEs of $436,050
and $463,309, respectively) |
$ | 1,387,675 | $ | 1,445,889 | ||||
Accounts payable, accrued expenses and other liabilities (inclusive of amounts attributable
to VIEs of $15,542 and $14,189, respectively) |
34,426 | 36,290 | ||||||
Prepaid and deferred rental income and security deposits (inclusive of amounts attributable
to VIEs of $11,617 and $12,476, respectively) |
59,185 | 58,063 | ||||||
Due to affiliates |
7,846 | 14,193 | ||||||
Distributions payable |
20,436 | 20,346 | ||||||
Total liabilities |
1,509,568 | 1,574,781 | ||||||
Redeemable noncontrolling interests |
316,729 | 337,397 | ||||||
Commitments and contingencies (Note 10) |
||||||||
Equity: |
||||||||
CPA®:16 Global shareholders equity: |
||||||||
Common stock, $0.001 par value; 250,000,000 shares authorized; 131,141,600 and
129,995,172 shares issued, respectively |
131 | 130 | ||||||
Additional paid-in capital |
1,184,851 | 1,174,230 | ||||||
Distributions in excess of accumulated earnings |
(239,937 | ) | (225,462 | ) | ||||
Accumulated other comprehensive (loss) income |
(7,003 | ) | 5,397 | |||||
938,042 | 954,295 | |||||||
Less, treasury stock at cost, 7,731,294 and 7,134,071 shares, respectively |
(70,746 | ) | (65,636 | ) | ||||
Total CPA®:16 Global shareholders equity |
867,296 | 888,659 | ||||||
Noncontrolling interests |
84,963 | 88,168 | ||||||
Total equity |
952,259 | 976,827 | ||||||
Total liabilities and equity |
$ | 2,778,556 | $ | 2,889,005 | ||||
See Notes to Consolidated Financial Statements.
CPA®:16 Global 3/31/2010 10-Q
2
Table of Contents
CORPORATE PROPERTY ASSOCIATES 16 GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
Revenues |
||||||||
Rental income |
$ | 38,726 | $ | 35,947 | ||||
Interest income from direct financing leases |
6,727 | 6,663 | ||||||
Interest income on notes receivable |
7,142 | 6,659 | ||||||
Other real estate income |
5,953 | 5,617 | ||||||
Other operating income |
609 | 822 | ||||||
59,157 | 55,708 | |||||||
Operating Expenses |
||||||||
Depreciation and amortization |
(12,220 | ) | (11,241 | ) | ||||
Property expenses |
(8,258 | ) | (8,239 | ) | ||||
Other real estate expenses |
(4,431 | ) | (4,441 | ) | ||||
General and administrative |
(2,263 | ) | (2,552 | ) | ||||
Impairment charges |
(8,030 | ) | (15,984 | ) | ||||
(35,202 | ) | (42,457 | ) | |||||
Other Income and Expenses |
||||||||
Income from equity investments in real estate |
4,781 | 3,064 | ||||||
Other interest income |
22 | 125 | ||||||
Gain on extinguishment of debt |
| 6,512 | ||||||
Other income and (expenses) |
(741 | ) | (332 | ) | ||||
Interest expense |
(19,812 | ) | (19,803 | ) | ||||
(15,750 | ) | (10,434 | ) | |||||
Income before income taxes |
8,205 | 2,817 | ||||||
Provision for income taxes |
(974 | ) | (293 | ) | ||||
Income from continuing operations |
7,231 | 2,524 | ||||||
Discontinued Operations |
||||||||
Income from operations of discontinued properties |
99 | 41 | ||||||
Gain on deconsolidation of a subsidiary |
7,082 | | ||||||
Income from discontinued operations |
7,181 | 41 | ||||||
Net Income |
14,412 | 2,565 | ||||||
Less: Net income attributable to noncontrolling interests |
(2,007 | ) | (4,183 | ) | ||||
Less: Net income attributable to redeemable noncontrolling interests |
(6,445 | ) | (6,027 | ) | ||||
Net Income (Loss) Attributable to CPA®:16
Global Shareholders |
$ | 5,960 | $ | (7,645 | ) | |||
Earnings (Loss) Per Share |
||||||||
Income (loss) from continuing operations attributable to CPA®:16 Global shareholders |
$ | 0.02 | $ | (0.06 | ) | |||
Income from discontinued operations attributable to CPA®:16 Global shareholders |
0.03 | | ||||||
Net income (loss) attributable to CPA®:16 Global shareholders |
$ | 0.05 | $ | (0.06 | ) | |||
Weighted Average Shares Outstanding |
123,608,911 | 122,789,807 | ||||||
Amounts Attributable to CPA®:16 Global
Shareholders |
||||||||
Income (loss) from continuing operations, net of tax |
$ | 2,372 | $ | (7,884 | ) | |||
Income from discontinued operations, net of tax |
3,588 | 239 | ||||||
Net income (loss) |
$ | 5,960 | $ | (7,645 | ) | |||
Distributions Declared Per Share |
$ | 0.1656 | $ | 0.1653 | ||||
See Notes to Consolidated Financial Statements.
CPA®:16 Global 3/31/2010 10-Q
3
Table of Contents
CORPORATE PROPERTY ASSOCIATES 16 GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
(in thousands)
(in thousands)
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
Net Income |
$ | 14,412 | $ | 2,565 | ||||
Other Comprehensive Loss: |
||||||||
Foreign currency translation adjustment |
(35,177 | ) | (41,132 | ) | ||||
Change in unrealized loss on derivative instruments |
(1,062 | ) | (1,099 | ) | ||||
Change in unrealized gain on marketable securities |
3 | 3 | ||||||
(36,236 | ) | (42,228 | ) | |||||
Comprehensive loss |
(21,824 | ) | (39,663 | ) | ||||
Amounts Attributable to Noncontrolling Interests: |
||||||||
Net loss (income) |
(2,007 | ) | (4,183 | ) | ||||
Foreign currency translation adjustment |
3,150 | 3,954 | ||||||
Change in unrealized loss on derivative instruments |
18 | 2 | ||||||
Comprehensive loss attributable to noncontrolling interests |
1,161 | (227 | ) | |||||
Amounts Attributable to Redeemable Noncontrolling Interests: |
||||||||
Net income |
(6,445 | ) | (6,027 | ) | ||||
Foreign currency translation adjustment |
20,668 | 20,927 | ||||||
Comprehensive loss attributable to redeemable noncontrolling interests |
14,223 | 14,900 | ||||||
Comprehensive Loss Attributable to CPA®:16
Global Shareholders |
$ | (6,440 | ) | $ | (24,990 | ) | ||
See Notes to Consolidated Financial Statements.
CPA®:16 Global 3/31/2010 10-Q
4
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CORPORATE PROPERTY ASSOCIATES 16 GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
(in thousands)
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
Cash Flows Operating Activities |
||||||||
Net income |
$ | 14,412 | $ | 2,565 | ||||
Adjustments to net income: |
||||||||
Depreciation and amortization including intangible assets and deferred financing costs |
12,421 | 11,966 | ||||||
Straight-line rent adjustments and amortization of rent-related intangibles |
654 | 345 | ||||||
Income from equity investments in real estate in excess of distributions received |
(736 | ) | (635 | ) | ||||
Issuance of shares to affiliate in satisfaction of fees due |
2,945 | 3,026 | ||||||
Realized gain on foreign currency transactions, net |
193 | 796 | ||||||
Unrealized loss (gain) on foreign currency and derivative transactions, net |
548 | (464 | ) | |||||
Gain on deconsolidation of a
subsidiary(a)
|
(7,082 | ) | | |||||
Gain on extinguishment of debt |
| (6,512 | ) | |||||
Impairment charges |
8,030 | 15,984 | ||||||
Change in other operating assets and liabilities, net |
(1,560 | ) | (909 | ) | ||||
Net cash provided by operating activities |
29,825 | 26,162 | ||||||
Cash Flows Investing Activities |
||||||||
Distributions received from equity investments in real estate in excess of equity income |
383 | 5,503 | ||||||
Contributions to equity investments in real estate |
| (65,318 | ) | |||||
Acquisitions of real estate and other capital expenditures |
(1,080 | ) | (17,560 | ) | ||||
Funding/purchases of notes receivable |
(791 | ) | (1,807 | ) | ||||
Release of funds held in escrow for acquisition and construction of real estate |
| 6,620 | ||||||
Proceeds from sale of real estate |
| 120 | ||||||
Payment of deferred acquisition fees to affiliate |
(6,261 | ) | (9,082 | ) | ||||
Net cash used in investing activities |
(7,749 | ) | (81,524 | ) | ||||
Cash Flows Financing Activities |
||||||||
Distributions paid |
(20,345 | ) | (20,140 | ) | ||||
Distributions paid to noncontrolling interests |
(9,217 | ) | (12,469 | ) | ||||
Contributions from noncontrolling interests |
383 | 2,543 | ||||||
Proceeds from mortgages and notes payable |
| 29,000 | ||||||
Scheduled payments of mortgage principal |
(5,065 | ) | (3,979 | ) | ||||
Prepayment of mortgages and note payable |
| (32,500 | ) | |||||
Deferred financing costs and mortgage deposits, net of deposits refunded |
| (284 | ) | |||||
Proceeds from issuance of shares, net of costs of raising capital |
7,677 | 8,348 | ||||||
Purchase of treasury stock |
(5,110 | ) | (11,332 | ) | ||||
Net cash used in financing activities |
(31,677 | ) | (40,813 | ) | ||||
Change in Cash and Cash Equivalents During the Period |
||||||||
Effect of exchange rate changes on cash |
1,556 | (3,382 | ) | |||||
Net decrease in cash and cash equivalents |
(8,045 | ) | (99,557 | ) | ||||
Cash and cash equivalents, beginning of period |
83,985 | 174,209 | ||||||
Cash and cash equivalents, end of period |
$ | 75,940 | $ | 74,652 | ||||
(a) See Note 12 for a description of the non-cash activity related to the deconsolidation.
