UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
|
|
|
þ |
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 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: 000-25771
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
(Exact name of registrant as specified in its charter)
|
|
|
Maryland
|
|
13-3951476 |
(State or other jurisdiction of incorporation or organization)
|
|
(I.R.S. Employer Identification No.) |
|
|
|
50 Rockefeller Plaza |
|
|
New York, New York
|
|
10020 |
(Address of principal executive offices)
|
|
(Zip code) |
Registrants telephone numbers, including area code:
Investor Relations (212) 492-8920
(212) 492-1100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.001 Per Share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
|
|
|
|
|
|
|
Large accelerated filer o
|
|
Accelerated filer o
|
|
Non-accelerated filer þ
|
|
Smaller reporting company o |
|
|
|
|
(Do not check if a smaller reporting company) |
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
Registrant has no active market for its common stock. Non-affiliates held 86,801,034 shares of
common stock at June 30, 2010.
As of March 18, 2011, there were 87,438,362 shares of common stock of registrant outstanding.
TABLE OF CONTENTS
Forward-Looking Statements
This Annual Report on Form 10-K, including Managements Discussion and Analysis of Financial
Condition and Results of Operations in Item 7 of Part II of this Report, contains forward-looking
statements within the meaning of the federal securities laws. These forward-looking statements
generally are identified by the words believe, project, expect, anticipate, estimate,
intend, strategy, plan, may, should, will, would, will be, will continue, will
likely result, and similar expressions. It is important to note that our actual results could be
materially different from those projected in such forward-looking statements. You should exercise
caution in relying on forward-looking statements as they involve known and unknown risks,
uncertainties and other factors that may materially affect our future results, performance,
achievements or transactions. Information on factors which could impact actual results and cause
them to differ from what is anticipated in the forward-looking statements contained herein is
included in this Report as well as in our other filings with the Securities and Exchange Commission
(the SEC), including but not limited to those described in Item 1A. Risk Factors of this Report.
We do not undertake to revise or update any forward-looking statements. Additionally, a description
of our critical accounting estimates is included in the Managements Discussion and Analysis of
Financial Condition and Results of Operations section of this Report.
CPA®:14 2010 10-K 1
PART I
(a) General Development of Business
Overview
Corporate Property Associates 14 Incorporated (together with its consolidated subsidiaries and
predecessors, we, us or our) is a publicly owned, non-listed real estate investment trust
(REIT) that primarily invests 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.
Our core investment strategy is to own and manage a portfolio of properties leased to a diversified
group of companies on a single tenant net lease basis. Our net leases generally require the tenant
to pay substantially all of the costs associated with operating and maintaining the property such
as maintenance, insurance, taxes, structural repairs and other operating expenses. Leases of this
type are referred to as triple-net leases. We generally seek to include in our leases:
|
|
|
clauses providing for mandated rent increases or periodic rent increases over the term
of the lease tied to increases in the Consumer Price Index (CPI) or other similar index
for the jurisdiction in which the property is located or, when appropriate, increases tied
to the volume of sales at the property; |
|
|
|
indemnification for environmental and other liabilities; |
|
|
|
operational or financial covenants of the tenant; and |
|
|
|
guarantees of lease obligations from parent companies or letters of credit. |
We are managed by W. P. Carey & Co. LLC (WPC) through certain of its wholly-owned subsidiaries
(collectively, the advisor). WPC is a publicly-traded company listed on the New York Stock
Exchange under the symbol WPC.
The advisor provides both strategic and day-to-day management services for us, including capital
funding services, investment research and analysis, investment financing and other investment
related services, asset management, disposition of assets, investor relations and administrative
services. The advisor also provides office space and other facilities for us. We pay asset
management fees and certain transactional fees to the advisor and also reimburse the advisor for
certain expenses incurred in providing services, including personnel provided for the
administration of our operations. The advisor also currently serves in this capacity for other
REITs that it formed under the Corporate Property Associates brand: Corporate Property Associates
15 Incorporated (CPA®:15), Corporate Property Associates 16 Global Incorporated
(CPA®:16 Global) and Corporate Property Associates 17 Global Incorporated
(CPA®:17 Global), collectively, including us, the CPA® REITs. The
advisor also serves as the advisor to Carey Watermark Investors Incorporated, which was formed in
March 2008 for the purpose of acquiring interests in lodging and lodging-related properties.
We were formed as a Maryland corporation in June 1997. Between November 1997 and November 2001, we
sold a total of 65,794,280 shares of common stock for a total of $657.9 million in gross offering
proceeds. Through December 31, 2010, we have also issued 4,775,729 shares ($61.9 million) through
our distribution reinvestment and stock purchase plan. We have repurchased 9,133,838 shares ($107.4
million) of our common stock under a redemption plan from inception through December 31, 2010. In
September 2009, as a result of redemptions nearing the 5% limitation under the terms of our
redemption plan and our desire to preserve capital and liquidity, our board of directors suspended
our redemption plan, effective for all redemption requests received subsequent to September 1,
2009, with limited exceptions in cases of death or disability. The suspension will remain in effect
until our board of directors, in its discretion, determines to reinstate the plan.
Our principal executive offices are located at 50 Rockefeller Plaza, New York, NY 10020 and our
telephone number is (212) 492-1100. We have no employees. At December 31, 2010, the advisor
employed 170 individuals who are available to perform services for us.
CPA®:14 2010 10-K 2
Significant Developments during 2010:
Proposed Merger and Asset Sales On December 13, 2010, we and CPA®:16 Global
entered into a definitive agreement pursuant to which we will merge with and into a subsidiary of
CPA®:16 Global, subject to the approval of our shareholders (the Proposed Merger).
In connection with this Proposed Merger, CPA®:16 Global filed a registration
statement with the SEC, which was declared effective by the SEC on March 8, 2011. Special
shareholder meetings for both us and CPA®:16 Global are currently scheduled to be
held on April 26, 2011 to obtain our shareholder approval of the Proposed Merger and the alternate
merger described below, and CPA®:16 Global shareholder approval of the alternate
merger, among other matters. The alternate merger is intended to provide an alternate tax-efficient
transaction if the amount of cash elected to be received by our shareholders in the Proposed Merger
could cause the Proposed Merger to be a taxable transaction. The closing of the Proposed Merger is
also subject to customary closing conditions, as well as the closing of our asset sales described
below. If the Proposed Merger is approved, we currently expect that the closing will occur in the
second quarter of 2011, although there can be no assurance of such timing.
In connection with the Proposed Merger, we have agreed to sell three properties each to the advisor
and CPA®:17 Global for aggregate selling prices of $32.1 million and $57.4 million,
respectively, plus the assumption of indebtedness totaling approximately $64.7 million and $153.9
million, respectively (the Asset Sales), and we expect to recognize a gain on the sales of these
properties. CPA®:16 Global is not purchasing the properties being sold to
CPA®:17 Global because CPA®:16 Global already is a joint venture
partner in those properties and does not wish to increase its ownership interest in them. The
properties being sold to the advisor are properties in which the advisor already is a joint venture
owner, and these properties all have remaining lease terms of less than 8 years, which are shorter
than the average lease term of CPA®:16 Globals portfolio of properties.
Consequently, CPA®:16 Global required that these assets be sold by us prior to the
Proposed Merger. The Asset Sales are contingent upon the approval of the Proposed Merger by our
shareholders.
If the Proposed Merger is consummated, the advisor will earn $31.2 million of termination fees in
connection with the termination of its advisory agreement with us, $15.2 million of subordinated
disposition fees and $6.1 million in fees that have been accrued but have not yet been paid under
the advisory agreement. The advisor has elected to receive the $31.2 million of termination fees in
shares of our common stock, for which it has agreed to elect to receive shares of
CPA®:16 Global in the Proposed Merger. In addition, based on the advisors ownership
of 8,018,456 shares of our common stock at December 31, 2010, we expect to pay the advisor
approximately $8.0 million as a result of a $1.00 per share special cash distribution to be paid by
us to our shareholders, in part from the proceeds of the Asset Sales, immediately prior to the
Proposed Merger, as described below. The advisor has agreed to elect to receive stock of
CPA®:16 Global in respect of the shares of our common stock that it owns if the
Proposed Merger is consummated.
In the Proposed Merger, our shareholders will be entitled to receive $11.50 per share, the Merger
Consideration, which is
equal to our estimated net asset value (NAV) per share as of September 30, 2010. The Merger
Consideration will be paid to our shareholders, at their election, in either cash or a combination
of the $1.00 per share special cash distribution and 1.1932 shares of CPA®:16 Global
common stock, which equates to $10.50 based on the $8.80 per share NAV of CPA®:16
Global as of September 30, 2010. Our advisor computed these NAVs internally, relying in part upon a
third-party valuation of each companys real estate portfolio and indebtedness as of September 30,
2010. Our board of directors and the board of directors of CPA®:16 Global each have
the ability, but not the obligation, to terminate the transaction if more than 50% of our
shareholders elect to receive cash in the Proposed Merger. Assuming that holders of 50% of our
outstanding stock elect to receive cash in the Proposed Merger, then the maximum cash required by
CPA®:16 Global to purchase these shares would be approximately $416.1 million, based
on our total shares outstanding at December 31, 2010. If the cash on hand and available to us and
CPA®:16 Global, including the proceeds of the Asset Sales and a new $300.0 million
senior credit facility to be entered into by CPA®:16 Global, is not sufficient to
enable CPA®:16 Global to fulfill cash elections in the Proposed Merger by our
shareholders, the advisor has agreed to purchase a sufficient number of shares of
CPA®:16 Global stock from CPA®:16 Global to enable it to pay such
amounts to our shareholders. If the Proposed Merger is consummated, the maximum cash required to
pay the $1.00 per share special cash distribution would be approximately $87.3 million, based on
our total shares outstanding at December 31, 2010.
Financing Activity During 2010, we refinanced maturing non-recourse mortgage loans with new
non-recourse financing of $104.8 million at a weighted average annual interest rate and term of
5.6% and 9.4 years, respectively.
Dispositions During 2010, we returned a property previously leased to Nortel Networks Inc.
(Nortel) to the lender in exchange for the lenders agreement to release us from all related
non-recourse mortgage loan obligations. In connection with this disposition, we recognized a gain
on the extinguishment of debt of $11.4 million. Also during 2010, we recognized a gain of $12.9
million on the deconsolidation of a subsidiary in connection with its property entering into
receivership.
CPA®:14 2010 10-K 3
Impairment Charges During 2010, we incurred impairment charges totaling $15.3 million to reduce
the carrying value of certain of our real estate investments and securities to their estimated fair
value (Note 11).
Net Asset Value In connection with the Proposed Merger described above, we obtained an interim
NAV as of September 30, 2010. This interim valuation resulted in a NAV of $11.50 per share, which
represented a 2.5% decline from our NAV of $11.80 per share at December 31, 2009.
(b) Financial Information About Segments
We operate in one industry segment, real estate ownership, with domestic and foreign investments.
Refer to Note 18 in the accompanying consolidated financial statements for financial information
about this segment.
(c) Narrative Description of Business
Business Objectives and Strategy
We intended to consider alternatives for providing liquidity for our shareholders generally
commencing eight years following the investment of substantially all of the net proceeds from our
initial public offering, which occurred in 2000. On this basis, in the first quarter of 2008 we
asked our advisor to begin reviewing possible liquidity alternatives for us. However, in light of
the deteriorating market conditions during 2008, the advisor recommended, and our board agreed,
that further consideration of liquidity alternatives be postponed until market conditions became
more stable. In early 2010, we announced that we believed we had begun to see an easing of the
global economic and financial crisis that had severely curbed liquidity in the credit and real
estate financing markets and that, as a result, we had asked our advisor to recommence its review
of possible liquidity alternatives for us. After considering various proposals, we announced that,
on December 13, 2010, we and CPA®:16 Global had entered into a definitive agreement
pursuant to which we will merge with and into a subsidiary of CPA®:16 Global, subject
to the approval of our shareholders. If the Proposed Merger is approved and the other closing
conditions are satisfied, we currently expect that the closing will occur in the second quarter of
2011, although there can be no assurance of such timing or that the closing will occur at all.
Currently, our primary business goal is to complete the Proposed Merger to provide a liquidity
event for our shareholders. The following is a description of our business objective and strategy
from inception to December 31, 2010.
We invest primarily in income-producing commercial real estate properties that are, upon
acquisition, improved or developed or that will be developed within a reasonable time after
acquisition.
Our objectives are to:
|
|
|
own a diversified portfolio of triple-net leased real estate; |
|
|
|
fund distributions to shareholders; and |
|
|
|
increase our equity in our real estate by making regular principal payments on mortgage
loans for our properties. |
We seek to achieve these objectives by investing in and holding commercial properties that are
generally triple-net leased to a single corporate tenant. We intend our portfolio to be diversified
by tenant, facility type, geographic location and tenant industry.
Our business plan is principally focused on managing our existing portfolio of properties,
including those properties we acquired from Corporate Property Associates 12 Incorporated
(CPA®:12) through a merger transaction in December 2006 (the 2006
Merger). This may include looking to selectively dispose of properties, obtaining new non-recourse
mortgage financing on unencumbered assets or refinancing existing mortgage loans on properties if
we can obtain such financing on attractive terms.
CPA®:14 2010 10-K 4
Our Portfolio
At December 31, 2010, our portfolio was comprised of our full or partial ownership interests in 304
properties, substantially all of which were triple-net leased to 82 tenants, and totaled
approximately 28 million square feet (on a pro rata basis) with an occupancy rate of approximately
94%. Our portfolio had the following property and lease characteristics:
Geographic Diversification
Information regarding the geographic diversification of our properties at December 31, 2010 is set
forth below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Investments |
|
|
Equity Investments in Real Estate (b) |
|
|
|
Annualized |
|
|
% of Annualized |
|
|
Annualized |
|
|
% of Annualized |
|
|
|
Contractual |
|
|
Contractual |
|
|
Contractual |
|
|
Contractual |
|
|
|
Minimum |
|
|
Minimum |
|
|
Minimum |
|
|
Minimum |
|
Region |
|
Base Rent (a) |
|
|
Base Rent |
|
|
Base Rent (a) |
|
|
Base Rent |
|
United States |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
East |
|
$ |
39,401 |
|
|
|
28 |
% |
|
$ |
3,179 |
|
|
|
7 |
% |
South |
|
|
27,841 |
|
|
|
19 |
|
|
|
7,982 |
|
|
|
18 |
|
Midwest |
|
|
25,506 |
|
|
|
18 |
|
|
|
8,374 |
|
|
|
19 |
|
West |
|
|
24,860 |
|
|
|
17 |
|
|
|
13,161 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. |
|
|
117,608 |
|
|
|
82 |
|
|
|
32,696 |
|
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe (c) |
|
|
25,323 |
|
|
|
18 |
|
|
|
11,413 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
142,931 |
|
|
|
100 |
% |
|
$ |
44,109 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects annualized contractual minimum base rent for the fourth quarter of 2010. |
|
(b) |
|
Reflects our pro rata share of annualized contractual minimum base rent for the fourth
quarter of 2010 from equity investments in real estate. |
|
(c) |
|
Reflects investments in Finland, France, Germany, the Netherlands and the United Kingdom. |
Property Diversification
Information regarding our property diversification at December 31, 2010 is set forth below (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Investments |
|
|
Equity Investments in Real Estate (b) |
|
|
|
Annualized |
|
|
% of Annualized |
|
|
Annualized |
|
|
% of Annualized |
|
|
|
Contractual |
|
|
Contractual |
|
|
Contractual |
|
|
Contractual |
|
|
|
Minimum |
|
|
Minimum |
|
|
Minimum |
|
|
Minimum |
|
Property Type |
|
Base Rent (a) |
|
|
Base Rent |
|
|
Base Rent (a) |
|
|
Base Rent |
|
Industrial |
|
$ |
44,316 |
|
|
|
31 |
% |
|
$ |
10,248 |
|
|
|
23 |
% |
Warehouse/distribution |
|
|
43,399 |
|
|
|
31 |
|
|
|
8,769 |
|
|
|
20 |
|
Office |
|
|
27,584 |
|
|
|
19 |
|
|
|
2,472 |
|
|
|
6 |
|
Retail |
|
|
15,744 |
|
|
|
11 |
|
|
|
12,937 |
|
|
|
29 |
|
Other properties (c) |
|
|
11,888 |
|
|
|
8 |
|
|
|
9,683 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
142,931 |
|
|
|
100 |
% |
|
$ |
44,109 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects annualized contractual minimum base rent for the fourth quarter of 2010. |
|
(b) |
|
Reflects our pro rata share of annualized contractual minimum base rent for the fourth
quarter of 2010 from equity investments in real estate. |
|
(c) |
|
Other properties include education, childcare and leisure; movie theaters; sports/fitness;
and storage/trucking facilities; as well as undeveloped land. |
CPA®:14 2010 10-K 5
Tenant Diversification
Information regarding our tenant diversification at December 31, 2010 is set forth below (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Investments |
|
|
Equity Investments in Real Estate (c) |
|
|
|
Annualized |
|
|
% of Annualized |
|
|
Annualized |
|
|
% of Annualized |
|
|
|
Contractual |
|
|
Contractual |
|
|
Contractual |
|
|
Contractual |
|
|
|
Minimum |
|
|
Minimum |
|
|
Minimum |
|
|
Minimum |
|
Tenant Industry (a) |
|
Base Rent (b) |
|
|
Base Rent |
|
|
Base Rent (b) |
|
|
Base Rent |
|
Retail trade |
|
$ |
40,704 |
|
|
|
29 |
% |
|
$ |
14,320 |
|
|
|
32 |
% |
Electronics |
|
|
17,279 |
|
|
|
12 |
|
|
|
7,448 |
|
|
|
17 |
|
Transportation cargo |
|
|
12,231 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
Automobile |
|
|
9,516 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
Construction and building |
|
|
9,156 |
|
|
|
6 |
|
|
|
6,825 |
|
|
|
15 |
|
Leisure, amusement, entertainment |
|
|
9,042 |
|
|
|
6 |
|
|
|
5,854 |
|
|
|
13 |
|
Business and commercial services |
|
|
8,309 |
|
|
|
6 |
|
|
|
2,552 |
|
|
|
6 |
|
Beverages, food, and tobacco |
|
|
6,346 |
|
|
|
4 |
|
|
|
1,764 |
|
|
|
4 |
|
Consumer non-durable goods |
|
|
5,875 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
Chemicals, plastics, rubber, and glass |
|
|
5,702 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
Machinery |
|
|
4,532 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
Healthcare, education and childcare |
|
|
4,495 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
Media: printing and publishing |
|
|
2,286 |
|
|
|
2 |
|
|
|
1,597 |
|
|
|
4 |
|
Buildings and real estate |
|
|
|
|
|
|
|
|
|
|
2,437 |
|
|
|
6 |
|
Other (d) |
|
|
7,458 |
|
|
|
5 |
|
|
|
1,312 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
142,931 |
|
|
|
100 |
% |
|
$ |
44,109 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Based on the Moodys Investors Service, Inc. classification system and information provided
by the tenant. |
|
(b) |
|
Reflects annualized contractual minimum base rent for the fourth quarter of 2010. |
|
(c) |
|
Reflects our pro rata share of annualized contractual minimum base rent for the fourth
quarter of 2010 from equity investments in real estate. |
|
(d) |
|
Other includes annualized contractual minimum base rent from tenants in our consolidated
investments in the following industries: consumer and durable goods (1.4%), aerospace and
defense (1.3%), mining (1.3%), forest products and paper (1.0%), and banking (less than 1%).