See Notes to Consolidated Financial Statements.
CPA®:16 Global 3/31/2010 10-Q
5
Table of Contents
CORPORATE PROPERTY ASSOCIATES 16 GLOBAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Business
Corporate Property Associates 16 Global Incorporated (together with its consolidated
subsidiaries and predecessors, we, us or our) is a publicly owned, non-listed real estate
investment trust (REIT) that invests primarily in commercial properties leased to companies
domestically and internationally. As a REIT, we are not subject to United States (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 March 31, 2010, our portfolio was comprised of our full or partial
ownership interests in 384 properties, substantially all of which were triple-net leased to 78
tenants, and totaled approximately 27 million square feet (on a pro rata basis), with an occupancy
rate of approximately 99%. We were formed in 2003 and are managed by W. P. Carey & Co. LLC (WPC)
and its subsidiaries (collectively, the advisor).
Note 2. Basis of Presentation
Our interim consolidated financial statements have been prepared, without audit, in accordance with
the instructions to Form 10-Q and therefore do not necessarily include all information and
footnotes necessary for a fair statement of our consolidated financial position, results of
operations and cash flows in accordance with accounting principles generally accepted in the
U.S. (GAAP).
In the opinion of management, the unaudited financial information for the interim periods presented
in this Report reflects all normal and recurring adjustments necessary for a fair statement of
results of operations, financial position and cash flows. Our interim consolidated financial
statements should be read in conjunction with our audited consolidated financial statements and
accompanying notes for the year ended December 31, 2009, which are included in our 2009 Annual
Report, as certain disclosures that would substantially duplicate those contained in the audited
consolidated financial statements have not been included in this Report. Operating results for
interim periods are not necessarily indicative of operating results for an entire fiscal year.
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. Certain prior year amounts have been reclassified to conform to the current
year presentation.
Basis of Consolidation
The consolidated financial statements affect 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. We hold investments in
tenant-in-common interests, which we account for as equity investments in real estate under current
authoritative accounting guidance.
In June 2009, the Financial Accounting Standard Board (FASB) issued amended guidance related to
the consolidation of variable interest entities (VIEs). The amended guidance affects the overall
consolidation analysis, changing the approach taken by companies in identifying which entities are
VIEs and in determining which party is the primary beneficiary, and requires 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 amended guidance changes 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, the guidance requires an ongoing reconsideration of the
primary beneficiary and provides a framework for the events that trigger a reassessment of whether
an entity is a VIE. We adopted this amended guidance on January 1, 2010, which did not require
consolidation of any additional VIEs, but we have reflected the assets and liabilities related to
previously consolidated VIEs, of which we are the primary beneficiary and which we consolidate,
separately in our consolidated balance sheets for all periods presented. The adoption of this
amended guidance did not affect our financial position and results of operations.
In connection with the adoption of the amended guidance on consolidating VIEs, we performed an
analysis of all of our subsidiary entities, including our venture entities with other parties, to
determine whether they qualify as VIEs and whether they should be consolidated or accounted for as
equity investments in an unconsolidated venture. As a result of our quantitative and qualitative
assessment to determine whether these entities are VIEs, we identified seven entities that were
deemed to be VIEs. These
entities were deemed VIEs as either: the third party tenant that leases property from each entity has the
right to repurchase the property during the term of their lease at a fixed price, our venture partners to the
entity were not deemed to have sufficient equity
at risk, a third party was deemed to have the power to direct matters that most significantly impact the entity,
or a third party was deemed to have the right to receive the expected residual returns of the entity.
The nature of operations and organizational structure of these VIEs are consistent
with our other entities (Note 1) except for the repurchase and residual returns rights of these
entities.
CPA®:16 Global 3/31/2010 10-Q
6
Table of Contents
Notes to Consolidated Financial Statements
After making the determination that these entities were VIEs, we performed an assessment as to
which party would be considered the primary beneficiary of each entity and would be required to
consolidate each entitys balance sheet and results of operations. This assessment was based upon
which party (1) had the power to direct activities that most significantly impact the entitys
economic performance and (2) had the obligation to absorb the expected losses of or right to
receive benefits from the VIE that could potentially be significant to the VIE. Based on our
assessment, it was determined that we would continue to consolidate six of the VIEs, while the remaining VIE would be
deconsolidated and reclassified as an asset held for sale in connection with the property being placed into
receivership during the first quarter of 2010 (Note 12). Activities that
we considered significant in our assessment included which entity had control over financing
decisions, leasing decisions and ability to sell the entitys assets.
Because we generally utilize non-recourse debt, our maximum exposure to any VIE is limited to the
equity we have in each VIE. We have not provided financial or other support to any VIE, and there
were no guarantees or other commitments from third parties that would affect the value or risk of
our interest in such entities.
Acquisition Costs
In accordance with the FASBs revised guidance for business combinations, which we adopted on
January 1, 2009, we immediately expense all acquisition costs and fees associated with transactions
deemed to be business combinations, but we capitalize these costs 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 generally 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.
Historically, we have not acquired investments that would be deemed business combinations. No
acquisition costs or fees were capitalized during the three months ended March 31, 2010 as we did
not complete any investments. During the three months ended March 31, 2009, we capitalized
acquisition costs and fees of $3.1 million in connection with our investment activity.
Information about International Geographic Areas
At March 31, 2010, our international investments were comprised of investments in the European
Union, Canada, Mexico, Malaysia and Thailand. Revenues from these investments totaled $26.3 million
and $25.4 million for the three months ended March 31, 2010 and 2009, respectively. Our net
investments in real estate for these investments totaled $932.9 million and $988.5 million at March
31, 2010 and December 31, 2009, respectively.
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
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 2010 and 2009, the advisor elected to
receive its asset management fees in cash and its performance fees in restricted shares. We
incurred base asset management fees of $2.9 million for both the three months ended March 31, 2010
and 2009, with performance fees in like amounts, both of which are included in Property expenses in
the consolidated financial statements. At March 31, 2010, the advisor owned 6,052,046 shares (4.9%)
of our common stock.
CPA®:16 Global 3/31/2010 10-Q
7
Table of Contents
Notes to Consolidated Financial Statements
Transaction Fees
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
investment 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 an investment was
purchased, subject to satisfying the 6% performance criterion. Interest on unpaid installments is
5% per year. We did not incur any current or deferred acquisition fees during the three months
ended March 31, 2010. We incurred current and deferred acquisition fees of $1.7 million and $1.4
million, respectively, during the three months ended March 31, 2009. Unpaid installments of
deferred acquisition fees totaled $2.7 million and $9.0 million at March 31, 2010 and December 31,
2009, respectively, and are included in Due to affiliates in the consolidated financial statements.
We paid annual deferred acquisition fee installments of $6.3 million and $9.1 million in cash to
the advisor in January 2010 and 2009, respectively.
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 both March
31, 2010 and December 31, 2009.
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 $0.8 million for both the three months ended March 31, 2010 and 2009,
which are included in General and administrative expenses in the consolidated financial statements.
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. This entity does not have any significant assets,
liabilities or operations other than its interest in the office lease. Under the terms of an office
cost-sharing 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 $0.2 million for each of the three months ended March
31, 2010 and 2009. Based on gross revenues through March 31, 2010, our current share of future
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 and account for the remainder under the equity method of
accounting.