For our equity investments in real estate, Other consists of annualized contractual minimum
base rent from tenants in personal transportation (3.0%). |
CPA®:14 2010 10-K 6
Lease Expirations
At December 31, 2010, lease expirations of our properties were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Investments |
|
|
Equity Investments in Real Estate (b) |
|
|
|
Annualized |
|
|
% of Annualized |
|
|
Annualized |
|
|
% of Annualized |
|
|
|
Contractual |
|
|
Contractual |
|
|
Contractual |
|
|
Contractual |
|
|
|
Minimum |
|
|
Minimum |
|
|
Minimum |
|
|
Minimum |
|
Year of Lease Expiration |
|
Base Rent (a) |
|
|
Base Rent |
|
|
Base Rent (a) |
|
|
Base Rent |
|
2011 |
|
$ |
4,512 |
|
|
|
3 |
% |
|
$ |
|
|
|
|
|
% |
2012 |
|
|
2,687 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
2013 |
|
|
337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2,913 |
|
|
|
2 |
|
|
|
1,312 |
|
|
|
3 |
|
2015 |
|
|
22,221 |
|
|
|
16 |
|
|
|
2,552 |
|
|
|
6 |
|
2016 |
|
|
7,295 |
|
|
|
5 |
|
|
|
1,763 |
|
|
|
4 |
|
2017 |
|
|
14,509 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
2018 |
|
|
2,850 |
|
|
|
2 |
|
|
|
8,972 |
|
|
|
20 |
|
2019 |
|
|
17,582 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
2020 |
|
|
17,391 |
|
|
|
12 |
|
|
|
1,597 |
|
|
|
4 |
|
2021 |
|
|
30,443 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
2022 |
|
|
15,444 |
|
|
|
11 |
|
|
|
8,209 |
|
|
|
19 |
|
2023 |
|
|
1,910 |
|
|
|
2 |
|
|
|
652 |
|
|
|
1 |
|
2024 |
|
|
2,837 |
|
|
|
2 |
|
|
|
2,437 |
|
|
|
5 |
|
2025 |
|
|
|
|
|
|
|
|
|
|
5,202 |
|
|
|
12 |
|
2026 |
|
|
|
|
|
|
|
|
|
|
11,413 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
142,931 |
|
|
|
100 |
% |
|
$ |
44,109 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects annualized contractual minimum base rent for the fourth quarter of 2010. |
|
(b) |
|
Reflects our pro rata share of annualized contractual minimum base rent for the fourth
quarter of 2010 from equity investments in real estate. |
Asset Management
We believe that effective management of our assets is essential to maintain and enhance property
values. Important aspects of asset management include restructuring transactions to meet the
evolving needs of current tenants, re-leasing properties, refinancing debt, selling assets and
knowledge of the bankruptcy process.
The advisor monitors, on an ongoing basis, compliance by tenants with their lease obligations and
other factors that could affect the financial performance of any of our properties. Monitoring
involves verifying that each tenant has paid real estate taxes, assessments and other expenses
relating to the properties it occupies and confirming that appropriate insurance coverage is being
maintained by the tenant. For international compliance, the advisor also utilizes third-party asset
managers for certain investments. The advisor reviews financial statements of our tenants and
undertakes regular physical inspections of the condition and maintenance of our properties.
Additionally, the advisor periodically analyzes each tenants financial condition, the industry in
which each tenant operates and each tenants relative strength in its industry.
CPA®:14 2010 10-K 7
Holding Period
We intend to hold each property we invest in for an extended period. The determination of whether a
particular property should be sold or otherwise disposed of will be made after consideration of
relevant factors, including prevailing economic conditions, with a view to achieving maximum
capital appreciation for our shareholders or avoiding increases in risk. No assurance can be given
that this objective will be realized.
Financing Strategies
Consistent with our investment policies, we use leverage when available on favorable terms.
Substantially all of our mortgage loans are non-recourse and provide for monthly or quarterly
installments, which include scheduled payments of principal. At December 31, 2010, 83% of our
mortgage financing bore interest at fixed rates. At December 31, 2010, approximately 70% of our
variable-rate debt bore interest at fixed rates that are scheduled to reset in the future, pursuant
to the terms of the mortgage contracts. Accordingly, our near-term cash flow should not be
adversely affected by increases in interest rates. The advisor may refinance properties or defease
a loan when a decline in interest rates makes it profitable to prepay an existing mortgage loan,
when an existing mortgage loan matures or if an attractive investment becomes available and the
proceeds from the refinancing can be used to purchase the investment. There is no assurance that
existing debt will be refinanced at lower rates of interest as the debt matures. The benefits of
the refinancing may include an increased cash flow resulting from reduced debt service
requirements, an increase in distributions from proceeds of the refinancing, if any, and/or an
increase in property ownership if some refinancing proceeds are reinvested in real estate. The
prepayment of loans may require us to pay a yield maintenance premium to the lender in order to pay
off a loan prior to its maturity.
A lender on non-recourse mortgage debt generally has recourse only to the property collateralizing
such debt and not to any of our other assets, while unsecured financing would give a lender
recourse to all of our assets. The use of non-recourse debt, therefore, helps us to limit the
exposure of our assets to any one debt obligation. Lenders may, however, have recourse to our other
assets in limited circumstances not related to the repayment of the indebtedness, such as under an
environmental indemnity or in the case of fraud. Lenders may also seek to include in the terms of
mortgage loans provisions making the termination or replacement of the advisor an event of default
or an event requiring the immediate repayment of the full outstanding balance of the loan. We will
attempt to negotiate loan terms allowing us to replace or terminate the advisor. Even if we are
successful in negotiating such provisions, the replacement or termination of the advisor may
require the prior consent of the mortgage lenders.
A majority of our financing requires us to make a lump-sum or balloon payment at maturity. At
December 31, 2010, scheduled balloon payments for the next five years were as follows (in
thousands):
|
|
|
|
|
2011 |
|
$ |
174,442 |
(a) (b) (c) |
2012 |
|
|
117,346 |
(b) (c) |
2013 |
|
|
|
(b) |
2014 |
|
|
15,076 |
(b) |
2015 |
|
|
13,004 |
|
|
|
|
(a) |
|
Of the amount shown, $4.3 million was paid in January 2011 and $11.2 million was paid in
March 2011. |
|
(b) |
|
Excludes our pro rata share of mortgage obligations of equity investments in real estate
totaling $9.8 million in 2011, $8.6 million in 2012, $32.4 million in 2013 and $16.7 million
in 2014. In February 2011, a venture repaid a mortgage loan due in 2011, of which our share of
the payment was $4.9 million. |
|
(c) |
|
Inclusive of amounts attributable to noncontrolling interests totaling $13.2 million in 2011
and $2.5 million in 2012. |
We are currently seeking to refinance certain of these loans due in 2011 and sell certain
properties to non-affiliates for gross proceeds of approximately $77.1 million. Our existing cash
resources and, if completed, cash proceeds from certain planned asset sales (Item 7, MD&A,
Financial Condition Cash Resources) can be used to make these payments, if necessary.
Investment Strategies
We invest primarily in income-producing properties that are, upon acquisition, improved or being
developed or that are to be developed within a reasonable period after acquisition. While we are
not currently seeking to make new significant investments, we may do so if attractive opportunities
arise.
CPA®:14 2010 10-K 8
Most of our properties are subject to long-term net leases and were acquired through sale-leaseback
transactions in which we acquire properties from companies that simultaneously lease the properties
back from us. These sale-leaseback transactions provide the lessee company with a source of capital
that is an alternative to other financing sources such as corporate borrowing, mortgaging real
property, or selling shares of its stock.
Our sale-leaseback transactions may occur in conjunction with acquisitions, recapitalizations or
other corporate transactions. We may act as one of several sources of financing for these
transactions by purchasing real property from the seller and net leasing it back to the seller or
its successor in interest (the lessee).
In analyzing potential net lease investment opportunities, the advisor reviews all aspects of a
transaction, including the creditworthiness of the tenant or borrower and the underlying real
estate fundamentals, to determine whether a potential acquisition satisfies our acquisition
criteria. The advisor generally considers, among other things, the following aspects of each
transaction:
Tenant/Borrower Evaluation The advisor evaluates each potential tenant or borrower for their
creditworthiness, typically considering factors such as management experience, industry position
and fundamentals, operating history, and capital structure, as well as other factors that may be
relevant to a particular investment. The advisor seeks opportunities in which it believes the
tenant may have a stable or improving credit profile or the credit profile has not been recognized
by the market. In evaluating a possible investment, the creditworthiness of a tenant or borrower
often is a more significant factor than the value of the underlying real estate, particularly if
the underlying property is specifically suited to the needs of the tenant; however, in certain
circumstances where the real estate is attractively valued, the creditworthiness of the tenant may
be a secondary consideration. Whether a prospective tenant or borrower is creditworthy will be
determined by the advisors investment department and its investment committee, as described below.
Creditworthy does not mean investment grade.
Properties Important to Tenant/Borrower Operations The advisor generally focuses on properties
that it believes are essential or important to the ongoing operations of the tenant. The advisor
believes that these properties provide better protection generally as well as in the event of a
bankruptcy, since a tenant/borrower is less likely to risk the loss of a critically important lease
or property in a bankruptcy proceeding or otherwise.
Diversification The advisor attempts to diversify our portfolio to avoid dependence on any one
particular tenant, borrower, collateral type, geographic location or tenant/borrower industry. By
diversifying our portfolio, the advisor seeks to reduce the adverse effect of a single
under-performing investment or a downturn in any particular industry or geographic region.
Lease Terms Generally, the net leased properties in which we invest are leased on a full
recourse basis to our tenants or their affiliates. In addition, the advisor generally seeks to
include a clause in each lease that provides for increases in rent over the term of the lease.
These increases are fixed or tied generally to increases in indices such as the CPI, or other
similar index in the jurisdiction in which the property is located, but may contain caps or other
limitations either on an annual or overall basis. Further, in some jurisdictions (notably Germany),
these clauses must provide for rent adjustments based on increases or decreases in the relevant
index. In the case of retail stores and hotels, the lease may provide for participation in gross
revenues of the tenant at the property above a stated level. Alternatively, a lease may provide for
mandated rental increases on specific dates.
Collateral Evaluation The advisor reviews the physical condition of the property and conducts a
market evaluation to determine the likelihood of replacing the rental stream if the tenant defaults
or of a sale of the property in such circumstances. The advisor will also generally engage third
parties to conduct, or requires the seller to conduct, Phase I or similar environmental site
assessments (including a visual inspection for the potential presence of asbestos) in an attempt to
identify potential environmental liabilities associated with a property prior to its acquisition.
If potential environmental liabilities are identified, the advisor generally requires that
identified environmental issues be resolved by the seller prior to property acquisition or, where
such issues cannot be resolved prior to acquisition, requires tenants contractually to assume
responsibility for resolving identified environmental issues post-closing and provide
indemnification protections against any potential claims, losses or expenses arising from such
matters. Although the advisor generally relies on its own analysis in determining whether to make
an investment, each real property to be purchased by us will be appraised by an independent
appraiser. The contractual purchase price (plus acquisition fees, but excluding acquisition
expenses, payable to the advisor) for a real property we acquire will not exceed its appraised
value, unless approved by our independent directors. The appraisals may take into consideration,
among other things, the terms and conditions of the particular lease transaction, the quality of
the lessees credit and the conditions of the credit markets at the time the lease transaction is
negotiated. The appraised value may be greater than the construction cost or the replacement cost
of a property, and the actual sale price of a property if sold by us may be greater or less than
the appraised value. In cases of special purpose real estate, a property is examined in light of
the prospects for the tenant/borrowers enterprise and the financial strength and the role of that
asset in the context of the
tenant/borrowers overall viability. Operating results of properties and other collateral may be
examined to determine whether or not projected income levels are likely to be met.
CPA®:14 2010 10-K 9
Transaction Provisions to Enhance and Protect Value The advisor attempts to include provisions
in our leases it believes may help protect our investment from changes in the operating and
financial characteristics of a tenant that may affect its ability to satisfy its obligations to us
or reduce the value of our investment, such as requiring our consent to specified tenant activity,
requiring the tenant to provide indemnification protections, and requiring the tenant to satisfy
specific operating tests. The advisor may also seek to enhance the likelihood of a tenants lease
obligations being satisfied through a guarantee of obligations from the tenants corporate parent
or other entity or a letter of credit. This credit enhancement, if obtained, provides us with
additional financial security. However, in markets where competition for net lease transactions is
strong, some or all of these provisions may be difficult to negotiate. In addition, in some
circumstances, tenants may retain the right to repurchase the property leased by the tenant. The
option purchase price is generally the greater of the contract purchase price or the fair market
value of the property at the time the option is exercised.
Other Equity Enhancements The advisor may attempt to obtain equity enhancements in connection
with transactions. These equity enhancements may involve warrants exercisable at a future time to
purchase stock of the tenant or borrower or their parent. If warrants are obtained, and become
exercisable, and if the value of the stock subsequently exceeds the exercise price of the warrant,
equity enhancements can help us to achieve our goal of increasing investor returns.
Investment Decisions The advisors investment department, under the oversight of its chief
investment officer, is primarily responsible for evaluating, negotiating and structuring potential
investment opportunities for the CPA® REITs and WPC. Before an investment is made, the
transaction is reviewed by the advisors investment committee, except under the limited
circumstances described below. The investment committee is not directly involved in originating or
negotiating potential investments but instead functions as a separate and final step in the
acquisition process. The advisor places special emphasis on having experienced individuals serve on
its investment committee. The advisor will not invest in a transaction on our behalf unless it is
approved by the investment committee, except that investments with a total purchase price of $10.0
million or less may be approved by either the chairman of the investment committee or the advisors
chief investment officer (up to, in the case of investments other than long-term net leases, a cap
of $30.0 million or 5% of our estimated net asset value, whichever is greater, provided that such
investments may not have a credit rating of less than BBB-). For transactions that meet the
investment criteria of more than one CPA® REIT, the chief investment officer has
discretion to allocate the investment to or among the CPA® REITs. In cases where two or
more CPA® REITs (or one or more of the CPA® REITs and the advisor) will hold
the investment, a majority of the independent directors of each CPA® REIT investing in
the property must also approve the transaction.
The following people currently serve on the investment committee:
|
|
|
Nathaniel S. Coolidge, Chairman Former senior vice president and head of the bond
and corporate finance department of John Hancock Mutual Life Insurance (currently known as
John Hancock Life Insurance Company). Mr. Coolidges responsibilities included overseeing
its entire portfolio of fixed income investments. |
|
|
|
Axel K.A. Hansing Currently serving as a senior partner at Coller Capital, Ltd., a
global leader in the private equity secondary market, and responsible for investment
activity in parts of Europe, Turkey and South Africa. |
|
|
|
Frank J. Hoenemeyer Former vice chairman and chief investment officer of the
Prudential Insurance Company of America. As chief investment officer, he was responsible
for all of Prudential Insurance Company of Americas investments including stocks, bonds
and real estate. |
|
|
|
Jean Hoysradt Currently serving as the chief investment officer of Mousse Partners
Limited, an investment office based in New York. |
|
|
|
Dr. Lawrence R. Klein Currently serving as professor emeritus of economics and
finance at the University of Pennsylvania and its Wharton School. Recipient of the 1980
Nobel Prize in economic sciences and former consultant to both the Federal Reserve Board
and the Presidents Council of Economic Advisors. |
|
|
|
Richard C. Marston Currently the James R.F. Guy professor of economics and finance
at the University of Pennsylvania and its Wharton School. |
CPA®:14 2010 10-K 10
|
|
|
Nick J.M. van Ommen Former chief executive officer of the European Public Real
Estate Association (EPRA), currently serves on the supervisory boards of several companies,
including Babis Vovos International Construction SA, a listed real estate company in
Greece, Intervest Retail and Intervest Offices, listed real estate companies in Belgium,
BUWOG / ESG, a residential leasing and development company in Austria and IMMOFINANZ, a
listed real estate company in Austria. |
|
|
|
Dr. Karsten von Köller Currently chairman of Lone Star Germany GMBH, a US private
equity firm (Lone Star), Chairman of the Supervisory Board of Düsseldorfer Hypothekenbank
AG, a subsidiary of Lone Star, and Vice Chairman of the Supervisory Boards of IKB Deutsche
Industriebank AG, Corealcredit Bank AG and MHB Bank AG. |
Segments
We operate in one industry segment, real estate ownership, with domestic and foreign investments.
For 2010, Carrefour France, SAS represented 16% of our total lease revenue.
Competition
We face active competition from many sources for investment opportunities in commercial properties
net leased to major corporations both domestically and internationally. In general, we believe that
our advisors experience in real estate, credit underwriting and transaction structuring should
allow us to compete effectively for commercial properties to the extent we make future
acquisitions. However, competitors may be willing to accept rates of return, lease terms, other
transaction terms or levels of risk that we may find unacceptable.
Environmental Matters
Our properties generally are or have been used for commercial purposes, including industrial and
manufacturing properties. Under various federal, state and local environmental laws and
regulations, current and former owners and operators of property may have liability for the cost of
investigating, cleaning up or disposing of hazardous materials released at, on, under, in or from
the property. These laws typically impose responsibility and liability without regard to whether
the owner or operator knew of or was responsible for the presence of hazardous materials or
contamination, and liability under these laws is often joint and several. Third parties may also
make claims against owners or operators of properties for personal injuries and property damage
associated with releases of hazardous materials. As part of our efforts to mitigate these risks, we
typically engage third parties to perform assessments of potential environmental risks when
evaluating a new acquisition of property, and we frequently obtain contractual protection
(indemnities, cash reserves, letters of credit or other instruments) from property sellers,
tenants, a tenants parent company or another third party to address known or potential
environmental issues.
Transactions with Affiliates
We enter into transactions with our affiliates, including the other CPA® REITs and our
advisor or its affiliates, if we believe that doing so is consistent with our investment objectives
and we comply with our investment policies and procedures. These transactions typically take the
form of jointly-owned ventures, direct purchases of assets, mergers or another type of transaction.
As discussed in Item 1, Significant Developments, on December 13, 2010, we and CPA®:16
Global entered into a definitive agreement regarding the Proposed Merger, pursuant to which we
will merge with and into a subsidiary of CPA®:16 Global, subject to the approval of
our shareholders. The closing of the Proposed Merger is also subject to customary closing
conditions, as well as the closing of our Asset Sales, pursuant to which we have agreed to sell
three properties each to the advisor and CPA®:17 Global for an aggregate selling
price of $32.1 million and $57.4 million, respectively, plus the assumption of indebtedness
totaling approximately $64.7 million and $153.9 million, respectively. The Asset Sales are
contingent upon the approval of the Proposed Merger by our shareholders.
Types of Investments
Substantially all of our investments to date are and will continue to be income-producing
properties, which are, upon acquisition, improved or being developed or which will be developed
within a reasonable period of time after their acquisition. These investments have primarily been
through sale-leaseback transactions, in which we invest in properties from companies that
simultaneously lease the properties back from us subject to long-term leases. Investments are not
restricted as to geographical areas.
CPA®:14 2010 10-K 11
Other Investments We may invest up to 10% of our net equity in unimproved or
non-income-producing real property and in equity interests. Investment in equity interests in the
aggregate will not exceed five percent of our net equity. Such equity interests are defined
generally to mean stock, warrants or other rights to purchase the stock of, or other interests in,
a tenant of a property, an entity to which we lend money or a parent or controlling person of a
borrower or tenant. We may invest in unimproved or non-income-producing property that the advisor
believes will appreciate in value or increase the value of adjoining or neighboring properties we
own. There can be no assurance that these expectations will be realized. Often, equity interests
will be restricted securities, as defined in Rule 144 under the Securities Act of 1933 (the
Securities Act), which means that the securities have not been registered with the SEC and are
subject to restrictions on sale or transfer. Under this rule, we may be prohibited from reselling
the equity securities until we have fully paid for and held the securities for a period between six
months to one year. It is possible that the issuer of equity interests in which we invest may never
register the interests under the Securities Act. Whether an issuer registers its securities under
the Securities Act may depend on many factors, including the success of its operations.
We will exercise warrants or other rights to purchase stock generally if the value of the stock at
the time the rights are exercised exceeds the exercise price. Payment of the exercise price will
not be deemed an investment subject to the above described limitations. We may borrow funds to pay
the exercise price on warrants or other rights or may pay the exercise price from funds held for
working capital and then repay the loan or replenish the working capital upon the sale of the
securities or interests purchased. We will not consider paying distributions out of the proceeds of
the sale of these interests until any funds borrowed to purchase the interest have been fully
repaid.
We will not invest in real estate contracts of sale unless the contracts are in recordable form and
are appropriately recorded in the applicable chain of title.
Cash resources will be invested in permitted temporary investments, which include short-term U.S.
Government securities, bank certificates of deposit and other short-term liquid investments. To
maintain our REIT qualification, we also may invest in securities that qualify as real estate
assets and produce qualifying income under the REIT provisions of the Internal Revenue Code. Any
investments in other REITs in which the advisor or any director is an affiliate must be approved as
being fair and reasonable by a majority of the directors (which must include a majority of the
independent directors) who are not otherwise interested in the transaction.
If at any time the character of our investments would cause us to be deemed an investment company
for purposes of the Investment Company Act of 1940 (the Investment Company Act), we will take the
necessary action to ensure that we are not deemed to be an investment company. The advisor will
continually review our investment activity, including monitoring the proportion of our portfolio
that is placed in various investments, to attempt to ensure that we do not come within the
application of the Investment Company Act.
Our reserves, if any, will be invested in permitted temporary investments. The advisor will
evaluate the relative risks and rate of return, our cash needs and other appropriate considerations
when making short-term investments on our behalf. The rate of return of permitted temporary
investments may be less than would be obtainable from real estate investments.
(d) Financial Information About Geographic Areas
See Our Portfolio above and Note 18 of the consolidated financial statements for financial
information pertaining to our geographic operations.
(e) Available Information
All filings we make with the SEC, including our Annual Report on Form 10-K, our quarterly reports
on Form 10-Q, and our current reports on Form 8-K, and any amendments to those reports, are
available for free on our website, http://www.cpa14.com, as soon as reasonably practicable after
they are filed or furnished to the SEC. Our SEC filings are available to be read or copied at the
SECs Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information regarding
the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
Our filings can also be obtained for free on the SECs Internet site at http://www.sec.gov. We are
providing our website address solely for the information of investors. We do not intend our website
to be an active link or to otherwise incorporate the information contained on our website into this
Report or other filings with the SEC.
We will supply to any shareholder, upon written request and without charge, a copy of this Annual
Report on Form 10-K for the year ended December 31, 2010 as filed with the SEC.
CPA®:14 2010 10-K 12
Our business, results of operations, financial condition and ability to pay distributions at the
current rate could be materially adversely affected by various risks and uncertainties, including
the conditions below. These risk factors may have affected, and in the future could affect, our
actual operating and financial results and could cause such results to differ materially from our
expectations as expressed in any forward-looking statements. You should not consider this list
exhaustive. New risk factors emerge periodically, and we cannot assure you that the factors
described below list all risks that may become material to us at any later time.
The recent financial and economic crisis adversely affected our business, and the continued
uncertainty in the global economic environment may adversely affect our business in the future.
Although we have seen signs of modest improvement in the global economy following the significant
distress in 2008 and 2009, the economic recovery remains weak, and our business is still dependent
on the speed and strength of that recovery, which cannot be predicted at the present time. To date,
its effects on our business have primarily been that a number of tenants have experienced increased
levels of financial distress, with several having filed for bankruptcy protection, although our
experience in 2010 reflected an improvement from 2008 and 2009.
Depending on the strength of the recovery, we could in the future experience a number of additional
effects on our business, including higher levels of default in the payment of rent by our tenants,
additional bankruptcies and impairments in the value of our property investments, as well as
difficulties in refinancing existing loans as they come due. Any of these conditions may negatively
affect our earnings, as well as our cash flow and, consequently, our ability to sustain the payment
of dividends at current levels or to resume our redemption plan.
We are subject to the risks of real estate ownership, which could reduce the value of our
properties.
Our performance and asset value are subject, in part, to risks incident to the ownership and
operation of real estate, including:
|
|
|
changes in the general economic climate; |
|
|
|
changes in local conditions such as an oversupply of space or reduction in demand for
commercial real estate; |
|
|
|
changes in interest rates and the availability of financing; and |
|
|
|
changes in laws and governmental regulations, including those governing real estate
usage, zoning and taxes. |
We may have difficulty selling or re-leasing our properties.
Real estate investments generally lack liquidity compared to other financial assets, and this lack
of liquidity will limit our ability to quickly change our portfolio in response to changes in
economic or other conditions. The triple-net leases we own, enter into, or acquire may be for
properties that are specially suited to the particular needs of the tenant. With these properties,
if the current lease is terminated or not renewed, we may be required to renovate the property or
to make rent concessions in order to lease the property to another tenant. In addition, if we are
forced to sell the property, we may have difficulty selling it to a party other than the tenant due
to the special purpose for which the property may have been designed. These and other limitations
may affect our ability to sell or re-lease properties without adversely affecting returns to our
shareholders. See Item 1 Business Our Portfolio for scheduled lease expirations.
We have recognized, and may in the future recognize, substantial impairment charges on our
properties.
We have incurred, and may in the future incur, substantial impairment charges, which we are
required to recognize whenever we sell a property for less than its carrying value or we determine
that the property has experienced a decline in its carrying value (or, for direct financing leases,
that the unguaranteed residual value of the underlying property has declined). By their nature, the
timing and extent of impairment charges are not predictable. Impairment charges reduce our net
income, although they do not necessarily affect our cash flow from operations.
CPA®:14 2010 10-K 13
The inability of a tenant in a single tenant property to pay rent will reduce our revenues and
increase our expenses.
Most of our properties are occupied by a single tenant, and therefore the success of our
investments is materially dependent on the financial stability of these tenants. Revenues from
several of our tenants/guarantors constitute a significant percentage of our lease revenues. Our
five largest tenants/guarantors represented approximately 34%, 33% and 32% of total lease revenues
in 2010, 2009 and 2008, respectively. Lease payment defaults by tenants negatively impact our net
income and reduce the amounts available for distributions to shareholders. As our tenants generally
may not have a recognized credit rating, they may have a higher risk of lease defaults than if our
tenants had a recognized credit rating. In addition, the bankruptcy of a tenant could cause the
loss of lease payments as well as an increase in the costs incurred to carry the property until it
can be re-leased or sold. We have had tenants file for bankruptcy protection. In the event of a
default, we may experience delays in enforcing our rights as landlord and may incur substantial
costs in protecting the investment and re-leasing the property. If a lease is terminated, there is
no assurance that we will be able to re-lease the property for the rent previously received or sell
the property without incurring a loss.
The bankruptcy or insolvency of tenants or borrowers may cause a reduction in revenue.
Bankruptcy or insolvency of a tenant or borrower could cause:
|
|
|
the loss of lease or interest payments; |
|
|
|
an increase in the costs incurred to carry the property; |
|
|
|
a reduction in the value of our shares; and |
|
|
|
a decrease in distributions to our shareholders. |
Under U.S. bankruptcy law, a tenant who is the subject of bankruptcy proceedings has the option of
assuming or rejecting any unexpired lease. If the tenant rejects the lease, any resulting claim we
have for breach of the lease (excluding collateral securing the claim) will be treated as a general
unsecured claim. The maximum claim will be capped at the amount owed for unpaid rent prior to the
bankruptcy unrelated to the termination, plus the greater of one years lease payments or 15% of
the remaining lease payments payable under the lease (but no more than three years lease
payments). In addition, due to the long-term nature of our leases and, in some cases, terms
providing for the repurchase of a property by the tenant, a bankruptcy court could recharacterize a
net lease transaction as a secured lending transaction. If that were to occur, we would not be
treated as the owner of the property, but we might have rights as a secured creditor. Those rights
would not include a right to compel the tenant to timely perform its obligations under the lease
but may instead entitle us to adequate protection, a bankruptcy concept that applies to protect
against a decrease in the value of the property if the value of the property is less than the
balance owed to us.
Insolvency laws outside of the U.S. may not be as favorable to reorganization or to the protection
of a debtors rights as tenants under a lease as are the laws in the U.S. Our rights to terminate a
lease for default may be more likely to be enforceable in countries other than the U.S., in which a
debtor/tenant or its insolvency representative may be less likely to have rights to force
continuation of a lease without our consent. Nonetheless, such laws may permit a tenant or an
appointed insolvency representative to terminate a lease if it so chooses.
However, in circumstances where the bankruptcy laws of the U.S. are considered to be more favorable
to debtors and to their reorganization, entities that are not ordinarily perceived as U.S. entities
may seek to take advantage of the U.S. bankruptcy laws if they are eligible. An entity would be
eligible to be a debtor under the U.S. bankruptcy laws if it had a domicile (state of incorporation
or registration), place of business or assets in the U.S. If a tenant became a debtor under the
U.S. bankruptcy laws, then it would have the option of assuming or rejecting any unexpired lease.
As a general matter, after the commencement of bankruptcy proceedings and prior to assumption or
rejection of an expired lease, U.S. bankruptcy laws provide that until an unexpired lease is
assumed or rejected, the tenant (or its trustee if one has been appointed) must timely perform
obligations of the tenant under the lease. However, under certain circumstances, the time period
for performance of such obligations may be extended by an order of the bankruptcy court.
We and the other CPA® REITs managed by the advisor have had tenants file for bankruptcy
protection and are involved in bankruptcy- related litigation (including several international
tenants). Four prior CPA® REITs reduced the rate of distributions to their investors as
a result of adverse developments involving tenants.
CPA®:14 2010 10-K 14
Similarly, if a borrower under one of our loan transactions declares bankruptcy, there may not be
sufficient funds to satisfy its payment obligations to us, which may adversely affect our revenue
and distributions to our shareholders. The mortgage loans in which we may invest and the mortgage
loans underlying the mortgage-backed securities in which we may invest may be subject to
delinquency, foreclosure and loss, which could result in losses to us.
Our distributions may exceed our adjusted cash flow from operating activities and our earnings in
accordance with accounting principles generally accepted in the U.S. (GAAP).
Over the life of our company, the regular quarterly cash distributions we pay are expected to be
principally sourced by adjusted cash flow from operating activities. Adjusted cash flow from
operating activities represents GAAP cash flow from operating activities, adjusted primarily to
reflect timing differences between the period an expense is incurred and paid, to add cash
distributions we receive from equity investments in real estate in excess of equity income and to
subtract cash distributions we pay to our noncontrolling partners in real estate ventures that we
consolidate. However, there can be no assurance that our adjusted cash flow from operating
activities will be sufficient to cover our future distributions, and we may use other sources of
funds, such as proceeds from borrowings and asset sales, to fund portions of our future
distributions.
For U.S. federal income tax purposes, portions of the distributions we make may represent return of
capital to our shareholders if they exceed our earnings and profits.
We do not fully control the management for our properties.
The tenants or managers of net lease properties are responsible for maintenance and other
day-to-day management of the properties. If a property is not adequately maintained in accordance
with the terms of the applicable lease, we may incur expenses for deferred maintenance expenditures
or other liabilities once the property becomes free of the lease. While our leases generally
provide for recourse against the tenant in these instances, a bankrupt or financially troubled
tenant may be more likely to defer maintenance and it may be more difficult to enforce remedies
against such a tenant. In addition, to the extent tenants are unable to conduct their operation of
the property on a financially successful basis, their ability to pay rent may be adversely
affected. Although we endeavor to monitor, on an ongoing basis, compliance by tenants with their
lease obligations and other factors that could affect the financial performance of our properties,
such monitoring may not in all circumstances ascertain or forestall deterioration either in the
condition of a property or the financial circumstances of a tenant.
Our leases may permit tenants to purchase a property at a predetermined price, which could limit
our realization of any appreciation or result in a loss.
In some circumstances, we grant tenants a right to repurchase the property they lease from us. The
purchase price may be a fixed price or it may be based on a formula or the market value at the time
of exercise. If a tenant exercises its right to purchase the property and the propertys market
value has increased beyond that price, we could be limited in fully realizing the appreciation on
that property. Additionally, if the price at which the tenant can purchase the property is less
than our purchase price or carrying value (for example, where the purchase price is based on an
appraised value), we may incur a loss.
Our success is dependent on the performance of the advisor.
Our ability to achieve our investment objectives and to pay distributions is largely dependent upon
the performance of the advisor in the acquisition of investments, the selection of tenants, the
determination of any financing arrangements, and the management of our assets. The advisory
agreement has a one year term and may be renewed at our option upon expiration. The past
performance of partnerships and CPA® REITs managed by the advisor may not be indicative
of the advisors performance with respect to us. We cannot guarantee that the advisor will be able
to successfully manage and achieve liquidity for our shareholders to the same extent that it has
done so for prior programs.
CPA®:14 2010 10-K 15
The advisor may be subject to conflicts of interest.
The advisor manages our business and selects our investments. The advisor has some conflicts of
interest in its management of us, which arise primarily from the involvement of the advisor in
other activities that may conflict with us and the payment of fees by us to the advisor. Unless the
advisor elects to receive our common stock in lieu of cash compensation, we will pay the advisor
substantial
cash fees for the services it provides, which will reduce the amount of cash available for
investment in properties or distribution to our shareholders. Circumstances under which a conflict
could arise between us and the advisor include:
|
|
|
the receipt of compensation by the advisor for property purchases, leases, sales and
financing for us, which may cause the advisor to engage in transactions that generate
higher fees, rather than transactions that are more appropriate or beneficial for our
business; |
|
|
|
agreements between us and the advisor, including agreements regarding compensation,
will not be negotiated on an arms-length basis as would occur if the agreements were with
unaffiliated third parties; |
|
|
|
acquisitions of single properties or portfolios of properties from affiliates,
including WPC or the CPA® REITs, subject to our investment policies and procedures, which
may take the form of a direct purchase of assets, a merger or another type of transaction; |
|
|
|
competition with certain affiliates for property acquisitions, which may cause the
advisor and its affiliates to direct properties suitable for us to other related entities; |
|
|
|
a decision by the advisor (on our behalf) of whether to hold or sell a property could
impact the timing and amount of fees payable to the advisor because it receives asset
management fees and may decide not to sell a property; |
|
|
|
disposition, incentive and termination fees, which are based on the sale price of
properties or the terms of a liquidity transaction, may cause a conflict between the
advisors desire to sell a property or engage in a liquidity transaction and our interests;
and |
|
|
|
whether a particular entity has been formed by the advisor specifically for the purpose
of making particular types of investments (in which case it will generally receive
preference in the allocation of those types of investments). |
We delegate our management functions to the advisor.
We delegate our management functions to the advisor, for which it earns fees pursuant to an
advisory agreement. Although at least a majority of our board of directors must be independent,
because the advisor earns fees from us and has an ownership interest in us, we have limited
independence from the advisor.
The termination or replacement of the advisor could trigger a default or repayment event under our
financing arrangements for some of our assets.
Lenders for certain of our assets typically request change of control provisions in the loan
documentation that would make the termination or replacement of WPC or its affiliates as the
advisor an event of default or an event requiring the immediate repayment of the full outstanding
balance of the loan. While we will attempt to negotiate not to include such provisions, lenders may
require such provisions. If an event of default or repayment event occurs with respect to any of
our assets, our revenues and distributions to our shareholders may be adversely affected.
Our NAV is computed by our advisor relying in part upon information that the advisor provides to a
third- party.
The asset management and performance compensation paid to the advisor are computed by our advisor
relying in part upon an annual third-party valuation of our real estate. Any such valuation
includes the use of estimates and may be influenced by the information provided to the third party
by the advisor. Because our NAV is an estimate, it can change as interest rate and real estate
markets fluctuate, and there is no assurance that a shareholder will realize such NAV in connection
with any liquidity event.
Valuations that we obtain may include leases in place on the property being appraised, and if the
leases terminate, the value of the property may become significantly lower.
The valuations that we obtain on our properties may be based on the values of the properties when
the properties are leased. If the leases on the properties terminate, the values of the properties
may fall significantly below the appraised value.
CPA®:14 2010 10-K 16
We are not required to meet any diversification standards; therefore, our investments may become
subject to concentration of risk.
Subject to our intention to maintain our qualification as a REIT, there are no limitations on the
number or value of particular types of investments that we may make. Although we attempt to do so,
we are not required to meet any diversification standards, including geographic diversification
standards. Therefore, our investments may become concentrated in type or geographic location, which
could subject us to significant concentration of risk with potentially adverse effects on our
investment objectives.
Our use of debt to finance investments could adversely affect our cash flow and distributions to
shareholders.
Most of our investments have been made by borrowing a portion of the purchase price of our
investments and securing the loan with a mortgage on the property. We generally borrow on a
non-recourse basis to limit our exposure on any property to the amount of equity invested in the
property. However, if we are unable to make our debt payments as required, a lender could foreclose
on the property or properties securing its debt. Additionally, lenders for our international
mortgage loan transactions typically incorporate provisions that can cause a loan default and over
which we have limited control, including a loan to value ratio, a debt service coverage ratio and a
material adverse change in the borrowers or tenants business, so if real estate values decline or
a tenant defaults, the lender would have the right to foreclose on its security. If any of these
events were to occur, it could cause us to lose part or all of our investment, which in turn could
cause the value of our portfolio, and revenues available for distribution to our shareholders, to
be reduced.
A majority of our financing also requires us to make a lump-sum or balloon payment at maturity.
Our ability to make balloon payments on debt will depend upon our ability either to refinance the
obligation when due, invest additional equity in the property or sell the related property. When
the balloon payment is due, we may be unable to refinance the balloon payment on terms as favorable
as the original loan or sell the property at a price sufficient to make the balloon payment. Our
ability to accomplish these goals will be affected by various factors existing at the relevant
time, such as the state of the national and regional economies, local real estate conditions,
available mortgage rates, our equity in the mortgaged properties, our financial condition, the
operating history of the mortgaged properties and tax laws. A refinancing or sale could affect the
rate of return to shareholders and the projected time of disposition of our assets.