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):
March 31, 2010 | December 31, 2009 | |||||||
Land |
$ | 333,588 | $ | 345,347 | ||||
Buildings |
1,317,547 | 1,351,525 | ||||||
Less: Accumulated depreciation |
(118,462 | ) | (112,385 | ) | ||||
$ | 1,532,673 | $ | 1,584,487 | |||||
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Notes to Consolidated Financial Statements
Operating Real Estate
Operating real estate, which consists primarily of our hotel operations, at cost, is summarized as
follows (in thousands):
March 31, 2010 | December 31, 2009 | |||||||
Land |
$ | 8,296 | $ | 8,296 | ||||
Buildings |
75,547 | 75,422 | ||||||
Less: Accumulated depreciation |
(7,236 | ) | (6,448 | ) | ||||
$ | 76,607 | $ | 77,270 | |||||
Other
In connection with our acquisition of properties, we have recorded net lease intangibles of $146.7
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 revenues,
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. Net amortization of
intangibles, including the effect of foreign currency translation, was $2.1 million for both the
three months ended March 31, 2010 and 2009, respectively.
Real Estate Under Construction
During 2008, we entered into a domestic build-to-suit project for a total cost of up to $61.2
million. Total estimated construction costs for this project were increased to $63.0 million
during 2009 and subsequently increased to $65.8 million during April 2010. Costs incurred on this
project through March 31, 2010 totaled $65.3 million, inclusive of $6.0 million of capitalized
interest, and have been presented as Real estate under construction in the consolidated balance
sheet.
Note 5. 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. 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 contributions).
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 Interest at | Carrying Value at | |||||||||||
Lessee | March 31, 2010 | March 31, 2010 | December 31, 2009 | |||||||||
U-Haul Moving Partners, Inc. and Mercury Partners, LP |
31 | % | $ | 33,582 | $ | 33,834 | ||||||
The New York Times Company |
27 | % | 33,214 | 33,195 | ||||||||
Schuler A.G. (a) (b) |
33 | % | 22,313 | 23,469 | ||||||||
Hellweg Die Profi-Baumarkte GmbH & Co. KG (Hellweg 1) (a) |
25 | % | 18,201 | 18,934 | ||||||||
TietoEnator Plc (a) |
40 | % | 7,941 | 8,488 | ||||||||
Police Prefecture, French Government (a) |
50 | % | 7,894 | 8,268 | ||||||||
Frontier Spinning Mills, Inc. |
40 | % | 6,244 | 6,077 | ||||||||
Pohjola Non-life Insurance Company (a) |
40 | % | 6,070 | 6,632 | ||||||||
OBI A.G. (a) (c) |
25 | % | 5,614 | 6,794 | ||||||||
Actebis Peacock GmbH (a) |
30 | % | 5,397 | 5,644 | ||||||||
Actuant Corporation (a) |
50 | % | 2,668 | 2,758 | ||||||||
Consolidated Systems, Inc. (b) |
40 | % | 2,120 | 2,131 | ||||||||
Lindenmaier A.G. (a) |
33 | % | 1,507 | 1,569 | ||||||||
Thales S.A. (a) |
35 | % | 535 | 356 | ||||||||
$ | 153,300 | $ | 158,149 | |||||||||
(a) | Carrying value of investment is affected by the impact of fluctuations in the exchange rate of the Euro. | |
(b) | Represents tenant-in-common interest. |
(c) | Carrying value of this investment included our share of the net loss on interest rate swap derivative instruments recognized by the venture. |
CPA®:16 Global 3/31/2010 10-Q
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Notes to Consolidated Financial Statements
As discussed in Note 2, we adopted the FASBs amended guidance on consolidating VIEs effective
January 1, 2010. Upon adoption of the amended guidance, we re-evaluated our existing interests in
unconsolidated entities and determined that we should continue to account for our interest in The
New York Times Company venture using the equity method of accounting,
as the third party tenant that leases the property from this venture
has the right to repurchase the property during the term of their
lease at a fixed price. Carrying amounts related to this VIE are
noted in the table above. Because we generally utilize non-recourse debt, our maximum exposure to
this VIE is limited to the equity we have in the VIE. We have not provided financial or other
support to this VIE, and there are no guarantees or other commitments from third parties that would
affect the value or risk of our interest in this entity.
The following tables present combined summarized financial information of our venture properties.
Amounts provided are the total amounts attributable to the venture properties and do not represent
our proportionate share (in thousands):
March 31, 2010 | December 31, 2009 | |||||||
Assets |
$ | 1,448,288 | $ | 1,504,375 | ||||
Liabilities |
(962,088 | ) | (1,003,311 | ) | ||||
Partners/members equity |
$ | 486,200 | $ | 501,064 | ||||
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
Revenues |
$ | 36,028 | $ | 32,173 | ||||
Expenses |
(21,097 | ) | (20,347 | ) | ||||
Net income |
$ | 14,931 | $ | 11,826 | ||||
We recognized income from equity investments in real estate of $4.8 million and $3.1 million for
the three months ended March 31, 2010 and 2009, respectively. Income from equity investments in
real estate represents our proportionate 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.
Equity Investment in Direct Financing Lease Acquired
2009 In March 2009, an entity in which we, our advisor and another affiliate, CPA®:17
Global, hold 27.25%, 17.75% and 55% interests, respectively, 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. 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 to be a real estate asset acquisition under current accounting guidance, the venture
capitalized acquisition-related costs and fees totaling $8.7 million, of which our share was $2.9
million. In August 2009, the venture 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.
Note 6. Fair Value Measurements
Under current authoritative accounting guidance for fair value measurements, the fair value of an
asset is defined as the exit price, which is the amount that would either be received when an asset
is sold or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. The guidance 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 securities.
CPA®:16 Global 3/31/2010 10-Q
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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 March 31, 2010 and December 31, 2009 (in thousands):
Fair Value Measurements at Reporting Date Using: | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||||||
Identical Assets | Observable Inputs | Inputs | ||||||||||||||
Description | March 31, 2010 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Assets: |
||||||||||||||||
Money market funds |
$ | 34,062 | $ | 34,062 | $ | | $ | | ||||||||
Other securities |
1,775 | | | 1,775 | ||||||||||||
Derivative assets |
2,023 | | 49 | 1,974 | ||||||||||||
$ | 37,860 | $ | 34,062 | $ | 49 | $ | 3,749 | |||||||||
Liabilities: |
||||||||||||||||
Derivative liabilities |
$ | (306 | ) | $ | | $ | (306 | ) | $ | | ||||||
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 | $ | | $ | | ||||||||
Other securities |
1,851 | | | 1,851 | ||||||||||||
Derivative assets |
2,228 | | 50 | 2,178 | ||||||||||||
$ | 53,340 | $ | 49,261 | $ | 50 | $ | 4,029 | |||||||||
Liabilities: |
||||||||||||||||
Derivative liabilities |
$ | (380 | ) | $ | | $ | (380 | ) | $ | | ||||||
Assets and liabilities presented above exclude assets and liabilities owned by unconsolidated
ventures.
Fair Value Measurements Using Significant Unobservable Inputs (Level 3 Only) | ||||||||||||||||||||||||
Other | Derivative | Total | Other | Derivative | Total | |||||||||||||||||||
Securities | Assets | Assets | Securities | Assets | Assets | |||||||||||||||||||
Three months ended March 31, 2010 | Three months ended March 31, 2009 | |||||||||||||||||||||||
Beginning
balance |
$ | 1,851 | $ | 2,178 | $ | 4,029 | $ | 2,192 | $ | 2,973 | $ | 5,165 | ||||||||||||
Total gains or
losses (realized
and unrealized): |
||||||||||||||||||||||||
Included in
earnings |
| (151 | ) | (151 | ) | | 647 | 647 | ||||||||||||||||
Included in
other
comprehensive
income
(loss) |
3 | (53 | ) | (50 | ) | 3 | (126 | ) | (123 | ) | ||||||||||||||
Amortization and
accretion |
(79 | ) | | (79 | ) | (76 | ) | | (76 | ) | ||||||||||||||
Ending balance |
$ | 1,775 | $ | 1,974 | $ | 3,749 | $ | 2,119 | $ | 3,494 | $ | 5,613 | ||||||||||||
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 |
$ | | $ | (151 | ) | $ | (151 | ) | $ | | $ | 647 | $ | 647 | ||||||||||
Gains and losses (realized and unrealized) included in earnings are reported in Other income and
(expenses) in the consolidated financial statements.
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Notes to Consolidated Financial Statements
Our financial instruments had the following carrying values and fair values as of the dates shown
(in thousands):
March 31, 2010 | December 31, 2009 | |||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
Non-recourse debt |
$ | 1,387,675 | $ | 1,262,277 | $ | 1,445,889 | $ | 1,286,300 | ||||||||
Notes receivable |
342,905 | 341,753 | 362,707 | 363,389 | ||||||||||||
Other securities |
1,760 | 1,775 | 1,839 | 1,851 |
We determined the estimated fair value of our debt instruments using a discounted cash flow model
with rates that take into account the credit of the tenants and interest rate risk. We estimated
that our other financial assets and liabilities (excluding net investments in direct financing
leases) had fair values that approximated their carrying values at both March 31, 2010 and December
31, 2009.