Failure to qualify as a REIT would adversely affect our operations and ability to make
distributions.
If we fail to qualify as a REIT in any taxable year, we would be subject to U.S. federal income tax
on our net taxable income at corporate rates. In addition, we would generally be disqualified from
treatment as a REIT for the four taxable years following the year we lose our REIT qualification.
Losing our REIT qualification would reduce our net earnings available for investment or
distribution to shareholders because of the additional tax liability, and we would no longer be
required to make distributions. We might be required to borrow funds or liquidate some investments
in order to pay the applicable tax.
Qualification as a REIT involves the application of highly technical and complex Internal Revenue
Code provisions for which there are only limited judicial and administrative interpretations. The
determination of various factual matters and circumstances not entirely within our control may
affect our ability to qualify as a REIT. In order to qualify as a REIT, we must satisfy a number of
requirements regarding the composition of our assets and the sources of our gross income. Also, we
must make distributions to our shareholders aggregating annually at least 90% of our net taxable
income, excluding net capital gains. Because we have investments in foreign real property, we are
subject to foreign currency gains and losses. Foreign currency gains are qualifying income for
purposes of the REIT income requirements, provided that the underlying income satisfies the REIT
income requirements. To reduce the risk of foreign currency gains adversely affecting our REIT
qualification, we may be required to defer the repatriation of cash from foreign jurisdictions or
to employ other structures that could affect the timing, character or amount of income we receive
from our foreign investments. No assurance can be given that we will be able to manage our foreign
currency gains in a manner that enables us to qualify as a REIT or to avoid U.S. federal and other
taxes on our income. In addition, legislation, new regulations, administrative interpretations or
court decisions may adversely affect our investors, our ability to qualify as a REIT for U.S.
federal income tax purposes or the desirability of an investment in a REIT relative to other
investments.
The Internal Revenue Service may take the position that specific sale-leaseback transactions we
treat as true leases are not true leases for U.S. federal income tax purposes but are, instead,
financing arrangements or loans. If a sale-leaseback transaction were so recharacterized, we might
fail to satisfy the qualification requirements applicable to REITs.
CPA®:14 2010 10-K 17
Dividends payable by REITs generally do not qualify for reduced U.S. federal income tax rates
because qualifying REITs do not pay U.S. federal income tax on their net income.
The maximum U.S. federal income tax rate for dividends payable by domestic corporations to taxable
U.S. shareholders is 15%. Dividends payable by REITs, however, are generally not eligible for the
reduced rates, except to the extent that they are attributable to dividends paid by a taxable REIT
subsidiary or a C corporation, or relate to certain other activities. This is because qualifying
REITs receive an entity-level tax benefit from not having to pay U.S. federal income tax on their
net income. As a result, the more favorable rates applicable to regular corporate dividends could
cause shareholders who are individuals to perceive investments in REITs to be relatively less
attractive than investments in the stocks of non-REIT corporations that pay dividends, which could
adversely affect the value of the stock of REITs, including our common stock. In addition, the
relative attractiveness of real estate in general may be adversely affected by the reduced U.S.
federal income tax rates applicable to corporate dividends, which could negatively affect the value
of our properties.
The ability of our board of directors to change our investment policies or revoke our REIT election
without shareholder approval may cause adverse consequences to our shareholders.
Our bylaws require that our independent directors review our investment policies at least annually
to determine that the policies we are following are in the best interest of our shareholders. These
policies may change over time. The methods of implementing our investment policies may also vary,
as new investment techniques are developed. Except as otherwise provided in our bylaws, our
investment policies, the methods for their implementation, and our other objectives, policies and
procedures may be altered by a majority of the directors (which must include a majority of the
independent directors), without the approval of our shareholders. As a result, the nature of your
investment could change without your consent. A change in our investment strategy may, among other
things, increase our exposure to interest rate risk, default risk and commercial real property
market fluctuations, all of which could materially adversely affect our ability to achieve our
investment objectives.
In addition, our organizational documents permit our board of directors to revoke or otherwise
terminate our REIT election, without the approval of our shareholders, if the board determines that
it is not in our best interest to qualify as a REIT. In such a case, we would become subject to
U.S. federal income tax on our taxable income and we would no longer be required to distribute most
of our net income to our shareholders, which may have adverse consequences on the total return to
our shareholders.
Potential liability for environmental matters could adversely affect our financial condition.
We have invested and in the future may invest in properties historically used for industrial,
manufacturing and other commercial purposes. We therefore own and may in the future acquire
properties that have known or potential environmental contamination as a result of historical
operations. Buildings and structures on the properties we own and purchase also may have known or
suspected asbestos-containing building materials. Our properties currently are used for industrial,
manufacturing, and other commercial purposes, and some of our tenants may handle hazardous or toxic
substances, generate hazardous wastes, or discharge regulated pollutants to the environment. We may
invest in properties located in countries that have adopted laws or observe environmental
management standards that are less stringent than those generally followed in the U.S., which may
pose a greater risk that releases of hazardous or toxic substances have occurred to the
environment. Leasing properties to tenants that engage in these activities, and owning properties
historically and currently used for industrial, manufacturing, and other commercial purposes, will
cause us to be subject to the risk of liabilities under environmental laws. Some of these laws
could impose the following on us:
|
|
|
responsibility and liability for the cost of investigation, removal or remediation of
hazardous or toxic substances released on or from our property, generally without regard to
our knowledge of, or responsibility for, the presence of these contaminants. |
|
|
|
liability for claims by third parties based on damages to natural resources or
property, personal injuries, or costs of removal or remediation of hazardous or toxic
substances in, on, or migrating from our property. |
|
|
|
responsibility for managing asbestos-containing building materials, and third-party
claims for exposure to those materials. |
Our costs of investigation, remediation or removal of hazardous or toxic substances, or for
third-party claims for damages, may be substantial. The presence of hazardous or toxic substances
at any of our properties, or the failure to properly remediate a contaminated property, could give
rise to a lien in favor of the government for costs it may incur to address the contamination or
otherwise adversely affect our ability to sell or lease the property or to borrow using the
property as collateral. While we attempt to mitigate identified environmental risks by requiring
tenants contractually to acknowledge their responsibility for complying with environmental laws and
to assume liability for environmental matters, circumstances may arise in which a tenant fails, or
is unable, to fulfill its contractual obligations. In addition, environmental liabilities, or costs
or operating limitations imposed on a tenant to comply with environmental laws, could affect its
ability to make rental payments to us.
CPA®:14 2010 10-K 18
International investments involve additional risks.
We have invested in properties located outside the U.S. At December 31, 2010, our directly-owned
real estate properties located outside of the U.S. represented 18% of current annualized
contractual minimum base rent. These investments may be affected by factors particular to the laws
of the jurisdiction in which the property is located. These investments may expose us to risks that
are different from and in addition to those commonly found in the U.S., including:
|
|
|
changing governmental rules and policies; |
|
|
|
enactment of laws relating to the foreign ownership of property and laws relating to
the ability of foreign entities to remove invested capital or profits earned from
activities within the country to the U.S.; |
|
|
|
legal systems under which the ability to enforce contractual rights and remedies may be
more limited than would be the case under U.S. law; |
|
|
|
the difficulty in conforming obligations in other countries and the burden of complying
with a wide variety of foreign laws, which may be more stringent than U.S. laws, including
tax requirements and land use, zoning and environmental laws, as well as changes in such
laws; |
|
|
|
adverse market conditions caused by changes in national or local economic or political
conditions; |
|
|
|
changes in relative interest rates; |
|
|
|
changes in the availability, cost and terms of mortgage funds resulting from varying
national economic policies; |
|
|
|
restrictions and/or significant costs in repatriating cash and cash equivalents held in
foreign bank accounts; and |
|
|
|
changes in real estate and other tax rates and other operating expenses in particular
countries. |
In addition, the lack of publicly available information in accordance with GAAP could impair our
ability to analyze transactions and may cause us to forego an investment opportunity. It may also
impair our ability to receive timely and accurate financial information from tenants necessary to
meet our reporting obligations to financial institutions or governmental or regulatory agencies.
Certain of these risks may be greater in emerging markets and less developed countries.
Also, we may rely on third-party asset managers in international jurisdictions to monitor
compliance with legal requirements and lending agreements with respect to our properties. Failure
to comply with applicable requirements may expose us or our operating subsidiaries to additional
liabilities.
Moreover, we are subject to foreign currency risk due to potential fluctuations in exchange rates
between foreign currencies and the U.S. dollar. Our primary currency exposure is to the Euro. We
attempt to mitigate a portion of the risk of currency fluctuation by financing our properties in
the local currency denominations, although there can be no assurance that this will be effective.
Because we generally place both our debt obligation to the lender and the tenants rental
obligation to us in the same currency, our results of foreign operations benefit from a weaker U.S.
dollar and are adversely affected by a stronger U.S. dollar relative to foreign currencies; that
is, a weaker U.S. dollar will tend to increase both our revenues and our expenses, while a stronger
U.S. dollar will tend to reduce both our revenues and our expenses.
CPA®:14 2010 10-K 19
The returns on our investments in net leased properties may not be as great as returns on equity
investments in real properties during strong real estate markets.
As an investor in single tenant, long-term net leased properties, the returns on our investments
are based primarily on the terms of the lease. Payments to us under our leases do not rise and fall
based upon the market value of the underlying properties. In addition, we generally lease each
property to one tenant on a long-term basis, which means that we cannot seek to improve current
returns at a particular property through an active, multi-tenant leasing strategy. While we will
sell assets from time to time and may recognize gains or losses on the sales based on then-current
market values, we generally intend to hold our properties on a long-term basis. We view our leases
as fixed income investments through which we seek to achieve attractive risk-adjusted returns that
will support a steady dividend. The value of our assets will likely not appreciate to the same
extent as equity investments in real estate during periods when real estate markets are very
strong. Conversely, in weak markets, the existence of a long-term lease may positively affect the
value of the property, although it is nonetheless possible that, as a result of property declines
generally, we may recognize impairment charges on some properties.
A potential change in U.S. accounting standards regarding operating leases may make the leasing of
facilities less attractive to our potential domestic tenants, which could reduce overall demand for
our leasing services.
Under current authoritative accounting guidance for leases, a lease is classified by a tenant as a
capital lease if the significant risks and rewards of ownership are considered to reside with the
tenant. This situation is considered to be met if, among other things, the non-cancellable lease
term is more than 75% of the useful life of the asset or if the present value of the minimum lease
payments equals 90% or more of the leased propertys fair value. Under capital lease accounting for
a tenant, both the leased asset and liability are reflected on their balance sheet. If the lease
does not meet any of the criteria for a capital lease, the lease is considered an operating lease
by the tenant and the obligation does not appear on the tenants balance sheet; rather, the
contractual future minimum payment obligations are only disclosed in the footnotes thereto. Thus,
entering into an operating lease can appear to enhance a tenants balance sheet in comparison to
direct ownership. In response to concerns caused by a 2005 SEC study that the current model does
not have sufficient transparency, the Financial Accounting Standards Board (FASB) and the
International Accounting Standards Board conducted a joint project to re-evaluate lease accounting.
In August 2010, the FASB issued a Proposed Accounting Standards Update titled Leases, providing
its views on accounting for leases by both lessees and lessors. The FASBs proposed guidance may
require significant changes in how leases are accounted for by both lessees and lessors. As of the
date of this Report, the FASB has not finalized its views on accounting for leases. Changes to the
accounting guidance could affect both our accounting for leases as well as that of our tenants.
These changes may affect how the real estate leasing business is conducted both domestically and
internationally. For example, if the accounting standards regarding the financial statement
classification of operating leases are revised, then companies may be less willing to enter into
leases in general or desire to enter into leases with shorter terms because the apparent benefits
to their balance sheets could be reduced or eliminated. This in turn could make it more difficult
for us to enter leases on terms we find favorable.
Our net tangible book value may be adversely affected if we are required to adopt certain fair
value accounting provisions.
In June 2007, the Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants (AICPA) issued accounting guidance that addresses when the accounting
principles of the AICPA Audit and Accounting Guide Investment Companies must be applied by an
entity and whether investment company accounting must be retained by a parent company in
consolidation or by an investor in the application of the equity method of accounting. In addition,
this guidance includes certain disclosure requirements for parent companies and equity method
investors in investment companies that retain investment company accounting in the parent companys
consolidated financial statements or the financial statements of an equity method investor. In
February 2008, the effective date of this guidance was indefinitely delayed, and adoption of the
guidance was prohibited for any entity that had not previously adopted it. Additionally, in its
investment properties project, the FASB is currently considering whether certain entities should
measure investment property at fair value. As currently proposed, an entity would need to meet
certain criteria related to its business purpose, activities, and capital structure to be within
the scope of the guidance. Entities within the scope of the guidance would report all their
investment properties at fair value on a recurring basis. We will assess the potential impact the
adoption of these standards would have on our financial position and results of operations if we
are required to adopt them.
While we maintain an exemption from the Investment Company Act and are therefore not regulated as
an investment company, we may be required to adopt fair value accounting provisions. Under these
provisions, our investments would be recorded at fair value with changes in value reflected in our
earnings, which may result in significant fluctuations in our results of operations and net
tangible book value. Net tangible book value per share may be further reduced by any declines in
the fair value of our investments.
CPA®:14 2010 10-K 20
Your investment return may be reduced if we are required to register as an investment company under
the Investment Company Act.
We do not intend to register as an investment company under the Investment Company Act. If we were
obligated to register as an investment company, we would have to comply with a variety of
substantive requirements under the Investment Company Act that impose, among other things:
|
|
|
limitations on capital structure; |
|
|
|
restrictions on specified investments; |
|
|
|
prohibitions on certain transactions with affiliates; and |
|
|
|
compliance with reporting, record keeping, voting, proxy disclosure and other rules and
regulations that would significantly increase our operating expenses. |
In general, we expect to be able to rely on the exemption from registration provided by Section
3(c)(5)(C) of the Investment Company Act. In order to qualify for this exemption, at least 55% of
our portfolio must be comprised of real property and mortgages and other liens on an interest in
real estate (collectively, qualifying assets) and at least 80% of our portfolio must be comprised
of real estate-related assets. Qualifying assets include mortgage loans, mortgage-backed securities
that represent the entire ownership in a pool of mortgage loans, and other interests in real
estate. In order to maintain our exemption from regulation under the Investment Company Act, we
must continue to engage primarily in the business of buying real estate.
To maintain compliance with the Investment Company Act exemption, we may be unable to sell assets
we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In
addition, we may have to acquire additional income or loss generating assets that we might not
otherwise have acquired or may have to forego opportunities to acquire interests in companies that
we would otherwise want to acquire and would be important to our investment strategy. If we were
required to register as an investment company, we would be prohibited from engaging in our business
as currently contemplated because the Investment Company Act imposes significant limitations on
leverage. In addition, we would have to seek to restructure the advisory agreement because the
compensation that it contemplates would not comply with the Investment Company Act. Criminal and
civil actions could also be brought against us if we failed to comply with the Investment Company
Act. In addition, our contracts would be unenforceable unless a court were to require enforcement,
and a court could appoint a receiver to take control of us and liquidate our business.
Failure to complete the Proposed Merger could negatively affect us.
It is possible that the Proposed Merger and the Asset Sales may not be completed. The parties
obligations to complete the Proposed Merger are subject to the satisfaction or waiver of specified
conditions, some of which are beyond our control. For example, the Proposed Merger is conditioned
on the receipt of the required approval of our shareholders. If this approval is not received, the
Proposed Merger cannot be completed even if all of the other conditions to the Proposed Merger are
satisfied or waived. In addition to receiving the required shareholder approval, the Proposed
Merger is also conditioned upon, among other things, the completion of the Asset Sales, the
completion of a new senior secured credit facility for CPA®:16 Global, the proceeds
of which will be used, in part, to pay for cash elections made by our shareholders in the Proposed
Merger, and the elections by holders of 50% or less of our outstanding common stock to receive
cash. CPA®:16 Global has entered into commitment letters with five lenders who will
provide CPA®:16 Global with the new senior secured credit facility; however, those
commitment letters are subject to customary conditions, including the lenders satisfactory
completion of due diligence and determination that no material adverse change has occurred in the
business, assets, financial condition, performance or prospects of CPA®:16 Global or
any of its material subsidiaries.
If the Proposed Merger is not completed, we may be subject to a number of material risks, including
the following:
|
|
|
our shareholders will not have had the opportunity to achieve liquidity, and our
directors will review other alternatives for liquidity, which may not occur in the near
term or on terms as attractive as the terms of the Proposed Merger and the Asset Sales; |
|
|
|
we will have incurred substantial costs related to the Proposed Merger and the related
transactions, such as legal, accounting and financial advisor fees, which may be payable by
us even if the Proposed Merger is not completed; and |
|
|
|
|
we may be required to pay CPA®:16 Globals out-of-pocket expenses up to
$5 million if the Proposed Merger is terminated (i) by CPA®:16 Global due to
our breach of any representation, warranty, covenant or agreement or (ii) by us due to our
board of directors withdrawing its recommendation of the Proposed Merger or the merger
agreement in connection with, or approving or recommending, a superior competing
transaction. |
CPA®:14 2010 10-K 21
There is not, and may never be, an active public trading market for our shares, so it will be
difficult for shareholders to sell shares quickly.
There is no active public trading market for our shares. Our articles of incorporation also
prohibit the ownership of more than 9.8% of our stock by one person or affiliated group, unless
exempted by our board of directors, which may inhibit large investors from desiring to purchase
your shares and may also discourage a takeover. Moreover, our redemption plan has been suspended.
Even if our redemption plan is reactivated, it will continue to include numerous restrictions that
limit your ability to sell your shares to us, and our board of directors will continue to have the
authority to further amend, suspend or terminate the plan. Therefore, it will be difficult for you
to sell your shares promptly or at all. In addition, the price received for any shares sold prior
to a liquidity event is likely to be less than the proportionate value of the real estate we own.
Investor suitability standards imposed by certain states may also make it more difficult to sell
your shares to someone in those states.
Maryland law could restrict change in control.
Provisions of Maryland law applicable to us prohibit business combinations with:
|
|
|
any person who beneficially owns 10% or more of the voting power of outstanding shares,
referred to as an interested shareholder; |
|
|
|
an affiliate who, at any time within the two-year period prior to the date in question,
was the beneficial owner of 10% or more of the voting power of our outstanding shares, also
referred to as an interested shareholder; or |
|
|
|
an affiliate of an interested shareholder. |
These prohibitions last for five years after the most recent date on which the interested
shareholder became an interested shareholder. Thereafter, any business combination must be
recommended by our board of directors and approved by the affirmative vote of at least 80% of the
votes entitled to be cast by holders of our outstanding shares and two-thirds of the votes entitled
to be cast by holders of our shares other than shares held by the interested shareholder or by an
affiliate or associate of the interested shareholder. These requirements could have the effect of
inhibiting a change in control even if a change in control was in our shareholders interest. These
provisions of Maryland law do not apply, however, to business combinations that are approved or
exempted by our board of directors prior to the time that someone becomes an interested
shareholder. In addition, a person is not an interested shareholder if the board of directors
approved in advance the transaction by which he or she otherwise would have become an interested
shareholder. However, in approving a transaction, the board of directors may provide that its
approval is subject to compliance at or after the time of approval, with any terms and conditions
determined by the board.