Items Measured at Fair Value on a Non-Recurring Basis
We performed a quarterly assessment of the value of certain of our real estate investments in
accordance with current authoritative accounting guidance. As part of that assessment, 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. We calculated the impairment charges recorded during
the three months ended March 31, 2010 and 2009 based on market conditions and assumptions at March
31, 2010 and 2009. Actual results may differ materially if market conditions or the underlying
assumptions change.
The following table presents information about our nonfinancial assets that were measured on a fair
value basis for the three months ended March 31, 2010 and 2009. All of the impairment charges were
measured using unobservable inputs (Level 3) (in thousands):
Three months ended March 31, 2010 | Three months ended March 31, 2009 | |||||||||||||||
Total Fair Value | Total Impairment | Total Fair Value | Total Impairment | |||||||||||||
Measurements | Charges | Measurements | Charges | |||||||||||||
Assets: |
||||||||||||||||
Net investments in properties |
$ | 17,295 | $ | 2,835 | $ | 12,459 | $ | 14,951 | ||||||||
Net investments in direct financing leases |
31,705 | 5,195 | | | ||||||||||||
Intangible assets |
| | 892 | 1,070 | ||||||||||||
$ | 49,000 | $ | 8,030 | $ | 13,351 | $ | 16,021 | |||||||||
Liabilities: |
$ | | $ | | $ | (31 | ) | $ | (37 | ) | ||||||
Intangible liabilities |
$ | | $ | | $ | (31 | ) | $ | (37 | ) | ||||||
Note 7. 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 other 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.
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.
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Notes to 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. 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 entered 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.
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 Other comprehensive income (OCI) until the hedged
item is recognized in earnings. The ineffective portion of a derivatives change in fair value is
immediately recognized in earnings.
The following table sets forth certain information regarding our derivative instruments at March
31, 2010 and December 31, 2009 (in thousands):
Balance Sheet | Asset Derivatives Fair Value at | Liability Derivatives Fair Value at | ||||||||||||||||
Location | March 31, 2010 | December 31, 2009 | March 31, 2010 | December 31, 2009 | ||||||||||||||
Derivatives designated as hedging instruments | ||||||||||||||||||
Interest rate caps |
Other assets | $ | 13 | $ | 50 | $ | | $ | | |||||||||
Foreign exchange collar contracts |
Other assets | 36 | | | | |||||||||||||
Foreign exchange contracts |
Other liabilities | | | (20 | ) | (143 | ) | |||||||||||
Interest rate swaps |
Other liabilities | | | (286 | ) | (237 | ) | |||||||||||
49 | 50 | (306 | ) | (380 | ) | |||||||||||||
Derivatives not designated as hedging instruments | ||||||||||||||||||
Embedded credit derivatives |
Other assets | 705 | 963 | | | |||||||||||||
Stock warrants |
Other assets | 1,269 | 1,215 | | | |||||||||||||
1,974 | 2,178 | | | |||||||||||||||
Total derivatives |
$ | 2,023 | $ | 2,228 | $ | (306 | ) | $ | (380 | ) | ||||||||
The following tables present the impact of derivative instruments on the consolidated financial
statements (in thousands):
Amount of Gain | Amount of (Loss) Gain | |||||||||||||||
Recognized in OCI on Derivatives | Reclassified from OCI into Income | |||||||||||||||
(Effective Portion) | (Effective Portion) | |||||||||||||||
Three months ended March 31, | Three months ended March 31, | |||||||||||||||
Derivatives in Cash Flow Hedging Relationships | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Interest rate caps (a) (b) |
$ | (37 | ) | $ | 20 | $ | | $ | | |||||||
Interest rate swaps (a) |
(50 | ) | 34 | | | |||||||||||
Foreign currency forward contracts (a) (c) |
123 | 18 | (10 | ) | 27 | |||||||||||
Foreign currency collars (a) |
36 | | | | ||||||||||||
Total |
$ | 72 | $ | 72 | $ | (10 | ) | $ | 27 | |||||||
(a) | During the three months ended March 31, 2010 and 2009, 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 loss (gain) attributable to noncontrolling interests totaling less than $0.1 million for the three months ended March 31, 2010 and 2009, respectively. | |
(c) | (Losses) gains reclassified from OCI into income for contracts that have matured are included in Other income and (expenses). |
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Notes to Consolidated Financial Statements
Amount of (Loss) Gain Recognized | ||||||||||
in Income on Derivatives | ||||||||||
Derivatives not in Cash Flow | Location of (Loss) Gain | Three months ended March 31, | ||||||||
Hedging Relationships | Recognized in Income | 2010 | 2009 | |||||||
Embedded credit
derivatives (a) |
Other income and (expenses) | $ | (205 | ) | $ | 647 | ||||
Stock warrants |
Other income and (expenses) | 54 | | |||||||
Total |
$ | (151 | ) | $ | 647 | |||||
(a) | Includes losses attributable to noncontrolling interests totaling $0.1 million and $0.5 million for the three months ended March 31, 2010 and 2009, respectively. |
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.
The interest rate swap and interest rate cap derivative instruments that we had outstanding at
March 31, 2010 were designated as cash flow hedges and are summarized as follows (dollars in
thousands):
Notional | Effective | Fair Value at | ||||||||||||||||||||||||||||||
Type | Amount (a) | Cap Rate | Spread | Interest Rate | Effective Date | Expiration Date | March 31, 2010 | |||||||||||||||||||||||||
1-Month LIBOR |
Pay-fixed swap | $ | 3,862 | N/A | N/A | 6.7 | % | 2/2008 | 2/2018 | $ | (286 | ) | ||||||||||||||||||||
1-Month LIBOR |
Interest rate cap (a) | 29,000 | 5.0 | % | 5.0 | % | 6.6 | % | 3/2009 | 3/2012 | 13 | |||||||||||||||||||||
$ | (273 | ) | ||||||||||||||||||||||||||||||
(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 March 31, 2010, and therefore the interest rate cap was not being utilized at that date. |
The interest rate swap and interest rate cap derivative instruments that our unconsolidated
ventures had outstanding at March 31, 2010 were designated as cash flow hedges and are summarized
as follows (dollars in thousands):
Ownership | Effective | |||||||||||||||||||||||||||||||||||
Interest at | Notional | Interest | Effective | Expiration | Fair Value at | |||||||||||||||||||||||||||||||
March 31, 2010 | Type | Amount | Cap Rate | Spread | Rate | Date | Date | March 31, 2010 | ||||||||||||||||||||||||||||
1-Month LIBOR |
25.0 | % | Pay-fixed swap | $ | 159,990 | N/A | N/A | 5.0%-5.6 | % | 7/2006-4/2008 | 10/2015-7/1/2016 | $ | (11,023 | ) | ||||||||||||||||||||||
1-Month LIBOR |
27.3 | % | Interest rate cap | 118,541 | 4.0 | % | 4.8 | % | N/A | 8/2009 | 8/2014 | 1,822 | ||||||||||||||||||||||||
$ | (9,201 | ) | ||||||||||||||||||||||||||||||||||
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Notes to Consolidated Financial Statements
Foreign Currency Contracts
We enter into foreign currency forward contracts and collars 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. A foreign currency
collar consists of a purchased call option to buy and a written put option to sell the foreign
currency. By entering into these instruments, we are locked into a future currency exchange rate,
which limits our exposure to the movement in foreign currency exchange rates.
In January 2010, we entered into two foreign currency zero-cost collars to hedge against a change
in the exchange rate of the Euro versus the U.S. dollar. These contracts had a total notional
amount of $6.9 million, based on the exchange rate of the Euro at March 31, 2010, and placed a floor
on the exchange rate of the Euro at $1.30 and a ceiling ranging from $1.4580 to 1.4616. One of
these contracts matured in April 2010 and the other contract is scheduled to mature in July 2010.
In January 2009, we entered into foreign currency forward contracts with a total notional amount of
$3.9 million, based on the exchange rate of the Euro at March 31, 2010. 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.
Stock Warrants
We own stock warrants that were generally granted to us by lessees in connection with structuring
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 March 31, 2010, 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 certain
of our indebtedness. At March 31, 2010, we had 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 $0.3 million and $0.4 million at March 31, 2010 and December 31, 2009, respectively,
which includes accrued interest but excludes any adjustment for nonperformance risk. If we had
breached any of these provisions at either March 31, 2010 or December 31, 2009, we could have been
required to settle our obligations under these agreements at their termination value of $0.3
million or $0.4 million, respectively.