Our articles of incorporation restrict beneficial ownership of more than 9.8% of the outstanding
shares by one person or affiliated group in order to assist us in meeting the REIT qualification
rules. These requirements could have the effect of inhibiting a change in control even if a change
in control were in our shareholders interest.
Shareholders equity may be diluted
Our shareholders do not have preemptive rights to any shares of common stock issued by us in the
future. Therefore, if we (i) sell shares of common stock in the future, including those issued
pursuant to our distribution reinvestment plan, (ii) sell securities that are convertible into our
common stock, (iii) issue common stock in a private placement to institutional investors, or (iv)
issue shares of common stock to our directors or to the advisor for payment of fees in lieu of
cash, then shareholders will experience dilution of their percentage ownership in us. Depending on
the terms of such transactions, most notably the offer price per share and the value of our
properties and our other investments, existing shareholders might also experience a dilution in the
book value per share of their investment in us.
CPA®:14 2010 10-K 22
|
|
|
Item 1B. |
|
Unresolved Staff Comments. |
None.
Our principal corporate offices are located at 50 Rockefeller Plaza, New York, NY 10020. The
advisor also has its primary international investment offices located in London and Amsterdam. The
advisor also has office space domestically in Dallas, Texas and internationally in Shanghai. The
advisor leases all of these offices and believes these leases are suitable for our operations for
the foreseeable future.
See Item 1, Business Our Portfolio for a discussion of the properties we hold for rental
operations and Part II, Item 8, Financial Statements and Supplemental Data Schedule III Real
Estate and Accumulated Depreciation for a detailed listing of such properties.
|
|
|
Item 3. |
|
Legal Proceedings. |
Various claims and lawsuits arising in the normal course of business are pending against us. The
results of these proceedings are not expected to have a material adverse effect on our consolidated
financial position or results of operations.
|
|
|
Item 4. |
|
Removed and Reserved. |
CPA®:14 2010 10-K 23
PART II
|
|
|
Item 5. |
|
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities. |
Unlisted Shares and Distributions
There is no active public trading market for our shares. At March 18, 2011, there were 28,323
holders of record of our shares.
We are required to distribute annually at least 90% of our distributable REIT net taxable income to
maintain our status as a REIT. Quarterly distributions declared by us for the past two years are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
First quarter |
|
$ |
0.1996 |
|
|
$ |
0.1976 |
|
Second quarter |
|
|
0.2001 |
|
|
|
0.1981 |
|
Third quarter |
|
|
0.2001 |
|
|
|
0.1986 |
|
Fourth quarter |
|
|
0.2001 |
|
|
|
0.1991 |
|
|
|
|
|
|
|
|
|
|
$ |
0.7999 |
|
|
$ |
0.7934 |
|
|
|
|
|
|
|
|
Unregistered Sales of Equity Securities
For the three months ended December 31, 2010, we issued 169,871 restricted shares of common stock
to the advisor as consideration for performance fees. These shares were issued at $11.80 per share,
which was our most recently published NAV per share as approved by our board of directors at the
date of issuance. Since none of these transactions were considered to have involved a public
offering within the meaning of Section 4(2) of the Securities Act, the shares issued were deemed
to be exempt from registration. In acquiring our shares, the advisor represented that such
interests were being acquired by it for the purposes of investment and not with a view to the
distribution thereof.
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum number (or |
|
|
|
|
|
|
|
|
|
|
|
Total number of shares |
|
|
approximate dollar value) |
|
|
|
|
|
|
|
|
|
|
|
purchased as part of |
|
|
of shares that may yet be |
|
|
|
Total number of |
|
|
Average price |
|
|
publicly announced |
|
|
purchased under the |
|
2010 Period |
|
shares purchased (a) |
|
|
paid per share |
|
|
plans or programs (a) |
|
|
plans or programs (a) |
|
October |
|
|
|
|
|
|
|
|
|
|
N/A |
|
|
|
N/A |
|
November |
|
|
|
|
|
|
|
|
|
|
N/A |
|
|
|
N/A |
|
December |
|
|
55,870 |
|
|
$ |
10.97 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
55,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents shares of our common stock purchased pursuant to our redemption plan. The amount
of shares purchasable in any period depends on the availability of funds generated by our
dividend reinvestment and share purchase plan (DRIP) and other factors and is at the
discretion of our board of directors. In September 2009, our board of directors approved the
suspension of our redemption plan, effective for all redemption requests received subsequent
to September 1, 2009, subject to limited exceptions in cases of death or qualifying
disability. The suspension continues as of the date of this Report and will remain in effect
until our board of directors, in its discretion, determines to reinstate the redemption plan.
We cannot give any assurances as to the timing of any further actions by the board with regard
to the plan. The redemption plan will terminate if and when our shares are listed on a
national securities market. |
CPA®:14 2010 10-K 24
|
|
|
Item 6. |
|
Selected Financial Data. |
The following selected financial data should be read in conjunction with the consolidated financial
statements and related notes in Item 8 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Operating Data (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
157,276 |
|
|
$ |
156,640 |
|
|
$ |
149,854 |
|
|
$ |
146,531 |
|
|
$ |
116,088 |
|
Income from continuing operations |
|
|
45,781 |
|
|
|
32,896 |
|
|
|
39,975 |
|
|
|
50,029 |
|
|
|
51,945 |
|
Net income (b) |
|
|
69,736 |
|
|
|
7,001 |
|
|
|
47,201 |
|
|
|
65,954 |
|
|
|
71,574 |
|
Less: Net income attributable to noncontrolling
interests |
|
|
(2,819 |
) |
|
|
(1,685 |
) |
|
|
(2,037 |
) |
|
|
(1,564 |
) |
|
|
(1,956 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to CPA®:14 shareholders |
|
|
66,917 |
|
|
|
5,316 |
|
|
|
45,164 |
|
|
|
64,390 |
|
|
|
69,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
attributable to CPA®:14 shareholders |
|
|
0.49 |
|
|
|
0.36 |
|
|
|
0.43 |
|
|
|
0.55 |
|
|
|
0.71 |
|
Net income attributable to CPA®:14 shareholders |
|
|
0.77 |
|
|
|
0.06 |
|
|
|
0.51 |
|
|
|
0.73 |
|
|
|
0.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions declared per share |
|
|
0.7999 |
|
|
|
0.7934 |
|
|
|
0.7848 |
|
|
|
0.7766 |
|
|
|
0.7711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,421,981 |
|
|
$ |
1,551,969 |
|
|
$ |
1,637,430 |
|
|
$ |
1,715,148 |
|
|
$ |
1,675,323 |
|
Net
investments in real estate (c) |
|
|
1,171,347 |
|
|
|
1,310,471 |
|
|
|
1,368,111 |
|
|
|
1,433,314 |
|
|
|
1,491,815 |
|
Long-term obligations (d) |
|
|
693,499 |
|
|
|
812,543 |
|
|
|
821,262 |
|
|
|
861,902 |
|
|
|
826,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from operating activities |
|
$ |
109,288 |
|
|
$ |
87,900 |
|
|
$ |
110,697 |
|
|
$ |
89,730 |
|
|
$ |
102,232 |
|
Distributions paid |
|
|
69,155 |
|
|
|
68,832 |
|
|
|
68,851 |
|
|
|
68,323 |
|
|
|
83,633 |
|
Payment of mortgage principal (e) |
|
|
154,126 |
|
|
|
44,873 |
|
|
|
17,383 |
|
|
|
16,552 |
|
|
|
12,580 |
|
|
|
|
(a) |
|
Certain prior year amounts have been reclassified from continuing operations to discontinued
operations. |
|
(b) |
|
Results for 2010, 2009 and 2008 reflected impairment charges totaling $15.3 million, $41.0
million and $10.9 million, respectively. |
|
(c) |
|
Net investments in real estate consists of net investments in properties, net investment in
direct financing leases, equity investments in real estate, real estate under construction and
assets held for sale, as applicable. |
|
(d) |
|
Represents mortgage obligations and deferred acquisition fee installments. |
|
(e) |
|
Represents scheduled mortgage principal payments. |
CPA®:14 2010 10-K 25
|
|
|
Item 7. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations. |
Managements discussion and analysis of financial condition and results of operations (MD&A) is
intended to provide the reader with information that will assist in understanding our financial
statements and the reasons for changes in certain key components of our financial statements from
period to period. MD&A also provides the reader with our perspective on our financial position and
liquidity, as well as certain other factors that may affect our future results.
Business Overview
As described in more detail in Item 1 of this Report, we are a publicly owned, non-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 1997 and are managed by the
advisor.
Financial Highlights
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Total revenues |
|
$ |
157,276 |
|
|
$ |
156,640 |
|
|
$ |
149,854 |
|
Net income attributable to CPA®:14 shareholders |
|
|
66,917 |
|
|
|
5,316 |
|
|
|
45,164 |
|
Cash flow from operating activities |
|
|
109,288 |
|
|
|
87,900 |
|
|
|
110,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions paid |
|
|
69,155 |
|
|
|
68,832 |
|
|
|
68,851 |
|
Supplemental financial measures: |
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations as adjusted (AFFO) |
|
$ |
83,773 |
|
|
$ |
81,805 |
|
|
$ |
99,178 |
|
Adjusted cash flow from operating activities |
|
|
101,561 |
|
|
|
101,198 |
|
|
|
98,795 |
|
We consider the performance metrics listed above, including certain supplemental metrics that
are not defined by GAAP ( non-GAAP) metrics such as Funds from operations as adjusted, or
AFFO, and Adjusted cash flow from operating activities, 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. Please see Supplemental Financial Measures
below for our definition of these measures and reconciliations to their most directly comparable
GAAP measure.
Total revenues increased slightly in 2010 as compared to 2009. The increase in income recognized in
connection with an early prepayment of a mortgage loan was substantially offset by the negative
impact of recent tenant activity, including the restructuring of leases due to tenant defaults and
lease rejections in bankruptcy court.
Net income attributable to CPA®:14 shareholders increased in 2010 as compared to 2009.
This increase was due to net gains on both the extinguishment of debt and the deconsolidation of a
subsidiary recognized in 2010, which are reflected in discontinued operations, as well as lower
impairment charges recognized during 2010.
Cash flow from operating activities in 2010 was favorably impacted by the increases in our results
of operations as well as the release of security deposit assets held by lenders as a result of the
repayment of matured non-recourse mortgage loans.
Our quarterly cash distribution remained at $0.2001 per share for the fourth quarter of 2010, which
equates to $0.80 per share on an annualized basis.
For the year ended December 31, 2010 as compared to 2009, our AFFO supplemental measure increased,
primarily due to increases in net income. For the year ended December 31, 2010 as compared to 2009,
our adjusted cash flow supplemental measure increased. The increase in cash flow provided by
operating activities was offset by a reduction in changes in working capital, a reduction
in
distributions received from equity investments in real estate in excess of equity income and an
increase in distributions paid to noncontrolling interests.
CPA®:14 2010 10-K 26
Current Trends
General Economic Environment
We are impacted by macro-economic environmental factors, the capital markets, and general
conditions in the commercial real estate market, both in the U.S. and globally. As of the date of
this Report, we have seen signs of modest improvement in the global economy following the
significant distress experienced in 2008 and 2009. While these factors reflect favorably on our
business, the economic recovery remains weak, and our business remains dependent on the speed and
strength of the recovery, which cannot be predicted at this time. 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.
Foreign Exchange Rates
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. During 2010, the Euro weakened
primarily as a result of sovereign debt issues in several European countries. Investments
denominated in the Euro accounted for approximately 18% of our annualized contractual minimum base
rent for 2010. During 2010, the U.S. dollar strengthened against the Euro, as the average
conversion rate for the U.S. dollar in relation to the Euro decreased by 5% in comparison to 2009.
Additionally, the end-of-period conversion rate of the Euro at December 31, 2010 decreased by 8% to
$1.3253 from $1.4333 at December 31, 2009. This strengthening had a negative impact on our balance
sheet at December 31, 2010 as compared to our balance sheet at December 31, 2009. While we actively
manage our foreign exchange risk, a significant unhedged decline in the value of the Euro could
have a material negative impact on our net asset values, future results, financial position and
cash flows.
Capital Markets
We have recently seen evidence of a gradual improvement in capital market conditions, including new
issuances of commercial mortgage-backed securities debt. Capital inflows to both commercial real
estate debt and equity markets have helped increase the availability of mortgage financing and
asset prices have begun to recover from their credit crisis lows. Over the past few quarters, there
has been continued improvement in the availability of financing; however, lenders remain cautious
and continue to employ more conservative underwriting standards. We have seen commercial real
estate capitalization rates begin to narrow from credit crisis highs, especially for higher-quality
assets or assets leased to tenants with strong credit.
Financing Conditions
We have recently seen a gradual improvement in both the credit and real estate financing markets.
During 2010, we saw an increase in the number of lenders for both domestic and international
investments as market conditions improved compared to prior years. However, during the fourth
quarter of 2010, the cost of debt rose, but we anticipate that this may be recoverable either
through deal pricing or if lenders adjust their spreads, which had been unusually high during the
crisis. The increase was primarily a result of a rise in the 10-year treasury rates for domestic
deals and due to the impact of the sovereign debt issues in Europe. During 2010, we refinanced
maturing non-recourse mortgage loans with new non-recourse financing totaling $104.8 million.
Real Estate Sector
As noted above, the commercial real estate market is impacted by a variety of macro-economic
factors, including but not limited to growth in gross domestic product, unemployment, interest
rates, inflation, and demographics. Since the beginning of the credit crisis, these macro-economic
factors have persisted, negatively impacting commercial real estate market fundamentals, which has
resulted in higher vacancies, lower rental rates, and lower demand for vacant space. While more
recently there have been some indications of stabilization in asset values and slight improvements
in occupancy rates, general uncertainty surrounding commercial real estate fundamentals and
property valuations continues. We are chiefly affected by changes in the appraised values of our
properties, tenant defaults, inflation, lease expirations, and occupancy rates.
CPA®:14 2010 10-K 27
Net Asset Value
The advisor calculates our NAV per share on an annual basis. To make this calculation, the advisor
relies in part upon 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, lease
terms, lending credit spreads, foreign currency exchange rates, and tenant defaults, among others.
We do not control these variables and, as such, cannot predict how they will change in the future.
As a result of continued weakness in the economy and a strengthening of the dollar versus the Euro
during 2010 and 2009, our NAV per share at September 30, 2010, which was calculated in connection
with the Proposed Merger, decreased to $11.50, a 2.5% decline from our December 31, 2009 NAV per
share of $11.80.
Tenant Defaults
As a net lease investor, we are exposed to credit risk within our tenant portfolio, which can
reduce our results of operations and cash flow from operations if our tenants are unable to pay
their rent. 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, resulting in reduced cash flow, which may negatively impact net asset values and
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.
As of the date of this Report, we have no significant exposure to tenants operating under
bankruptcy protection. Our experience for 2010 reflects an improvement from the unusually high
level of tenant defaults during 2008 and 2009, when companies across many industries experienced
financial distress due to the economic downturn and the seizure in the credit markets. There were
two tenant defaults in our portfolio during 2010 as compared to four during 2009. We have observed
that many of our tenants have benefited from continued improvements in general business conditions,
which we anticipate will result in reduced tenant defaults going forward; however, it is possible
that additional tenants may file for bankruptcy or default on their leases during 2011 and that
economic conditions may again deteriorate.
To mitigate these risks, we have historically looked to invest in assets that we believe are
critically important to a tenants operations and have attempted to diversify our portfolio by
tenant, tenant industry and geography. 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, as well as protecting our rights
when tenants default or enter into bankruptcy.
Inflation
Our leases generally have rent adjustments that are either fixed or based on formulas indexed to
changes in the CPI or other similar index 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, 2010 generally benefited from increases in
inflation rates during the years prior to the scheduled rent adjustment date. However, despite
recent signs of inflationary pressure, we continue to 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.
Lease Expirations and Occupancy
At December 31, 2010, we had no significant leases scheduled to expire or renew in the next twelve
months. The advisor actively manages our real estate portfolio and begins discussing options with
tenants in advance of the scheduled lease expiration. In certain cases, we obtain lease renewals
from our tenants; however, tenants may elect to move out at the end of their term, or may elect to
exercise purchase options, if any, in their leases. In cases where tenants elect not to renew, we
may seek replacement tenants or try to sell the property. Our occupancy declined slightly from 95%
at December 31, 2009 to 94% at December 31, 2010.
CPA®:14 2010 10-K 28
Proposed Accounting Changes
The International Accounting Standards Board and FASB have issued an Exposure Draft on a joint
proposal that would dramatically transform lease accounting from the existing model. These changes
would impact most companies but are particularly applicable to those that are significant users of
real estate. The proposal outlines a completely new model for accounting by lessees, whereby their
rights and obligations under all leases, existing and new, would be capitalized and recorded on the
balance sheet. For some companies,
the new accounting guidance may influence whether or not, or the extent to which, they may enter
into the type of sale-leaseback transactions in which we specialize. At this time, the proposed
guidance has not been finalized and as such we are unable to determine whether this proposal will
have a material impact on our business.
The Emerging Issues Task Force (EITF) of the FASB discussed the accounting treatment for
deconsolidating subsidiaries in situations other than a sale or transfer at its September 2010
meeting. While the EITF did not reach a consensus for exposure, the EITF determined that further
research was necessary to more fully understand the scope and implications of the matter, prior to
issuing a consensus for exposure. If the EITF reaches a consensus for exposure, we will evaluate
the impact of such conclusion on our financial statements. We deconsolidated a subsidiary that
leased property to Buffets, Inc. (Buffets) which had total assets and liabilities of $7.2 million
and $20.1 million, respectively, and recognized a gain in the amount of $12.9 million during 2010.
How We Evaluate Results of Operations
We evaluate our results of operations with a primary focus on our ability to generate cash flow
necessary to meet our objectives of funding distributions to shareholders and increasing our equity
in our real estate. As a result, our assessment of operating results gives less emphasis to the
effect of unrealized gains and losses, which may cause fluctuations in net income for comparable
periods but have no impact on cash flows, and to other non-cash charges, such as depreciation and
impairment charges.
We consider cash flows from operating activities, cash flows from investing activities, cash flows
from financing activities and certain non-GAAP performance metrics to be important measures in the
evaluation of our results of operations, liquidity and capital resources. Cash flows from operating
activities are sourced primarily from long-term lease contracts. These leases are generally triple
net and mitigate, to an extent, our exposure to certain property operating expenses. Our evaluation
of the amount and expected fluctuation of cash flows from operating activities is essential in
evaluating our ability to fund operating expenses, service debt and fund distributions to
shareholders.