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 March 31, 2010, 57% 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 (37%),
with Germany (26%) representing the most significant international concentration based on
percentage of our annualized contractual minimum base rent for the first quarter of 2010. In
addition, one German tenant, Hellweg Die Profi-Baumarkte GmbH & Co. KG, represented 20% of lease
revenue for the three months ended March 31, 2010, inclusive of noncontrolling interest. At March
31, 2010, our directly owned real estate properties contained significant concentrations in the
following asset types: industrial (44%), warehouse/distribution (20%), retail (19%) and office
(12%); and in the following tenant industries: retail (29%) and chemicals, plastics, rubber and
glass (11%).
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Notes to Consolidated Financial Statements
Many companies in automotive related industries (manufacturing, parts, services, etc.) have
experienced financial difficulties for several years, which resulted in several companies filing
for bankruptcy. At March 31, 2010, we had seven tenants in automotive related industries, three of
which have filed for bankruptcy protection (see below). These seven tenants accounted for lease
revenues, inclusive of noncontrolling interests, of $3.9 million and $3.7 million for the three
months ended March 31, 2010 and 2009, respectively. For our equity investments in real estate, we
recognized net income and loss of less than $0.1 million and $0.1 million for the three months
ended March 31, 2010 and 2009, respectively, with respect to these tenants. These investments had
an aggregate carrying value of $141.8 million and $146.1 million at March 31, 2010 and December 31,
2009, respectively. Based on their carrying values at March 31, 2010, 54% of these investments were
international (in the European Union, Canada and Mexico).
At March 31, 2010, five tenants, three of which operate in the automotive industry, were in various
stages of the bankruptcy process. These five tenants accounted for lease revenues of $1.9 million,
inclusive of amounts attributable to noncontrolling interests of $0.2 million, and $1.8 million,
inclusive of amounts attributable to noncontrolling interests of $0.2 million, for the three months
ended March 31, 2010 and 2009, respectively, and income or loss from equity investments of less
than $0.1 million and $0.1 million for the three months ended March 31, 2010 and 2009,
respectively. These investments had an aggregate carrying value of $62.8 million at March 31,
2010. As a result of these tenant defaults, we suspended debt service on two non-recourse
mortgage loans, which had an aggregate outstanding balance of $13.2 million and $13.8 million at
March 31, 2010 and December 31, 2009, respectively.
Note 8. Noncontrolling Interests
Noncontrolling interest is the portion of equity in a subsidiary not attributable, directly or
indirectly, to a parent. There were no changes in our ownership interest in any of our consolidated
subsidiaries for the three months ended March 31, 2010.
The following table presents a reconciliation of total equity, the equity attributable to our
shareholders and the equity attributable to noncontrolling interests (in thousands):
CPA®:16 Global | Noncontrolling | |||||||||||
Total | Shareholders | Interests | ||||||||||
Balance at January 1, 2010 |
976,827 | 888,659 | 88,168 | |||||||||
Shares issued |
10,622 | 10,622 | | |||||||||
Contributions |
383 | | 383 | |||||||||
Net income |
7,967 | 5,960 | 2,007 | |||||||||
Distributions |
(22,862 | ) | (20,435 | ) | (2,427 | ) | ||||||
Change in other comprehensive income (loss) |
(15,568 | ) | (12,400 | ) | (3,168 | ) | ||||||
Shares repurchased |
(5,110 | ) | (5,110 | ) | | |||||||
Balance at March 31, 2010 |
$ | 952,259 | $ | 867,296 | $ | 84,963 | ||||||
CPA®:16 Global | Noncontrolling | |||||||||||
Total | Shareholders | Interests | ||||||||||
Balance at January 1, 2009 |
$ | 1,046,605 | $ | 959,896 | $ | 86,709 | ||||||
Shares issued |
11,374 | 11,374 | | |||||||||
Contributions |
2,543 | | 2,543 | |||||||||
Net (loss) income |
(3,462 | ) | (7,645 | ) | 4,183 | |||||||
Distributions |
(26,393 | ) | (20,169 | ) | (6,224 | ) | ||||||
Change in other comprehensive income (loss) |
(21,301 | ) | (17,345 | ) | (3,956 | ) | ||||||
Shares repurchased |
(11,332 | ) | (11,332 | ) | | |||||||
Balance at March 31, 2009 |
$ | 998,034 | $ | 914,779 | $ | 83,255 | ||||||
Redeemable Noncontrolling Interests
Under 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.
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Notes to Consolidated Financial Statements
2010 | 2009 | |||||||
Balance at January 1, |
$ | 337,397 | $ | 331,841 | ||||
Foreign currency translation adjustment |
(20,668 | ) | (20,927 | ) | ||||
Balance at March 31, |
$ | 316,729 | $ | 310,914 | ||||
Note 9. Impairment Charges
We periodically assess whether there are any indicators that the value of our real estate
investments may be impaired or that their carrying value may not be recoverable. For investments in
real estate in which an impairment indicator is identified, we follow a two-step process to
determine whether the investment is impaired and to determine the amount of the charge. First, we
compare the carrying value of the real estate to the future net undiscounted cash flow that we
expect the real estate will generate, including any estimated proceeds from the eventual sale of
the real estate. If this amount is less than the carrying value, the real estate is considered to
be impaired, and we then measure the loss as the excess of the carrying value of the real estate
over the estimated fair value of the real estate, which is primarily determined using market
information from outside sources such as recent comparable sales or broker quotes. If relevant
market information is not deemed appropriate, we then perform a future net cash flow analysis
discounted for inherent risk associated with each investment.
The following table summarizes impairment charges recognized on our consolidated and unconsolidated
real estate investments during the three months ended March 31, 2010 and 2009 (in thousands):
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
Net investments in properties |
$ | 2,835 | $ | 15,984 | ||||
Net investment in direct financing leases |
5,195 | | ||||||
Total impairment charges included in income from continuing operations |
$ | 8,030 | $ | 15,984 | ||||
2010 During the three months ended March 31, 2010, we recognized an impairment charge of $8.0
million, inclusive of amounts attributable to noncontrolling interests of $2.4 million, on a
property leased to The Talaria Company (Hinckley) to reduce the carrying value of this investment
to its estimated fair value based on a potential sale of the property as a result of tenant
financial difficulties. At March 31, 2010, the land of this property was classified as Net
investments in properties and the building was classified as Net investment in direct financing
leases in the consolidated financial statements.
2009 During the three months ended March 31, 2009, we recognized 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. At March 31, 2009, this property was classified
as Net investments in properties in the consolidated financial statements.
Note 10. 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 11. 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 the various states and municipalities within the U.S. and in the European
Union, Canada, Mexico, Malaysia and Thailand, and as a result, we file income tax returns in the
U.S. federal jurisdiction and various state and certain foreign jurisdictions.
We account for uncertain tax positions in accordance with current authoritative accounting
guidance. At both March 31, 2010 and December 31, 2009, we had unrecognized tax benefits of $0.3
million, 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 both March 31, 2010 and December 31, 2009, we had less than $0.1 million of accrued
interest related to uncertain tax positions.
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Notes to Consolidated Financial Statements
Our tax returns are subject to audit by taxing authorities. These audits can often take years to
complete and settle. The tax years 2006 2010 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 accounting guidance. One of these
subsidiaries has operated at a loss since inception, and as a result, we have recorded a full
valuation allowance for this subsidiarys net operating loss carryforwards. The other subsidiary
turned profitable in the first quarter of 2009, and therefore we have recorded a tax provision for
this subsidiary.
Note 12. 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. 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 January 2010, a consolidated
subsidiary consented to a court order appointing a receiver following an event
of a default on a nonrecourse debt obligation involving a property that was
previously leased to Goertz & Schiele Corp. As we no longer have control
over the activities which most significantly impact the economic performance of
this subsidiary following possession by the receiver during January 2010,
the subsidiary has been deconsolidated during the first quarter of 2010. During
the second quarter of 2009, Goertz & Schiele Corp. ceased making rent
payments to us and as a result, we suspended the debt service payments on the
related mortgage loan beginning in July 2009. Goertz & Schiele Corp.
filed for bankruptcy in September 2009 and terminated its lease with us in
bankruptcy proceedings in January, 2010. At the date of deconsolidation, the
property had a carrying value of $5.9 million, reflecting the impact of
impairment charges totalling $15.7 million incurred in 2009, and the
non-recourse mortgage loan had an outstanding balance of $13.3 million. In
connection with this deconsolidation, we recognized a gain of
$7.1 million, inclusive of amounts attributable to noncontrolling interest
of $3.5 million. We believe that the fair value of our retained interest
in this deconsolidated entity is zero at March 31, 2010. We have recorded
the operations and gain recognized upon deconsolidation 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. 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):
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
Revenues |
$ | 348 | $ | 1,706 | ||||
Expenses |
(249 | ) | (1,665 | ) | ||||
Gain on extinguishment of debt |
7,082 | | ||||||
Income from discontinued operations |
$ | 7,181 | $ | 41 | ||||
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Item 2. | 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. Our MD&A should be
read in conjunction with our 2009 Annual Report.