We consider cash flows from operating activities plus cash distributions from equity investments in
real estate in excess of equity income, less cash distributions paid to consolidated joint venture
partners, as a supplemental measure of liquidity in evaluating our ability to sustain distributions
to shareholders. We consider this measure useful as a supplemental measure to the extent the source
of distributions in excess of equity income in real estate is the result of non-cash charges, such
as depreciation and amortization, because it allows us to evaluate the cash flows from consolidated
and unconsolidated investments in a comparable manner. In deriving this measure, we exclude cash
distributions from equity investments in real estate that are sourced from the sales of the equity
investees assets or refinancing of debt because we deem them to be returns of investment and not
returns on investment.
We focus on measures of cash flows from investing activities and cash flows from financing
activities in our evaluation of our capital resources. Investing activities typically consist of
the acquisition or disposition of investments in real property and the funding of capital
expenditures with respect to real properties. Financing activities primarily consist of the payment
of distributions to shareholders, obtaining non-recourse mortgage financing, generally in
connection with the acquisition or refinancing of properties, and making mortgage principal
payments. Our financing strategy has been to purchase substantially all of our properties with a
combination of equity and non-recourse mortgage debt. A lender on a non-recourse mortgage loan
generally has recourse only to the property collateralizing such debt and not to any of our other
assets. This strategy has allowed us to diversify our portfolio of properties and, thereby, limit
our risk. In the event that a balloon payment comes due, we may seek to refinance the loan,
restructure the debt with existing lenders, or evaluate our ability to pay the balloon payment from
our cash reserves or sell the property and use the proceeds to satisfy the mortgage debt.
CPA®:14 2010 10-K 29
Results of Operations
The following table presents the components of our lease revenues (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Rental income |
|
$ |
133,779 |
|
|
$ |
136,992 |
|
|
$ |
128,972 |
|
Interest income from direct financing leases |
|
|
13,744 |
|
|
|
14,356 |
|
|
|
15,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
147,523 |
|
|
$ |
151,348 |
|
|
$ |
144,331 |
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the net lease revenues (i.e., rental income and interest income
from direct financing leases) that we earned from lease obligations through our direct ownership of
real estate (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
Lessee |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Carrefour France, SAS (a) (b) |
|
$ |
23,821 |
|
|
$ |
22,177 |
|
|
$ |
19,656 |
|
PETsMART, Inc. (c) |
|
|
8,023 |
|
|
|
8,027 |
|
|
|
7,940 |
|
Federal Express Corporation (c) |
|
|
7,121 |
|
|
|
7,044 |
|
|
|
6,967 |
|
Dicks Sporting Goods, Inc. |
|
|
6,939 |
|
|
|
6,939 |
|
|
|
7,076 |
|
Atrium Companies, Inc. |
|
|
4,945 |
|
|
|
5,277 |
|
|
|
5,170 |
|
Katun Corporation (a) (d) |
|
|
4,610 |
|
|
|
4,501 |
|
|
|
4,497 |
|
Perkin Elmer, Inc. (a) |
|
|
4,334 |
|
|
|
4,552 |
|
|
|
4,802 |
|
Caremark Rx, Inc. |
|
|
4,300 |
|
|
|
4,300 |
|
|
|
4,300 |
|
Amylin Pharmaceuticals, Inc. (b) (e) |
|
|
4,027 |
|
|
|
3,635 |
|
|
|
|
|
McLane Company Food Service Inc. |
|
|
3,794 |
|
|
|
3,736 |
|
|
|
3,706 |
|
Amerix Corp. (f) |
|
|
3,241 |
|
|
|
3,241 |
|
|
|
2,980 |
|
Tower Automotive, Inc. (d) |
|
|
3,229 |
|
|
|
3,155 |
|
|
|
3,062 |
|
Rave Reviews Cinemas LLC |
|
|
3,071 |
|
|
|
3,037 |
|
|
|
2,907 |
|
Gibson Guitar Corp. (c) |
|
|
2,827 |
|
|
|
2,727 |
|
|
|
2,658 |
|
Builders FirstSource, Inc. (c) |
|
|
2,783 |
|
|
|
2,719 |
|
|
|
2,692 |
|
Gerber Scientific, Inc. |
|
|
2,678 |
|
|
|
2,668 |
|
|
|
2,591 |
|
Waddington North America, Inc. |
|
|
2,660 |
|
|
|
2,536 |
|
|
|
2,536 |
|
Collins & Aikman Corporation |
|
|
2,576 |
|
|
|
2,564 |
|
|
|
2,488 |
|
Other (a) (c) |
|
|
52,544 |
|
|
|
58,513 |
|
|
|
58,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
147,523 |
|
|
$ |
151,348 |
|
|
$ |
144,331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Amounts are subject to fluctuations in foreign currency exchange rates. The average rate for
the U.S. dollar in relation to the Euro during both 2010 and 2009 strengthened by
approximately 5% in comparison to the respective prior years, resulting in a negative impact
on lease revenues for our Euro-denominated investments in 2010 and 2009. This impact was
mitigated in some cases by CPI or similar rent increases. |
|
(b) |
|
Increase in 2010 was due to CPI-based (or equivalent) rent increase and lease restructuring. |
|
(c) |
|
These revenues are generated in consolidated ventures, generally with our affiliates, and on
a combined basis include lease revenues applicable to noncontrolling interests totaling $8.5
million, $8.2 million and $6.3 million for the years ended December 31, 2010, 2009 and 2008,
respectively. |
|
(d) |
|
Increases in 2010 and 2009 were due to CPI-based (or equivalent) rent increase. |
|
(e) |
|
We consolidated this venture effective January 1, 2009. As a result of a refinancing in 2007,
we became the general partner of the venture and therefore have control over the venture. |
|
(f) |
|
Increase in 2009 was due to CPI-based (or equivalent) rent increase. |
CPA®:14 2010 10-K 30
We recognize income from equity investments in real estate, of which lease revenues are a
significant component. The following table sets forth the net lease revenues earned by these
ventures. Amounts provided are the total amounts attributable to the ventures and do not represent
our proportionate share (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership |
|
|
|
|
|
|
Interest at |
|
|
Years ended December 31, |
|
Lessee |
|
December 31, 2010 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Hellweg Die Profi-Baumarkte GmbH & Co. KG (a) |
|
|
32 |
% |
|
$ |
34,408 |
|
|
$ |
35,889 |
|
|
$ |
37,128 |
|
U-Haul Moving Partners, Inc. and Mercury Partners, L.P. (b) |
|
|
12 |
% |
|
|
32,486 |
|
|
|
30,589 |
|
|
|
28,541 |
|
True Value Company |
|
|
50 |
% |
|
|
14,213 |
|
|
|
14,492 |
|
|
|
14,698 |
|
Advanced Micro Devices, Inc. |
|
|
67 |
% |
|
|
11,173 |
|
|
|
11,175 |
|
|
|
11,175 |
|
Life Time Fitness, Inc. |
|
|
56 |
% |
|
|
9,280 |
|
|
|
9,272 |
|
|
|
9,272 |
|
CheckFree Holdings, Inc. |
|
|
50 |
% |
|
|
5,103 |
|
|
|
4,964 |
|
|
|
4,830 |
|
Compucom Systems, Inc. (c) |
|
|
67 |
% |
|
|
4,884 |
|
|
|
5,020 |
|
|
|
4,902 |
|
Best Buy Co., Inc. |
|
|
37 |
% |
|
|
4,577 |
|
|
|
4,553 |
|
|
|
4,421 |
|
Del Monte Corporation (d) |
|
|
50 |
% |
|
|
3,527 |
|
|
|
3,529 |
|
|
|
3,241 |
|
The Upper Deck Company |
|
|
50 |
% |
|
|
3,194 |
|
|
|
3,194 |
|
|
|
3,194 |
|
Dicks Sporting Goods, Inc. |
|
|
45 |
% |
|
|
3,141 |
|
|
|
3,141 |
|
|
|
3,141 |
|
ShopRite Supermarkets, Inc. (c) |
|
|
45 |
% |
|
|
2,954 |
|
|
|
2,484 |
|
|
|
2,461 |
|
Town Sports International Holdings, Inc. |
|
|
56 |
% |
|
|
1,119 |
|
|
|
1,086 |
|
|
|
1,086 |
|
Amylin Pharmaceuticals, Inc. (e) |
|
|
50 |
% |
|
|
|
|
|
|
|
|
|
|
3,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
130,059 |
|
|
$ |
129,388 |
|
|
$ |
131,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In addition to lease revenues, the venture also earned interest income of $24.2 million,
$27.1 million and $28.1 million on a note receivable during 2010, 2009 and 2008, respectively.
Amounts are subject to fluctuations in foreign currency exchange rates. The average rate for
the U.S. dollar in relation to the Euro during both 2010 and 2009 strengthened by
approximately 5% in comparison to the respective prior years, resulting in a negative impact
on lease revenues for our Euro-denominated investments in 2010 and 2009. |
|
(b) |
|
Increases in 2010 and 2009 were due to CPI-based (or equivalent) rent increase. |
|
(c) |
|
In December 2010, this venture sold its properties and distributed the proceeds to the
venture partners. We have no further economic interest in this venture. |
|
(d) |
|
Increase in 2009 was due to CPI-based (or equivalent) rent increase. |
|
(e) |
|
We consolidated this venture effective January 1, 2009. As a result of a refinancing in 2007,
we became the general partner of the venture and therefore have control over the venture. |
Lease Revenues
Our net leases generally have rent adjustments based on formulas indexed to changes in the CPI or
other similar index 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 foreign currency exchange rates.
2010 vs. 2009 For the year ended December 31, 2010 as compared to 2009, lease revenues decreased
by $3.8 million, primarily due to the impact of tenant activity in 2009 and 2010, including the
restructuring of leases due to tenant defaults and lease rejections in bankruptcy court, which
resulted in a reduction to lease revenues of $6.5 million. In addition, lease revenues decreased by
$1.3 million as a result of the negative impact of fluctuations in foreign currency exchange rates.
These decreases were partially offset by scheduled rent increases at several properties totaling
$4.1 million.
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, lease revenues increased
by $7.0 million, primarily due to scheduled rent increases at several properties totaling $4.7
million. In addition, an adjustment we made in the third quarter of 2009 to consolidate the Amylin
venture that was previously accounted for under the equity method resulted in a $2.5 million
increase in lease revenues.
CPA®:14 2010 10-K 31
Other Operating Income
Other operating income generally consists of costs reimbursable by tenants, lease termination
payments and other non-rent related revenues including, but not limited to, settlements of claims
against former lessees. We receive settlements in the ordinary course of business; however, the
timing and amount of such settlements cannot always be estimated. Reimbursable tenant costs are
recorded as both income and property expense and, therefore, have no impact on net income.
2010 vs. 2009 For the year ended December 31, 2010 as compared to 2009, other operating income
increased by $4.5 million, primarily due to property-related income recognized in connection with a
prepayment of a non-recourse mortgage loan. New Creative Enterprises rejected its lease with us
during bankruptcy proceedings in March 2009. As a result, we stopped making debt service payments
on the related mortgage loan in March 2010 in an attempt to negotiate an early prepayment of the
loan. In October 2010, the lender, who was holding $4.0 million cash from a converted letter of
credit issued by New Creative Enterprises, applied the cash to the outstanding principal balance
and the remaining debt balance was paid off at that time.
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, other operating income
was substantially the same.
Depreciation and Amortization
2010 vs. 2009 For the year ended December 31, 2010 as compared to 2009, depreciation and
amortization decreased by $2.5 million, primarily due to a decrease in amortization of $1.1 million
as a result of an intangible asset becoming fully amortized in September 2009 and a write-off of
$1.1 million in intangible assets as a result of a lease restructuring during the third quarter of
2009.
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, depreciation and
amortization increased by $3.1 million, primarily due to an increase of $2.2 million as a result of
a cumulative adjustment we recorded in the third quarter of 2009 to consolidate a previously
unconsolidated venture, Amylin Pharmaceuticals, as well as the $1.1 million write-off in intangible
assets as described above.
Property Expenses
2010 vs. 2009 For the year ended December 31, 2010 as compared to 2009, property expenses
decreased by $0.1 million. Asset management and performance fees payable to the advisor decreased
by $2.0 million as a result of a decline in the appraised value of our real estate assets at
December 31, 2009 as compared to a year earlier and property sales. This decrease was substantially
offset by a $1.8 million increase in costs related to current and former tenants who have filed for
bankruptcy or are experiencing financial difficulties.
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, property expenses
decreased by $1.1 million, primarily due to a $2.2 million decrease in asset management and
performance fees payable to the advisor as a result of a decline in the appraised value of our real
estate assets at December 31, 2008 as compared to a year earlier. This decrease was partially
offset by an increase of $1.0 million in costs related to current and former tenants who have filed
for bankruptcy or were experiencing financial difficulties.
General and Administrative
2010 vs. 2009 For the year ended December 31, 2010 as compared to 2009, general and
administrative expenses increased by $1.4 million, primarily due to costs incurred in connection
with the Proposed Merger.
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, general and
administrative expenses decreased by $1.6 million, primarily due to $1.4 million of costs incurred
in connection with exploring potential liquidity alternatives during 2008.
CPA®:14 2010 10-K 32
Impairment Charges
For the years ended December 31, 2010, 2009 and 2008, we recorded impairment charges included in
operating expenses for our continuing real estate operations totaling $8.5 million, $10.1 million
and $0.1 million, respectively. The table below summarizes these impairment charges recorded in
operating expenses for the past three fiscal years for both continuing and discontinued operations
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lessee |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Triggering Events |
Metaldyne Company |
|
$ |
4,344 |
|
|
$ |
4,027 |
|
|
$ |
|
|
|
Potential sale |
Atrium Companies, Inc. |
|
|
2,209 |
|
|
|
|
|
|
|
|
|
|
Property sold |
Nexpak Corporation |
|
|
1,907 |
|
|
|
3,500 |
|
|
|
|
|
|
Potential sale |
Various lessees |
|
|
|
|
|
|
2,566 |
|
|
|
110 |
|
|
Decline in unguaranteed residual value |
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charges included in
operating
expenses from continuing operations |
|
$ |
8,460 |
|
|
$ |
10,093 |
|
|
$ |
110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nortel Networks Inc. |
|
$ |
|
|
|
$ |
22,152 |
|
|
$ |
|
|
|
Tenant filed for bankruptcy |
Buffets, Inc. |
|
|
|
|
|
|
8,100 |
|
|
|
|
|
|
Tenant filed for bankruptcy |
Orgill, Inc. |
|
|
1,271 |
|
|
|
|
|
|
|
|
|
|
Property sold |
Tower Automotive inc. |
|
|
400 |
|
|
|
|
|
|
|
1,029 |
|
|
Property sold |
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charges from discontinued
operations |
|
$ |
1,671 |
|
|
$ |
30,252 |
|
|
$ |
1,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Income from Equity Investments in Real Estate and Other Income and (Expenses) below for
additional impairment charges incurred during 2010, 2009 and 2008.
Income from Equity Investments in Real Estate
Income from equity investments in real estate represents our proportionate share of net income
(revenue less expenses) from investments entered into with affiliates or third parties in which we
have a noncontrolling interest but over which we exercise significant influence. Under current
accounting guidance for investments in unconsolidated ventures, we are required to periodically
compare an investments carrying value to its estimated fair value and recognize an impairment
charge to the extent that carrying value exceeds fair value.
2010 vs. 2009 For the year ended December 31, 2010 as compared to 2009, income from equity
investments in real estate increased by $6.8 million. In 2010, income from equity investments in
real estate included our share of the gains recognized by two ventures that sold their properties
totaling $11.4 million, partially offset by the recognition of a $4.7 million other-than-temporary
impairment charge on our investment in a venture to reduce its carrying value to its estimated fair
value.
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, income from equity
investments in real estate increased by $13.2 million, primarily due to a decrease in
other-than-temporary impairment charges of $9.1 million and a reduction in interest expense of $2.1
million as a result of several ventures refinancing their mortgage loans during 2008 and 2009.
During 2009, we incurred an other-than-temporary impairment charge of $0.7 million on an equity
investment to reduce the carrying value of the investment to its estimated fair value. During 2008,
we incurred impairment charges totaling $9.8 million on three domestic equity investments as a
result of their carrying values exceeding their estimated fair values, for which we deemed the
decline in value to be other-than-temporary.
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 or 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 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.
CPA®:14 2010 10-K 33
2010 vs. 2009 For the year ended December 31, 2010, we recognized other expenses of $1.8
million, compared to other income of $1.4 million in 2009. Other expenses in 2010 included an
other-than-temporary impairment charge of $0.4 million recognized on certain securities to reflect
a decline in their fair value. Additionally, during the fourth quarter of 2010, we recorded a $1.3
million out-of-period adjustment to correct an error in 2009 pertaining the valuation of these
securities (Note 2).
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, net other income
decreased by $1.9 million, primarily due to a decrease in realized gains on foreign currency
transactions of $3.3 million as a result of the strengthening of the U.S. dollar relative to the
Euro in 2009 as compared to 2008, as well as a reduction in the total amount of cash repatriated
from foreign subsidiaries. This decrease was partially offset by the $1.3 million error which was
corrected in 2010 as described above and an other-than-temporary impairment charge of $0.1 million
recognized in 2008 on certain securities to reflect a decline in their fair value.
Advisor Settlement
2008 During 2008, we recognized income of $10.9 million in connection with the advisors SEC
Settlement (Note 14).
Interest Expense
2010 vs. 2009 For the year ended December 31, 2010 as compared to 2009, interest expense
decreased by $5.2 million, primarily due to a decrease of $2.9 million as a result of repaying or
refinancing debt during 2010 and 2009 and a decrease of $2.2 million as a result of making
scheduled mortgage principal payments, which reduced the balances on which interest was incurred.
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, interest expense
decreased by $0.2 million.
Discontinued Operations
2010 During 2010, we recognized income from discontinued operations of $24.0 million, primarily
consisting of a $12.9 million gain on the deconsolidation of a subsidiary that holds the property
previously leased to Buffets, as well as an $11.4 million gain on the extinguishment of debt
recognized when we returned the property previously leased to Nortel to the lender in exchange for
the lenders agreement to release us from all related non-recourse mortgage loan obligations.
2009 During 2009, we recognized a loss from discontinued operations of $25.9 million, primarily
due to impairment charges of $22.2 million recognized on the Nortel property and $8.1 million
recognized on the Buffets property. In addition, we recognized a loss from the operations of
discontinued properties of $4.3 million. These losses were partially offset by a net gain on sale
of two domestic properties totaling $8.6 million.
2008 During 2008, we recognized income from discontinued operations of $7.2 million, primarily
due to income generated from the operations of discontinued properties.
Net Income Attributable to CPA®:14 Shareholders
2010 vs. 2009 For the year ended December 31, 2010 as compared to 2009, the resulting net income
attributable to CPA®:14 shareholders increased by $61.6 million.
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, the resulting net income
attributable to CPA®:14 shareholders decreased by $39.8 million.
Funds from Operations as Adjusted (AFFO)
AFFO is a non-GAAP measure we use to evaluate our business. For a definition of AFFO and a
reconciliation to net income attributable to CPA®:14 shareholders, see Supplemental
Financial Measures below.
2010 vs. 2009 For the year ended December 31, 2010 as compared to 2009, AFFO increased by $2.0
million, primarily driven by the aforementioned increases in our results of operations.