Business Overview
We are a publicly owned, non-listed 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)
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
Total revenues |
$ | 59,157 | $ | 55,708 | ||||
Net income (loss) attributable to CPA®:16 Global shareholders |
5,960 | (7,645 | ) | |||||
Cash flow from operating activities |
29,825 | 26,162 |
Total revenues in the first quarter of 2010 increased as compared to the same period in 2009,
primarily due to an investment entered into in July 2009.
Net income in the first quarter of 2010 reflected higher lease revenue and a reduction in the level
of impairment charges recognized during the quarter
as compared to the same period in 2009. During the first quarter of 2010, we recognized an impairment
charge of $8.0 million, inclusive of amounts attributable to noncontrolling interests of $2.4
million, while for the same period in 2009 we recognized an
impairment charge of $16.0 million.
Cash flow from operating activities in the first quarter of 2010 benefited from the additional
revenues generated from our investment activity during 2009.
Our quarterly cash distribution remained at $0.1656 per share for the first quarter of 2010, 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.
Current Trends
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.
As of the date of this Report, we believe that general economic conditions and conditions in the
credit and real estate financing markets are continuing to improve, albeit slowly. As a result, we
are benefiting from improved financing conditions. However, the lingering effects of the recent
challenging economic environment continue to affect us in several ways, including continued
financial stress on tenants, lower rental rates obtained on renewals of tenant leases and 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 consumer price index (CPI).
Despite recent indicators that the economy is beginning to recover, the full magnitude, effects and
duration of the crisis cannot be predicted, and 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, and our response to those trends, is presented
below.
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Financing Conditions
Since the onset of the credit crisis, lenders for both domestic and international investments
typically offered loans to us at shorter maturities and subject to variable interest rates.
However, we believe we are beginning to see an easing in these trends, with more willingness by
lenders to offer loans to us at fixed rates of interest and with longer maturities. When we are
unable to obtain fixed-rate debt, we generally attempt to obtain interest rate caps or swaps to
mitigate the impact of variable rate financing.
At March 31, 2010, our share of balloon payments that will be due during the next twelve months on
debt in our unconsolidated ventures totaled $7.9 million. We and our venture partner are actively
seeking to refinance this debt but believe we have sufficient financing alternatives and/or cash
resources to make these payments, if necessary. We have no balloon payments that will be due on
debt in our consolidated investments until 2012. 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.
Tenant Defaults
Tenant defaults can reduce our results of operations and cash flow from operations. Tenants
experiencing financial difficulties 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.
During 2009, some of our tenants experienced financial difficulties that could affect us. While we
do not expect to see the unusually high level of tenant defaults that we experienced during 2009,
it is possible that additional tenants may file for bankruptcy or default on their leases during
2010. Based on recent tenant activity including lease amendments, early lease renewals and lease
rejections in bankruptcy court, we currently expect that 2010 lease revenue will decrease by approximately 3% on an annualized basis, as compared with 2009 lease revenue. However, this projected amount
may increase or decrease based on additional tenant activity and changes in economic conditions,
both of which are outside of our control. We would expect that our tenants would benefit from
continued improvements in general business conditions, which should result in reduced tenant
defaults in the future; however, if economic conditions deteriorate, it is likely that our tenants
financial condition would deteriorate as well.
We have several tenants that were in various stages of the bankruptcy process as of the date of
this Report. As a result of these tenant defaults, we have currently suspended debt service on one
non-recourse mortgage loan with an aggregate outstanding balance of $4.1 million, or approximately
0.3% of our aggregate outstanding non-recourse debt.
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.
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.
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
2009 and, to a lesser extent, the first quarter of 2010 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.
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We have foreign investments and as a result are subject to risk from the
effects of exchange rate movements. 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. Our primary foreign currency exposure is to the Euro. Investments denominated in
the Euro accounted for approximately 37% and 39% of our annualized lease revenues for the first quarter of 2010 and 2009, respectively.
The following table presents the exchange rates used to translate our
Euro-denominated foreign operations to U.S. dollars in our consolidated financial statements for the periods presented:
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
Average conversion rate from Euro to U.S. dollar |
1.3856 | 1.3083 | ||||||
As shown in the table above, the average rate for the U.S. dollar in relation to
the Euro during the first quarter of 2010 weakened by approximately 6% in comparison to the same period in 2009, resulting in a modestly
positive impact on our results of operations in the current period from our Euro-denominated investments. However, the U.S. dollar has
recently strengthened against the Euro, as the conversion rate at March 31, 2010 decreased approximately 6% to 1.3455 from 1.4333 at
December 31, 2009. This recent strengthening had a modestly negative impact on our balance sheet at March 31, 2010. A significant decline
in the value of the Euro could have a material negative impact on our future results and cash flows.
Results of Operations
Our evaluation of the sources of lease revenues is as follows (in thousands):
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
Rental income |
$ | 38,726 | $ | 35,947 | ||||
Interest income from direct financing leases |
6,727 | 6,663 | ||||||
$ | 45,453 | $ | 42,610 | |||||
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):
Three months ended March 31, | ||||||||
Lessee | 2010 | 2009 | ||||||
Hellweg Die Profi-Baumarkte GmbH & Co. KG (Hellweg 2) (a) (b) |
8,947 | 8,432 | ||||||
Telcordia Technologies, Inc. |
2,343 | 2,342 | ||||||
Tesco plc (a) (b) (c) |
1,894 | | ||||||
Nordic Cold Storage LLC |
1,731 | 1,624 | ||||||
Berry Plastics Corporation (b) |
1,697 | 1,660 | ||||||
Fraikin SAS (a) |
1,410 | 1,395 | ||||||
MetoKote Corp., MetoKote Canada Limited and MetoKote de Mexico (a) (d) |
1,207 | 1,145 | ||||||
International Aluminum Corp. and United States Aluminum of Canada Ltd. (a) |
1,129 | 1,129 | ||||||
The Talaria Company (Hinckley) (b) (e) |
1,120 | 1,244 | ||||||
LFD Manufacturing Ltd., IDS Logistics (Thailand) Ltd. and IDS Manufacturing SDN BHD (a) |
1,043 | 940 | ||||||
Huntsman International, LLC |
1,006 | 1,006 | ||||||
Best Brands Corp. |
997 | 988 | ||||||
Ply Gem Industries, Inc. (a) |
985 | 959 | ||||||
TRW Vehicle Safety Systems Inc. (d) |
892 | 892 | ||||||
Bobs Discount Furniture, LLC |
888 | 860 | ||||||
Performance Fibers GmbH (a) |
841 | 804 | ||||||
Universal Technical Institute of California, Inc. |
836 | 836 | ||||||
Kings Super Markets Inc. |
835 | 835 | ||||||
Finisar Corporation |
805 | 805 | ||||||
Dicks Sporting Goods, Inc. (b) |
784 | 784 | ||||||
Other (a) (b) (d) |
14,063 | 13,930 | ||||||
$ | 45,453 | $ | 42,610 | |||||
(a) | Amounts are subject to fluctuations in foreign currency exchange rates. | |
(b) | These revenues are generated in consolidated ventures, generally with our affiliates, and include lease revenues applicable to noncontrolling interests totaling $11.0 million and $9.6 million for the three months ended March 31, 2010 and 2009, respectively. |
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(c) | Investment was acquired in July 2009. | |
(d) | Tenant operates in the automotive industry. Included in Other are lease revenues from four additional tenants operating in the automotive industry totaling $1.8 million and $1.7 million for the three months ended March 31, 2010 and 2009, respectively. | |
(e) | During the second half of 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. In April 2010, the lease was further amended to extend the rental payment deferral period through August 2010. In connection with a potential sale of this property, during the three months ended March 31, 2010, we recognized an impairment charge of $8.0 million, inclusive of amounts attributable to noncontrolling interests of $2.4 million. |
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 | Three months ended March 31, | |||||||||||
Lessee | March 31, 2010 | 2010 | 2009 | |||||||||
U-Haul Moving Partners, Inc. and Mercury Partners, L.P. (a) |
31 | % | $ | 8,122 | $ | 7,136 | ||||||
The New York Times Company (b) |
27 | % | 6,659 | 1,850 | ||||||||
OBI A.G. (c) |
25 | % | 4,060 | 3,908 | ||||||||
Hellweg Die Profi-Baumarkte GmbH & Co. KG (c) |
25 | % | 3,754 | 3,430 | ||||||||
Pohjola Non-life Insurance Company (c) |
40 | % | 2,210 | 2,120 | ||||||||
Police Prefecture, French Government (a) (c) |
50 | % | 2,157 | 1,843 | ||||||||
TietoEnator Plc (c) |
40 | % | 2,098 | 1,980 | ||||||||
Schuler A.G. (c) |
33 | % | 1,595 | 1,520 | ||||||||
Frontier Spinning Mills, Inc. |
40 | % | 1,118 | 1,109 | ||||||||
Thales S.A. (c) (d) |
35 | % | 1,086 | 3,342 | ||||||||
Actebis Peacock GmbH (c) |
30 | % | 1,008 | 949 | ||||||||
Consolidated Systems, Inc. |
40 | % | 449 | 449 | ||||||||
Actuant Corporation (c) |
50 | % | 446 | 423 | ||||||||
Lindenmaier A.G. (c) (e) |
33 | % | 379 | 603 | ||||||||
$ | 35,141 | $ | 30,662 | |||||||||
(a) | Increase was due to CPI-based (or equivalent) rent increase. | |
(b) | We acquired our interest in this investment in March 2009. | |
(c) | Amounts are subject to fluctuations in foreign currency exchange rates. | |
(d) | The venture sold four of the five properties leased to Thales in July 2009. | |
(e) | Tenant operates in the automotive industry and is operating under bankruptcy protection. 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. Additionally, in April 2010 we entered into a lease agreement with a new tenant at a vacant property formerly leased to Lindenmaier, which will generate annualized lease revenues of approximately $0.3 million. |
Through a venture with our affiliates, we own a 26% effective ownership interest in a venture that
owns 37 properties throughout Germany (the Hellweg 2 transaction). We consolidate the venture in
our financial statements under current authoritative accounting guidance for the consolidation of
VIEs. However, because our effective ownership interest is 26%, a significant portion of the
results of operations from this transaction is reduced by noncontrolling interests in the entity.
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, this transaction generated property level cash flow from operations
(revenues less interest expense) of $3.6 million and $2.8 million, inclusive of noncontrolling
interests of $2.7 million and $2.1 million, for the three months ended March 31, 2010 and 2009,
respectively.
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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 intended 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.
For the three months ended March 31, 2010 as compared to the same period in 2009, lease revenues
increased by $2.8 million. Lease revenues increased by $1.9 million in the current year period from
an investment entered into during July 2009 and $1.1 million as a result of the positive impact of
fluctuations in foreign currency exchange rates (primarily the Euro). These increases were
partially offset by the impact of recent tenant activity, including lease restructurings and lease
expirations.
Depreciation and Amortization
For the three months ended March 31, 2010 as compared to the same period in 2009, depreciation and
amortization expense increased by $1.0 million, due primarily to investments entered into or placed
into service during 2009.
Impairment Charges
During the three months ended March 31, 2010, we recognized an impairment charge of $8.0 million,
inclusive of amounts attributable to noncontrolling interests of $2.4 million, on a property
leased to Hinckley to reduce the carrying value of this investment to its estimated fair value
based on a potential sale of the property as a result of tenant financial difficulties.
During the three months ended March 31, 2009, we recognized 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.
Income from Equity Investments in Real Estate
Income from equity investments in real estate represents our proportionate share of net income or
loss (revenue less expenses) from investments entered into with affiliates or third parties in
which we have a non controlling interest but exercise significant influence.
For the three months ended March 31, 2010 as compared to the same period in 2009, income from
equity investments in real estate increased by $1.7 million, primarily due to our investment in The
New York Times transaction in March 2009, which contributed an increase of $0.9 million to income
for the current year period, and scheduled rent increases on several properties, which contributed
$0.7 million.
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.
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.
For the three months ended March 31, 2010 as compared to the same period in 2009, net other
expenses increased $0.4 million, primarily due to the recognition of a net loss of $0.2 million on
the Hellweg 2 embedded credit derivative during the three months ended March 31, 2010 as compared
to a net gain of $0.6 million on that derivative recognized during the three months ended March 31,
2009.
Net Income (Loss) Attributable to CPA®:16
Global Shareholders
For the three months ended March 31, 2010, the resulting net income attributable to
CPA®:16 Global shareholders was $6.0 million as compared to net loss of $7.6
million for the three months ended March 31, 2009.
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Financial Condition
Sources and Uses of Cash During the Period
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, payment to the
advisor of the annual installment of deferred acquisition fees and interest thereon in the first
quarter and changes in foreign currency exchange rates. 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 the three months ended March 31, 2010, we used cash flows from operating activities of $29.8
million to fund distributions to shareholders of $20.3 million. We also made scheduled mortgage
principal installments of $5.1 million and paid distributions to noncontrolling interests partners
of $9.2 million. We also used cash distributions from equity investments in real estate in excess
of equity income of $0.4 million (see Investing Activities below) and our existing cash resources
to fund these payments. For 2010, the advisor has elected to continue to receive its performance
fees in restricted shares of our common stock, and as a result, we paid performance fees of $2.9
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), payment of our annual installment of deferred acquisition fees to the advisor and
capitalized property related costs. In January 2010, we paid our annual installment of deferred
acquisition fees to the advisor, which totaled $6.3 million. We used $1.1 million to fund
construction costs at a build-to-suit project and to make capital improvements on a hotel property.
Financing Activities
In addition to making scheduled mortgage principal installments and paying distributions to
shareholders and noncontrolling interests during the three months ended March 31, 2010, we received
$7.7 million as a result of issuing shares through our distribution reinvestment and stock purchase
plan and used $5.1 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 plan pursuant to which we may, at the discretion of our board of
directors, redeem shares of our common stock from shareholders seeking liquidity. The terms of the
plan 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. At March 31, 2010, redemptions totaled approximately 2.6% 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.
For the three months ended March 31, 2010, we received requests to redeem 597,223 shares of our
common stock pursuant to our redemption plan, and we redeemed these requests at a price per share
of $8.56. We funded share redemptions during 2010 from the proceeds of the sale of shares of our
common stock pursuant to our distribution reinvestment and share purchase plan.
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Summary of Financing
The table below summarizes our non-recourse long-term debt (dollars in thousands):
March 31, 2010 | December 31, 2009 | |||||||
Balance |
||||||||
Fixed rate |
$ | 1,329,116 | $ | 1,385,550 | ||||
Variable rate (a) |
58,559 | 60,339 | ||||||
Total |
$ | 1,387,675 | $ | 1,445,889 | ||||
Percent of total debt |
||||||||
Fixed rate |
96 | % | 96 | % | ||||
Variable rate (a) |
4 | % | 4 | % | ||||
100 | % | 100 | % | |||||
Weighted average interest rate at end of period |
||||||||
Fixed rate |
5.9 | % | 5.9 | % | ||||
Variable rate (a) |
6.0 | % | 6.0 | % |
(a) | Variable rate debt at March 31, 2010 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 effective interest rate of the cap was not in effect at March 31, 2010 and (iii) $25.7 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 March 31, 2010, our cash resources consisted of cash and cash equivalents totaling $75.9
million. Of this amount, $31.2 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 $187.4 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.
Cash Requirements
During the next twelve months, 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 (neither we nor our venture partners have any balloon
payments on our mortgage obligations until the third quarter of 2011) and funding build-to-suit and
lending commitments that we currently estimate to total $12.7 million, as well as other normal
recurring operating expenses.
At March 31, 2010, we had several tenants that were in various stages of the bankruptcy process.
Several of these tenants have stopped making rent payments and in some cases have vacated the
properties they lease from us. As a result of these tenant defaults, we have currently suspended
debt service on two non-recourse mortgage loans with an aggregate outstanding balance of $13.2
million, or approximately 1.0% of our aggregate outstanding non-recourse debt. For the remaining
vacant property, we anticipate that we will incur significant carrying costs during the time the
property remains unoccupied.
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Off-Balance Sheet Arrangements and Contractual Obligations
The table below summarizes our off-balance sheet arrangements and contractual obligations at March
31, 2010 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 | 13 years | 35 years | 5 years | ||||||||||||||||
Non-recourse debt Principal |
$ | 1,387,675 | $ | 22,504 | $ | 82,273 | $ | 124,158 | $ | 1,158,740 | ||||||||||
Deferred acquisition fees Principal |
2,700 | 1,911 | 789 | | | |||||||||||||||
Interest on borrowings and deferred acquisition
fees (a) |
579,307 | 81,613 | 157,059 | 146,560 | 194,075 | |||||||||||||||
Subordinated disposition fees (b) |
1,013 | | | | 1,013 | |||||||||||||||
Build-to-suit commitments (c) |
6,526 | 6,526 | | | | |||||||||||||||
Lending commitments (d) |
209 | 209 | | | | |||||||||||||||
Operating and other lease commitments (e) |
56,564 | 1,792 | 3,618 | 3,615 | 47,539 | |||||||||||||||
$ | 2,033,994 | $ | 114,555 | $ | 243,739 | $ | 274,333 | $ | 1,401,367 | |||||||||||
(a) | Interest on an unhedged variable rate debt obligation was calculated using the variable interest rate and balance outstanding at March 31, 2010. | |
(b) | Payable to the advisor, subject to meeting contingencies, in connection with any liquidity event. There can be no assurance that any liquidity event will be achieved in this time frame. | |
(c) | Represents remaining build-to-suit commitment for a domestic project. During April 2010, the estimated budget for this project was increased by $2.8 million. Total estimated construction costs for this project are currently projected to be $65.8 million, of which $56.5 million had been funded at March 31, 2010. | |
(d) | Represents unfunded amount on a commitment to provide a loan to a developer of a domestic property. During April 2010, we committed to fund additional loan proceeds of $3.2 million through the completion of this project. The total commitment for the loan is currently $19.0 million, of which $16.0 million had been funded at March 31, 2010. | |
(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 $8.7 million. |
Amounts in the table above related to our foreign operations are based on the exchange rate of the
local currencies at March 31, 2010. At March 31, 2010, we had no material capital lease obligations
for which we are the lessee, either individually or in the aggregate.