2009 vs. 2008 For the year ended December 31, 2009 as compared to 2008, AFFO decreased by $17.4
million, primarily as a result of the aforementioned decreases in our results of operations.
CPA®:14 2010 10-K 34
Financial Condition
Sources and Uses of Cash during the Year
We use the cash flow generated from net leases to meet our 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,
the 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 year are described below.
Operating Activities Cash flow from operating activities in 2010 was favorably impacted by the
increases in our results of operations as well as the release of security deposit assets held by
lenders as a result of the repayment of matured non-recourse mortgage loans. During 2010, we used
cash flows from operating activities of $109.3 million to primarily fund cash distributions to
shareholders of $61.4 million, excluding $7.8 million in dividends that were reinvested by
shareholders in our common stock through our DRIP, and to fund distributions to affiliates who hold
noncontrolling interests in various entities with us of $13.1 million (see Financing Activities
below).
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. During 2010, we received distributions from
our equity investments in real estate in excess of cumulative equity income of $42.0 million. We
also received proceeds of $19.5 million from the sales of several properties and $7.0 million from
the repayment of notes receivable that matured during the period. We made contributions to
unconsolidated ventures totaling $4.8 million, including $4.2 million paid to a venture to pay off
its maturing non-recourse mortgage loan. In January 2010, we paid our annual installment of
deferred acquisition fees to the advisor, which totaled $2.6 million.
Financing Activities During 2010, we made scheduled mortgage principal installments of $154.1
million, which included scheduled balloon payments totaling $139.9 million. Proceeds from mortgage
refinancing, cash distributions received from equity investments in real estate in excess of equity
income (see Investing Activities below) and our existing cash resources were used to fund scheduled
mortgage principal payments. We also made cash distributions of $74.4 million to shareholders and
to affiliates that hold noncontrolling interests in various entities with us, excluding $7.8
million in dividends reinvested through our DRIP. We obtained $112.2 million as a result of
refinancing several non-recourse mortgage loans that were scheduled to mature during 2010. We also
received $7.4 million as a result of issuing shares through our distribution reinvestment and stock
purchase plan, net of costs, and used $2.0 million to repurchase our shares under our redemption
plan, 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. We limit the
number of shares we may redeem so that the shares we redeem in any quarter, together with the
aggregate number of shares redeemed in the preceding three fiscal quarters, does not exceed a
maximum of 5% of our total shares outstanding as of the last day of the immediately preceding
quarter. In addition, our ability to effect redemptions is subject to our having available cash to
do so. Due to higher levels of redemption requests as compared to prior years, as of the third
quarter of 2009, redemptions totaled approximately 5% of total shares outstanding. In light of this
5% limitation and our desire to preserve capital and liquidity, in September 2009 our board of
directors approved the suspension of our redemption plan, effective for all redemption requests
received subsequent to September 1, 2009, which was the deadline for all redemptions taking place
in the third quarter of 2009. We may make limited exceptions to the suspension of the program in
cases of death or qualifying disability. The suspension continues as of the date of this Report and
will remain in effect until our board of directors, in its discretion, determines to reinstate the
redemption plan. We cannot give any assurances as to the timing of any further actions by the board
with respect to the plan.
CPA®:14 2010 10-K 35
For the year ended December 31, 2010, we redeemed 178,584 shares of our common stock pursuant to
our redemption plan at an average price per share of $11.16, all of which were redeemed under the
limited exceptions to the suspension of our redemption plan as described above. Of the total 2010
redemptions, we redeemed 55,870 shares in the fourth quarter. We funded share redemptions
during 2010 from the proceeds of the sale of shares of our common stock pursuant to our DRIP from
existing cash resources. In December 2010, the DRIP was suspended by our board of directors in
connection with the Proposed Merger.
Adjusted Cash Flow from Operating Activities
Adjusted cash flow from operating activities is a non-GAAP measure we use to evaluate our business.
For a definition of adjusted cash flow from operating activities and a reconciliation to cash flow
from operating activities, see Supplemental Financial Measures below.
Our adjusted cash flow from
operating activities for the year ended December 31, 2010 was $101.6
million, an increase of $0.4 million from 2009. While cash flow from operating activities increased
by $21.4 million, it was partially offset by a $13.4 million decrease in distributions received
from equity investments in real estate in excess of equity income, a $6.2 million decrease
associated with changes in working capital and a $1.4 million increase in distributions paid
to noncontrolling interests.
Summary of Financing
The table below summarizes our non-recourse long-term debt (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Balance |
|
|
|
|
|
|
|
|
Fixed rate |
|
$ |
573,568 |
|
|
$ |
684,284 |
|
Variable rate (a) |
|
|
115,696 |
|
|
|
121,379 |
|
|
|
|
|
|
|
|
Total |
|
$ |
689,264 |
|
|
$ |
805,663 |
|
|
|
|
|
|
|
|
Percent of total debt |
|
|
|
|
|
|
|
|
Fixed rate |
|
|
83 |
% |
|
|
85 |
% |
Variable rate (a) |
|
|
17 |
% |
|
|
15 |
% |
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
Weighted average interest rate at end of year |
|
|
|
|
|
|
|
|
Fixed rate |
|
|
6.7 |
% |
|
|
7.2 |
% |
Variable rate (a) |
|
|
6.0 |
% |
|
|
6.2 |
% |
|
|
|
(a) |
|
Variable-rate debt at December 31, 2010 included (i) $18.1 million that was effectively
converted to fixed-rate debt through interest rate swap derivative instruments and (ii) $80.6
million in mortgage obligations that bore interest at fixed rates but that convert to variable
rates during their term. |
CPA®:14 2010 10-K 36
Cash Resources
At December 31, 2010, our cash resources consisted of cash and cash equivalents totaling $124.7
million. Of this amount, $10.3 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. In addition, we have entered into contracts to sell certain properties to
non-affiliates for gross proceeds of approximately $77.1 million; however, there can be no
assurance that these sales will be completed. We also had unleveraged properties that had an
aggregate carrying value of $141.2 million at December 31, 2010, although there can be no assurance
that we would be able to obtain financing for these properties. Our cash resources can be used for
making scheduled mortgage loan principal payments, working capital needs and other commitments.
Cash Requirements
If the Proposed Merger does not occur or is significantly delayed, we expect that cash payments
during 2011 will include paying distributions to our shareholders and to our affiliates who hold
noncontrolling interests in entities we control and making scheduled mortgage loan principal
payments, as well as other normal recurring operating expenses. Balloon payments on our mortgage
loan obligations totaling $174.4 million will be due during 2011, inclusive of amounts attributable
to noncontrolling interests totaling $13.2 million. In addition, our share of balloon payments due
in 2011 on our unconsolidated ventures totals $9.8 million. We are actively seeking to refinance
certain of these loans and believe we have sufficient financing alternatives and/or cash resources
that can be used to make these payments. See below for cash requirements related to the Proposed
Merger.
Expected Impact of Proposed Merger and Asset Sales
If approved, we currently expect the Proposed Merger and the Asset Sales to have the following
impact on our liquidity and results of operations beginning in the second quarter of 2011; however,
there can be no assurance that these transactions will be completed during this time frame or at
all.
In connection with the Proposed Merger, we have agreed to sell three properties each to the advisor
and CPA®:17 Global for aggregate selling prices of $32.1 million and $57.4 million,
respectively, plus the assumption of indebtedness totaling approximately $64.7 million and $153.9
million, respectively, and we expect to recognize a gain on the sales of these properties. These
Asset Sales are contingent upon the approval of the Proposed Merger by our shareholders. As a
result of selling these properties, we currently estimate that our annual lease revenue and cash
flow will decrease by approximately $8.8 million and $4.0 million, respectively.
If the Proposed Merger is consummated, the advisor will earn $31.2 million of termination fees from
us in connection with the termination of its advisory agreement with us, $15.2 million of
subordinated disposition fees and $6.1 million in fees we have accrued but have not yet paid under
the advisory agreement. The advisor has elected to receive the $31.2 million of termination fees in
shares of our common stock, for which it has agreed to elect to receive shares of
CPA®:16 Global in the Proposed Merger. If the Proposed Merger is consummated, the
maximum cash required to pay the $1.00 per share special cash distribution would be approximately
$87.3 million, based on our total shares outstanding at December 31, 2010. We expect to make these
cash payments with proceeds from the Asset Sales and our existing cash resources.
CPA®:14 2010 10-K 37
Off-Balance Sheet Arrangements and Contractual Obligations
The table below summarizes our debt, off-balance sheet arrangements and other contractual
obligations at December 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 |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
Non-recourse debt Principal (a) |
|
$ |
687,865 |
|
|
$ |
194,619 |
|
|
$ |
142,519 |
|
|
$ |
54,316 |
|
|
$ |
296,411 |
|
Deferred acquisition fees Principal |
|
|
4,235 |
|
|
|
1,753 |
|
|
|
1,310 |
|
|
|
773 |
|
|
|
399 |
|
Interest on borrowings and deferred acquisition fees (b) |
|
|
178,964 |
|
|
|
42,711 |
|
|
|
47,585 |
|
|
|
39,337 |
|
|
|
49,331 |
|
Subordinated disposition fees (c) |
|
|
6,065 |
|
|
|
6,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and other lease commitments (d) |
|
|
36,212 |
|
|
|
1,663 |
|
|
|
2,297 |
|
|
|
2,283 |
|
|
|
29,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
913,341 |
|
|
$ |
246,811 |
|
|
$ |
193,711 |
|
|
$ |
96,709 |
|
|
$ |
376,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Excludes $1.4 million of purchase accounting adjustments in connection with the 2006 Merger,
which is included in Non-recourse debt at December 31, 2010. |
|
(b) |
|
Interest on un-hedged variable-rate debt obligations was calculated using the applicable
annual variable interest rates and balances outstanding at December 31, 2010. |
|
(c) |
|
Payable to the advisor, subject to meeting contingencies, in connection with the Proposed
Merger. See Current Development in Item 1 above. There can be no assurance that the Proposed
Merger will occur in this time frame, if at all. |
|
(d) |
|
Operating and other lease commitments consist primarily of the total minimum rents payable on
the ground leases, property improvement commitments and our share of total 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. The table above excludes the total minimum rents payable under ground
leases of two ventures in which we own a combined interest of 32%. These obligations total
approximately $32.3 million over the lease terms, which extend through 2091. We account for
these ventures under the equity method of accounting. |
Amounts in the table above related to our foreign operations are based on the exchange rate of the
local currencies at December 31, 2010. At December 31, 2010, we had no material capital lease
obligations for which we are the lessee, either individually or in the aggregate.
Proposed Merger and Asset Sales
In connection with the Proposed Merger, we have agreed to sell three properties each to the advisor
and CPA®:17 Global for aggregate selling prices of $32.1 million and $57.4 million,
respectively, plus the assumption of indebtedness totaling approximately $64.7 million and $153.9
million, respectively, and we expect to recognize a gain on the sales of these properties. If the
Proposed Merger is consummated, the maximum cash required to pay the $1.00 per share special cash
distribution in connection with the Proposed Merger would be approximately $87.3 million, based on
our total shares outstanding at December 31, 2010. We expect to make the special cash distributions
with proceeds from the Asset Sales and our existing cash resources.
Equity Investments in Real Estate
We acquired two related investments in 2007 (the Hellweg 2 transaction) that are accounted for
under the equity method of accounting as we do not have a controlling interest but over which we
exercise significant influence. The remaining ownership of these entities is held by the advisor
and certain of our affiliates. The primary purpose of these investments was to ultimately acquire
an interest in the underlying properties and 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 an interest in
a venture, the property venture, that in turn acquired a 24.7% (direct and indirect) ownership
interest in a limited partnership owning 37 properties throughout Germany. Concurrently, we also
acquired an interest in a second venture, the lending venture, that made a loan, the note
receivable, to the holder of the remaining 75.3% (direct and indirect) interests in the limited
partnership, which is referred to in this Report as our partner. In connection with the
acquisition, the property venture agreed to three option agreements that give the property venture
the right to purchase, from our partner, the remaining 75.3% (direct and indirect) interest in the
limited partnership at a price equal to the principal amount of the note receivable at the time of
purchase. In November 2010, the property venture exercised the first of its three options and
acquired from our partner a 70% direct interest in the limited
partnership, thus owning a (direct and indirect) 94.7% interest in the limited partnership. The
property venture has assignable option agreements to acquire the remaining (direct and indirect)
5.3% interest in the limited partnership by October 2012. If the property venture does not exercise
its option agreements, our 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. Currently, under the terms of the note receivable, the
lending venture will receive interest income that approximates 5.3% of all income earned by the
limited partnership less adjustments. Our total effective ownership interest in the ventures is
approximately 32%.
CPA®:14 2010 10-K 38
Upon exercise of the relevant 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 will be in amounts necessary to fully satisfy the sellers obligations to the lending
venture, and the lending venture will be deemed to have transferred such funds up to us and our
affiliates as if they had been recontributed down into the property venture based on their pro rata
ownership. Accordingly, at December 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 $2.2
million, with our share approximating $0.7 million. In addition, our maximum exposure to loss on
these ventures was $14.3 million (inclusive of both our existing investment and the amount to fund
our future commitment).
We have investments in unconsolidated ventures that own single-tenant properties net leased to
corporations. Generally, the underlying investments are jointly-owned with our affiliates.
Summarized financial information for these ventures and our ownership interest in the ventures at
December 31, 2010 are presented below. Summarized financial information provided represents the
total amounts attributable to the ventures and does not represent our proportionate share (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest at |
|
|
|
|
|
|
Total Third |
|
|
|
|
Lessee |
|
December 31, 2010 |
|
|
Total Assets |
|
|
Party Debt |
|
|
Maturity Date |
|
|
|
|
|
The Upper Deck Company (a) |
|
|
50 |
% |
|
$ |
26,845 |
|
|
$ |
9,817 |
|
|
|
2/2011 |
|
Del Monte Corporation |
|
|
50 |
% |
|
|
14,739 |
|
|
|
10,092 |
|
|
|
8/2011 |
|
Best Buy Co., Inc. |
|
|
37 |
% |
|
|
27,397 |
|
|
|
23,889 |
|
|
|
2/2012 |
|
True Value Company |
|
|
50 |
% |
|
|
128,636 |
|
|
|
67,803 |
|
|
|
1/2013 & 2/2013 |
|
U-Haul Moving Partners, Inc. and Mercury Partners, LP |
|
|
12 |
% |
|
|
286,824 |
|
|
|
160,191 |
|
|
|
5/2014 |
|
Checkfree Holdings, Inc. |
|
|
50 |
% |
|
|
32,696 |
|
|
|
29,138 |
|
|
|
6/2016 |
|
Life Time Fitness, Inc. |
|
|
56 |
% |
|
|
104,454 |
|
|
|
73,834 |
|
|
|
12/2016 |
|
Hellweg Die Profi-Baumarkte GmbH & Co. KG(b) |
|
|
32 |
% |
|
|
429,916 |
|
|
|
369,323 |
|
|
|
4/2017 |
|
Town Sports International Holdings, Inc. |
|
|
56 |
% |
|
|
7,462 |
|
|
|
7,609 |
|
|
|
5/2017 |
|
Advanced Micro Devices, Inc. (c) |
|
|
67 |
% |
|
|
86,157 |
|
|
|
57,166 |
|
|
|
1/2019 |
|
Dicks Sporting Goods, Inc. |
|
|
45 |
% |
|
|
27,138 |
|
|
|
21,861 |
|
|
|
1/2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,172,264 |
|
|
$ |
830,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In February 2011, this venture repaid its maturing mortgage loan. |
|
(b) |
|
Ownership interest represents our combined interest in two ventures. Total assets excludes a
note receivable from an unaffiliated third party. Total third-party debt excludes a related
noncontrolling interest that is redeemable by the unaffiliated third party. The note
receivable and noncontrolling interest each had a carrying value of $21.8 million at December
31, 2010. Dollar amounts shown are based on the exchange rate of the Euro at December 31,
2010. |
|
(c) |
|
In August 2010, this venture refinanced its existing non-recourse mortgage loan and
distributed the net proceeds to the venture partners. |
CPA®:14 2010 10-K 39
Environmental Obligations
In connection with the purchase of many of our properties, we required the sellers to perform
environmental reviews. We believe, based on the results of these reviews, that our properties were
in substantial compliance with Federal and state environmental statutes at the time the properties
were acquired. However, portions of certain properties have been subject to some degree of
contamination, principally in connection with leakage from underground storage tanks, surface
spills or other on-site activities. In most instances where contamination has been identified,
tenants are actively engaged in the remediation process and addressing identified conditions.
Tenants are generally subject to environmental statutes and regulations regarding the discharge of
hazardous materials and any related remediation obligations. In addition, our leases generally
require tenants to indemnify us from all liabilities and losses related to the
leased properties with provisions of such indemnification specifically addressing environmental
matters. The leases generally include provisions that allow for periodic environmental assessments,
paid for by the tenant, and allow us to extend leases until such time as a tenant has satisfied its
environmental obligations. Certain of our leases allow us to require financial assurances from
tenants, such as performance bonds or letters of credit, if the costs of remediating environmental
conditions are, in our estimation, in excess of specified amounts. Accordingly, we believe that the
ultimate resolution of environmental matters should not have a material adverse effect on our
financial condition, liquidity or results of operations.
Critical Accounting Estimates
Our significant accounting policies are described in Note 2 to the consolidated financial
statements. Many of these accounting policies require judgment and the use of estimates and
assumptions when applying these policies in the preparation of our consolidated financial
statements. On a quarterly basis, we evaluate these estimates and judgments based on historical
experience as well as other factors that we believe to be reasonable under the circumstances. These
estimates are subject to change in the future if underlying assumptions or factors change. Certain
accounting policies, while significant, may not require the use of estimates. Those accounting
policies that require significant estimation and/or judgment are listed below.
Classification of Real Estate Leases
We classify our leases for financial reporting purposes at the inception of a lease, or when
significant lease terms are amended, as either real estate leased under operating leases or net
investment in direct financing leases. This classification is based on several criteria, including,
but not limited to, estimates of the remaining economic life of the leased assets and the
calculation of the present value of future minimum rents. We estimate remaining economic life
relying in part upon third-party appraisals of the leased assets. We calculate the present value of
future minimum rents using the leases implicit interest rate, which requires an estimate of the
residual value of the leased assets as of the end of the non-cancelable lease term. Estimates of
residual values are generally determined by us relying in part upon third-party appraisals.
Different estimates of residual value result in different implicit interest rates and could
possibly affect the financial reporting classification of leased assets. The contractual terms of
our leases are not necessarily different for operating and direct financing leases; however, the
classification is based on accounting pronouncements that are intended to indicate whether the
risks and rewards of ownership are retained by the lessor or substantially transferred to the
lessee. We believe that we retain certain risks of ownership regardless of accounting
classification. Assets related to leases classified as net investment in direct financing leases
are not depreciated but are written down to expected residual value over the lease term. Therefore,
the classification of leases may have a significant impact on net income even though it has no
effect on cash flows.
Identification of Tangible and Intangible Assets in Connection with Real Estate Acquisitions
In connection with our acquisition of properties accounted for as operating leases, we allocate
purchase costs to tangible and intangible assets and liabilities acquired based on their estimated
fair values. We determine the value of tangible assets, consisting of land and buildings, as if
vacant, and record intangible assets, including the above- and below-market value of leases, the
value of in-place leases and the value of tenant relationships, at their relative estimated fair
values.