Together with our advisor and certain of our affiliates, we 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 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. We acquired a venture (the
property venture) that in turn acquired a 24.7% ownership interest in a limited partnership
owning 37 properties throughout Germany. Concurrently, we also acquired a second venture (the
lending venture) that made a loan (the note receivable) to the holder of the remaining 75.3%
interests in the limited partnership (the partner). Under the terms of the note receivable, the
lending venture will receive interest that approximates 75% of all income earned by the limited
partnership, less adjustments. 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 March 31, 2010 (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 $2.3
million, with our share approximating $0.6 million. In addition, our maximum exposure to loss on
these ventures was approximately $98.5 million (inclusive of noncontrolling interests and of both
our existing investment and the amount to fund our future commitment).
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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 March 31, 2010 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 | Total Third | |||||||||||||||
Lessee | at March 31, 2010 | Total Assets | Party Debt | Maturity Date | ||||||||||||
Thales S.A. (a) |
35 | % | $ | 27,864 | $ | 25,337 | 7/2011 | |||||||||
U-Haul Moving Partners, Inc. and Mercury Partners, L.P. |
31 | % | 297,517 | 163,283 | 5/2014 | |||||||||||
Actuant Corporation (a) |
50 | % | 17,114 | 11,228 | 5/2014 | |||||||||||
TietoEnator Plc (a) |
40 | % | 91,162 | 70,709 | 7/2014 | |||||||||||
The New York Times Company |
27 | % | 241,237 | 118,541 | 9/2014 | |||||||||||
Pohjola Non-life Insurance Company |
40 | % | 97,226 | 80,173 | 1/2015 | |||||||||||
Hellweg Die Profi-Baumarkte GmbH & Co. KG (Hellweg 1)
(a) |
25 | % | 182,723 | 98,787 | 5/2015 | |||||||||||
Actebis Peacock GmbH (a) |
30 | % | 49,149 | 29,941 | 7/2015 | |||||||||||
Frontier Spinning Mills, Inc. |
40 | % | 39,494 | 23,224 | 8/2016 | |||||||||||
Consolidated Systems, Inc. |
40 | % | 16,925 | 11,494 | 11/2016 | |||||||||||
Lindenmaier A.G. (a) |
33 | % | 16,927 | 11,850 | 10/2017 | |||||||||||
OBI A.G. (a) |
25 | % | 198,021 | 159,990 | 3/2018 | |||||||||||
Police Prefecture, French Government (a) |
50 | % | 103,113 | 84,834 | 8/2020 | |||||||||||
Schuler A.G. (a) |
33 | % | 69,816 | | N/A | |||||||||||
$ | 1,448,288 | $ | 889,391 | |||||||||||||
(a) | Dollar amounts shown are based on the applicable exchange rate of the foreign currency at March 31, 2010. |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Market Risk
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 is 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.
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 recent economic conditions, 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.
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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 a series of interest rate flows
are exchanged 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. We estimate that the net fair value of our interest rate
cap and interest rate swap, which are included in Other assets, net and Accounts payable, accrued
expenses and other liabilities in the consolidated financial statements, was a liability of $0.3
million at March 31, 2010. 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 $9.2 million in the aggregate, representing the total amount attributable
to the ventures, not our proportionate share, at March 31, 2010 (Note 7).
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 three months ended March
31, 2010, the embedded credit derivatives generated unrealized losses of $0.2 million, inclusive of
noncontrolling interest of $0.1 million. 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 March 31, 2010, 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 March 31, 2010 ranged from 4.4% to 7.7%. The annual interest rates on our variable rate debt at
March 31, 2010 ranged from 5.2% to 6.7%. Our debt obligations are more fully described in Financial
Condition in Item 2 above. The following table presents principal cash flows based upon expected
maturity dates of our debt obligations outstanding at March 31, 2010 (in thousands):
2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | Fair value | |||||||||||||||||||||||||
Fixed rate debt |
$ | 16,280 | $ | 24,585 | $ | 26,604 | $ | 29,666 | $ | 92,803 | $ | 1,139,178 | $ | 1,329,116 | $ | 1,203,722 | ||||||||||||||||
Variable rate debt |
$ | 301 | $ | 406 | $ | 29,410 | $ | 417 | $ | 489 | $ | 27,536 | $ | 58,559 | $ | 58,555 |
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 this debt at March 31, 2010 by an
aggregate increase of $70.5 million or an aggregate decrease of $65.7 million, respectively. This
debt is generally not subject to short-term fluctuations in interest rates. Annual interest expense
on our unhedged variable rate debt that does not bear interest at fixed rates at March 31, 2010
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 2 above, a portion of the debt classified
as variable rate debt in the tables above bore interest at fixed rates at March 31, 2010 but has
interest rate reset features that will change the fixed interest rates to then-prevailing market
fixed rates at certain points during 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 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 the three months ended March 31, 2010, 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 the three months ended March 31, 2010, we recognized net
realized and unrealized foreign currency transaction losses of $0.2 million and $0.4 million,
respectively. These 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
consolidated subsidiaries.
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In January 2010, we entered into two foreign currency zero-cost collars to hedge against a change
in the exchange rate of the Euro versus the U.S. dollar. These contracts had a total notional
amount of $6.9 million, based on the exchange rate of the Euro at March 31, 2010, and placed a floor
on the exchange rate of the Euro at $1.30 and a ceiling ranging from $1.4580 to $1.4616. One of
these contracts matured in April 2010 and the other contract is scheduled to mature in July 2010.
The net estimated fair value of the foreign currency collars, which is included in Other assets in
the consolidated financial statements, was less than $0.1 million at March 31, 2010.
In January 2009, we entered into foreign currency forward contracts with a total notional amount of
$3.9 million, based on the exchange rate of the Euro at March 31, 2010. 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 the three months ended March 31, 2010, we recorded a net loss
of less than $0.1 million upon settlement of one of these contracts. This loss was included in
Other income and (expenses) in the consolidate 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 less than $0.1
million at March 31, 2010.
We have obtained non-recourse mortgage financing at fixed rates of interest in the local currency.
To the extent that currency fluctuations increase or decrease rental revenues as translated to
dollars, the change in debt service, as translated to dollars, will partially offset the effect of
fluctuations in revenue, and, to some extent, mitigate the risk from changes in foreign currency
rates.
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 March 31, 2010, warrants issued to us were classified
as derivative instruments and had an aggregate estimated fair value of $1.3 million.
Item 4. | 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. It should be noted that no system of
controls can provide complete assurance of achieving a companys objectives and that future events
may impact the effectiveness of a system of controls.
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 at March 31, 2010, have concluded that our disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective as of March 31,
2010 at a reasonable level of assurance.
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.
PART II
Item 2. | Unregistered Sales of Equity Securities |
For the three months ended March 31, 2010, we issued 320,150 restricted shares of common stock to
the advisor as consideration for performance fees. These shares were issued at $9.20 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.
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Issuer Purchases of Equity Securities:
The following table provides information with respect to repurchases of our common stock during the
three months ended March 31, 2010:
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 | |||||||||||||
2010 Period | shares purchased(a) | paid per share | plans or programs(a) | plans or programs(a) | ||||||||||||
January |
N/A | N/A | ||||||||||||||
February |
N/A | N/A | ||||||||||||||
March |
597,223 | $ | 8.56 | N/A | N/A | |||||||||||
Total |
597,223 | |||||||||||||||
(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. |
Item 6. | Exhibits |
Exhibit No. | Description | Method of Filing | ||||
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 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
Corporate Property Associates 16 Global Incorporated |
||||
Date 5/14/2010 | By: | /s/ Mark J. DeCesaris | ||
Mark J. DeCesaris | ||||
Managing Director and Acting Chief Financial Officer (Principal Financial Officer) | ||||
Date 5/14/2010 | By: | /s/ Thomas J. Ridings, Jr. | ||
Thomas J. Ridings, Jr. | ||||
Executive Director and Chief Accounting Officer (Principal Accounting Officer) |
||||
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EXHIBIT INDEX
Exhibit No. | Description | Method of Filing | ||||
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 |
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