We determine the value attributed to tangible assets in part using a discounted cash flow model
that is intended to approximate both what a third party would pay to purchase the vacant property
and rent at current estimated market rates. In applying the model, we assume that the disinterested
party would sell the property at the end of an estimated market lease term. Assumptions used in the
model are property-specific where this information is available; however, when certain necessary
information is not available, we use available regional and property-type information. Assumptions
and estimates include a discount rate or internal rate of return, marketing period necessary to put
a lease in place, carrying costs during the marketing period, leasing commissions and tenant
improvements allowances, market rents and growth factors of these rents, market lease term and a
cap rate to be applied to an estimate of market rent at the end of the market lease term.
CPA®:14 2010 10-K 40
We acquire properties subject to net leases and determine the value of above-market and
below-market lease intangibles based on the difference between (i) the contractual rents to be paid
pursuant to the leases negotiated and in place at the time of acquisition of the properties and
(ii) our estimate of fair market lease rates for the property or a similar property, both of which
are measured over a period equal to the estimated market lease term. We discount the difference
between the estimated market rent and contractual rent to a present value using an interest rate
reflecting our current assessment of the risk associated with the lease acquired, which includes a
consideration of the credit of the lessee. Estimates of market rent are generally determined by us
relying in part upon a third-party appraisal obtained in connection with the property acquisition
and can include estimates of market rent increase factors, which are generally provided in the
appraisal or by local brokers.
We evaluate the specific characteristics of each tenants lease and any pre-existing relationship
with each tenant in determining the value of in-place lease and tenant relationship intangibles. To
determine the value of in-place lease intangibles, we consider estimated market rent, estimated
carrying costs of the property during a hypothetical expected lease-up period, current market
conditions and costs to execute similar leases. Estimated carrying costs include real estate taxes,
insurance, other property operating costs and estimates of lost rentals at market rates during the
hypothetical expected lease-up periods, based on assessments of specific market conditions. In
determining the value of tenant relationship intangibles, we consider the expectation of lease
renewals, the nature and extent of our existing relationship with the tenant, prospects for
developing new business with the tenant and the tenants credit profile. We also consider estimated
costs to execute a new lease, including estimated leasing commissions and legal costs, as well as
estimated carrying costs of the property during a hypothetical expected lease-up period. We
determine these values using our estimates or by relying in part upon third-party appraisals.
Basis of Consolidation
When we obtain an economic interest in an entity, we evaluate the entity to determine if it is
deemed a variable interest entity (VIE) and, if so, whether we are deemed to be the primary
beneficiary and are therefore required to consolidate the entity. Significant judgment is required
to determine whether a VIE should be consolidated. We review the contractual arrangements provided
for in the partnership agreement or other related contracts to determine whether the entity is
considered a VIE under current authoritative accounting guidance, and to establish whether we have
any variable interests in the VIE. We then compare our variable interests, if any, to those of the
other variable interest holders to determine which party is the primary beneficiary of a VIE based
on whether the entity (i) has the power to direct the activities that most significantly impact the
economic performance of the VIE, and (ii) has the obligation to absorb losses or the right to
receive benefits of the VIE that could potentially be significant to the VIE.
For an entity that is not considered to be a VIE, the general partners in a limited partnership (or
similar entity) are presumed to control the entity regardless of the level of their ownership and,
accordingly, may be required to consolidate the entity. We evaluate the partnership agreements or
other relevant contracts to determine whether there are provisions in the agreements that would
overcome this presumption. If the agreements provide the limited partners with either (a) the
substantive ability to dissolve or liquidate the limited partnership or otherwise remove the
general partners without cause or (b) substantive participating rights, the limited partners
rights overcome the presumption of control by a general partner of the limited partnership, and,
therefore, the general partner must account for its investment in the limited partnership using the
equity method of accounting.
When we obtain an economic interest in an entity that is structured at the date of acquisition as a
tenant-in-common interest, we evaluate the tenancy-in-common agreements or other relevant documents
to ensure that the entity does not qualify as a VIE and does not meet the control requirement
required for consolidation. We also use judgment in determining whether the shared decision-making
involved in a tenant-in-common interest investment creates an opportunity for us to have
significant influence on the operating and financial decisions of these investments and thereby
creates some responsibility by us for a return on our investment. We account for tenancy-in-common
interests under the equity method of accounting.
Impairments
On a quarterly basis, we assess whether there are any indicators that the value of our long-lived
assets may be impaired or that their carrying value may not be recoverable. These impairment
indicators include, but are not limited to, the vacancy of a property that is not subject to a
lease; a lease default by a tenant that is experiencing financial difficulty; the termination of a
lease by a tenant or the rejection of a lease in a bankruptcy proceeding. We may incur impairment
charges on long-lived assets, including real estate, direct financing leases, assets held for sale
and equity investments in real estate. We may also incur impairment charges on marketable
securities. Estimates and judgments used when evaluating whether these assets are impaired are
presented below.
CPA®:14 2010 10-K 41
Real Estate
For real estate assets in which an impairment indicator is identified, we follow a two-step process
to determine whether an asset is impaired and to determine the amount of the charge. First, we
compare the carrying value of the property to the future net undiscounted cash flow that we expect
the property will generate, including any estimated proceeds from the eventual sale of the
property. The undiscounted cash flow analysis requires us to make our best estimate of market
rents, residual values and holding periods. We estimate market rents and residual values using
market information from outside sources such as broker quotes or recent comparable sales. In cases
where the available market information is not deemed appropriate, we perform a future net cash flow
analysis discounted for inherent risk associated with each asset to determine an estimated fair
value. As our investment objective is to
hold properties on a long-term basis, holding periods used in the undiscounted cash flow analysis
generally range from five to ten years. Depending on the assumptions made and estimates used, the
future cash flow projected in the evaluation of long-lived assets can vary within a range of
outcomes. We consider the likelihood of possible outcomes in determining the best possible estimate
of future cash flows. If the future net undiscounted cash flow of the property is less than the
carrying value, the property is considered to be impaired. We then measure the loss as the excess
of the carrying value of the property over its estimated fair value. The propertys estimated fair
value is primarily determined using market information from outside sources such as broker quotes
or recent comparable sales.
Direct Financing Leases
We review our direct financing leases at least annually to determine whether there has been an
other-than-temporary decline in the current estimate of residual value of the property. The
residual value is our estimate of what we could realize upon the sale of the property at the end of
the lease term, based on market information from outside sources such as broker quotes or recent
comparable sales. If this review indicates that a decline in residual value has occurred that is
other-than-temporary, we recognize an impairment charge and revise the accounting for the direct
financing lease to reflect a portion of the future cash flow from the lessee as a return of
principal rather than as revenue. While we evaluate direct financing leases if there are any
indicators that the residual value may be impaired, the evaluation of a direct financing lease can
be affected by changes in long-term market conditions even though the obligations of the lessee are
being met.
Assets Held for Sale
We classify real estate assets that are accounted for as operating leases as held for sale when we
have entered into a contract to sell the property, all material due diligence requirements have
been satisfied and we believe it is probable that the disposition will occur within one year. When
we classify an asset as held for sale, we calculate its estimated fair value as the expected sale
price, less expected selling costs. We base the expected sale price on the contract and the
expected selling costs on information provided by brokers and legal counsel. We then compare the
assets estimated fair value to its carrying value, and if the estimated fair value is less than
the propertys carrying value, we reduce the carrying value to the estimated fair value. We will
continue to review the property for subsequent changes in the estimated fair value, and may
recognize an additional impairment charge if warranted.
If circumstances arise that we previously considered unlikely and, as a result, we decide not to
sell a property previously classified as held for sale, we reclassify the property as held and
used. We measure and record a property that is reclassified as held and used at the lower of (a)
its carrying amount before the property was classified as held for sale, adjusted for any
depreciation expense that would have been recognized had the property been continuously classified
as held and used, or (b) the estimated fair value at the date of the subsequent decision not to
sell.
Equity Investments in Real Estate
We evaluate our equity investments in real estate on a periodic basis to determine if there are any
indicators that the value of our equity investment may be impaired and to establish whether or not
that impairment is other-than-temporary. To the extent impairment has occurred, we measure the
charge as the excess of the carrying value of our investment over its estimated fair value, which
is determined by multiplying the estimated fair value of the underlying ventures net assets by our
ownership interest percentage. For our unconsolidated ventures in real estate, we calculate the
estimated fair value of the underlying ventures real estate or net investment in direct financing
lease as described in Real Estate and Direct Financing Leases above. The fair value of the
underlying ventures debt, if any, is calculated based on market interest rates and other market
information. The fair value of the underlying ventures other financial assets and liabilities
(excluding net investment in direct financing leases) have fair values that approximate their
carrying values.
CPA®:14 2010 10-K 42
Marketable Securities
We evaluate our marketable securities for impairment if a decline in estimated fair value below
cost basis is considered other-than-temporary. In determining whether the decline is
other-than-temporary, we consider the underlying cause of the decline in value, the estimated
recovery period, the severity and duration of the decline, as well as whether we plan to sell the
security or will more likely than not be required to sell the security before recovery of its cost
basis. If we determine that the decline is other-than-temporary, we record an impairment charge to
reduce our cost basis to the estimated fair value of the security. Beginning in 2009, the credit
component of an other-than-temporary impairment is recognized in earnings while the non-credit
component is recognized in Other comprehensive income (OCI). Prior to 2009, all portions of
other-than-temporary impairments were recorded in earnings.
Provision for Uncollected Amounts from Lessees
On an ongoing basis, we assess our ability to collect rent and other tenant-based receivables and
determine an appropriate allowance for uncollected amounts. Because we have a limited number of
lessees (18 lessees represented 64% of lease revenues during 2010), we believe that it is necessary
to evaluate the collectability of these receivables based on the facts and circumstances of each
situation rather than solely using statistical methods. Therefore, in recognizing our provision for
uncollected rents and other tenant receivables, we evaluate actual past due amounts and make
subjective judgments as to the collectability of those amounts based on factors including, but not
limited to, our knowledge of a lessees circumstances, the age of the receivables, the tenants
credit profile and prior experience with the tenant. Even if a lessee has been making payments, we
may reserve for the entire receivable amount from the lessee if we believe there has been
significant or continuing deterioration in the lessees ability to meet its lease obligations.
Income Taxes
We have elected to be treated as a REIT under Sections 856 through 860 of the Internal Revenue
Code. In order to maintain our qualification as a REIT, we are required to, among other things,
distribute at least 90% of our REIT net taxable income to our shareholders (excluding net capital
gains) and meet certain tests regarding the nature of our income and assets. As a REIT, we are not
subject to U.S. federal income tax with respect to the portion of our income that meets certain
criteria and is distributed annually to shareholders. Accordingly, no provision for U.S. federal
income taxes is included in the consolidated financial statements with respect to these operations.
We believe we have operated, and we intend to continue to operate, in a manner that allows us to
continue to meet the requirements for taxation as a REIT. Many of these requirements, however, are
highly technical and complex. If we were to fail to meet these requirements, we would be subject to
U.S. federal income tax.
We conduct business in various states and municipalities within the U.S. and the European Union
and, as a result, we or one or more of our subsidiaries file income tax returns in the U.S. federal
jurisdiction and various state and certain foreign jurisdictions. As a result, we are subject to
certain state, local and foreign taxes and a provision for such taxes is included in the
consolidated financial statements.
Significant judgment is required in determining our tax provision and in evaluating our tax
positions. We establish tax reserves in accordance using a benefit recognition model, which we
believe could result in a greater amount of benefit (and a lower amount of reserve) being initially
recognized in certain circumstances. Provided that the tax position is deemed more likely than not
of being sustained, we recognize the largest amount of tax benefit that is greater than 50 percent
likely of being ultimately realized upon settlement. The tax position must be derecognized when it
is no longer more likely than not of being sustained.
Subsequent Event
In March 2011, we returned a property previously leased to Nexpak Corporation to the lender in
exchange for the lenders agreement to release us from all related non-recourse mortgage loan
obligations. On the date of disposition, the property had a carrying value of $5.5 million,
reflecting the impact of impairment charges totaling $1.9 million incurred in 2010 and $3.5 million
incurred in 2009, and the related non-recourse mortgage loan had an outstanding balance of $7.1
million.
CPA®:14 2010 10-K 43
Supplemental Financial Measures
In the real estate industry, analysts and investors employ certain non-GAAP measures in order to
facilitate meaningful comparisons between periods and among peer companies. Additionally, in the
formulation of our goals and in the evaluation of the effectiveness of our strategies, we employ
the use of supplemental non-GAAP measures, which are uniquely defined by our management. We believe
these measures are useful to investors to consider because they may assist them to better
understand and measure the performance of our business over time and against similar companies. A
description of these non-GAAP financial measures and reconciliations to the most directly
comparable GAAP measures are provided below.
Funds from Operations as Adjusted
Funds from Operations (FFO) is a non-GAAP measure defined by the National Association of Real
Estate Investment Trusts (NAREIT). NAREIT defines FFO as net income or loss (as computed in
accordance with GAAP) excluding: depreciation and amortization expense from real estate assets,
gains or losses from sales of depreciated real estate assets and extraordinary items; however, FFO
related to assets held for sale, sold or otherwise transferred and included in the results of
discontinued operations are to be included. These adjustments also incorporate the pro rata share
of unconsolidated subsidiaries. FFO is used by management, investors and analysts to facilitate
meaningful comparisons of operating performance between periods and among our peers. Although
NAREIT has published this definition of FFO, real estate companies often modify this definition as
they seek to provide financial measures that meaningfully reflect their distinctive operations.
We modify the NAREIT computation of FFO to include other adjustments to GAAP net income for certain
non-cash charges, where applicable, such as gains or losses on extinguishment of debt and
deconsolidation of subsidiaries, amortization of intangibles, straight-line rents, impairment
charges on real estate and unrealized foreign currency exchange gains and losses. We refer to our
modified definition of FFO as AFFO, and we employ it as one measure of our operating performance
when we formulate corporate goals and evaluate the effectiveness of our strategies. We exclude
these items from GAAP net income as they are not the primary drivers in our decision-making
process. Our assessment of our operations is focused on long-term sustainability and not on such
non-cash items, which may cause short-term fluctuations in net income but have no impact on cash
flows. As a result, we believe that AFFO is a useful supplemental measure for investors to consider
because it will help them to better understand and measure the performance of our business over
time without the potentially distorting impact of these short-term fluctuations.
CPA®:14 2010 10-K 44
FFO and AFFO for the years ended December 31, 2010, 2009 and 2008 are presented below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
Net income attributable to CPA®:14 shareholders |
|
$ |
66,917 |
|
|
$ |
5,316 |
|
|
$ |
45,164 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of real property |
|
|
30,594 |
|
|
|
35,910 |
|
|
|
32,963 |
|
Loss (gain) on sale of real estate |
|
|
2,486 |
|
|
|
(8,611 |
) |
|
|
(1,062 |
) |
Proportionate share of adjustments to equity in net income of
partially
owned entities to arrive at FFO: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of real property |
|
|
12,200 |
|
|
|
12,646 |
|
|
|
13,975 |
|
Gain on sale of real estate |
|
|
(11,605 |
) |
|
|
(2 |
) |
|
|
|
|
Proportionate share of adjustments for noncontrolling interests to
arrive at FFO |
|
|
(2,097 |
) |
|
|
(2,865 |
) |
|
|
(1,871 |
) |
|
|
|
|
|
|
|
|
|
|
Total adjustments |
|
|
31,578 |
|
|
|
37,078 |
|
|
|
44,005 |
|
|
|
|
|
|
|
|
|
|
|
FFO as defined by NAREIT |
|
|
98,495 |
|
|
|
42,394 |
|
|
|
89,169 |
|
|
|
|
|
|
|
|
|
|
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Gain on extinguishment of debt |
|
|
(10,573 |
) |
|
|
|
|
|
|
|
|
Gain on deconsolidation of a subsidiary |
|
|
(12,870 |
) |
|
|
|
|
|
|
|
|
Other depreciation, amortization and non-cash charges |
|
|
(119 |
) |
|
|
80 |
|
|
|
(27 |
) |
Straight-line and other rent adjustments |
|
|
(6,545 |
) |
|
|
(1,810 |
) |
|
|
(1,225 |
) |
Impairment charges |
|
|
10,131 |
|
|
|
40,345 |
|
|
|
1,139 |
|
Proportionate share of adjustments to equity in net income of
partially owned entities to arrive at AFFO: |
|
|
|
|
|
|
|
|
|
|
|
|
Other depreciation, amortization and other non-cash charges |
|
|
271 |
|
|
|
362 |
|
|
|
1,100 |
|
Straight-line and other rent adjustments |
|
|
(84 |
) |
|
|
(450 |
) |
|
|
(829 |
) |
Impairment charges |
|
|
4,736 |
|
|
|
671 |
|
|
|
9,820 |
|
Proportionate share of adjustments for noncontrolling interests
to arrive at AFFO |
|
|
331 |
|
|
|
213 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments |
|
|
(14,722 |
) |
|
|
39,411 |
|
|
|
10,009 |
|
|
|
|
|
|
|
|
|
|
|
AFFO |
|
$ |
83,773 |
|
|
$ |
81,805 |
|
|
$ |
99,178 |
|
|
|
|
|
|
|
|
|
|
|
Adjusted Cash Flow from Operating Activities
Adjusted cash flow from operating activities refers to our cash flow from operating activities (as
computed in accordance with GAAP) adjusted, where applicable, primarily to: add cash distributions
that we receive from our investments in unconsolidated real estate joint ventures in excess of our
equity income; subtract cash distributions that we make to our non-controlling partners in real
estate joint ventures that we consolidate; and eliminate changes in working capital. We hold a
number of interests in real estate joint ventures, and we believe that adjusting our GAAP cash flow
provided by operating activities to reflect these actual cash receipts and cash payments as well as
eliminating the effect of timing differences between the payment of certain liabilities and the
receipt of certain receivables in a period other than that in which the item is recognized, may
give investors additional information about our actual cash flow that is not incorporated in cash
flow from operating activities as defined by GAAP.
We believe that adjusted cash flow from operating activities is a useful supplemental measure for
assessing the cash flow generated from our core operations as it gives investors important
information about our liquidity that is not provided within cash flow from operating activities as
defined by GAAP, and we use this measure when evaluating distributions to shareholders.
CPA®:14 2010 10-K 45
Adjusted cash flow from operating activities for the years ended December 31, 2010, 2009 and 2008
is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Cash flow provided by operating activities |
|
$ |
109,288 |
|
|
$ |
87,900 |
|
|
$ |
110,697 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Distributions received from equity investments in real estate in excess of
equity income, net |
|
|
(3,473 |
) |
|
|
9,880 |
|
|
|
7,959 |
|
Distributions paid to noncontrolling interests, net |
|
|
(3,702 |
) |
|
|
(2,277 |
) |
|
|
(3,522 |
) |
Changes in
working capital(a) |
|
|
(552 |
) |
|
|
5,695 |
|
|
|
(5,471 |
) |
Advisor settlement |
|
|
|
|
|
|
|
|
|
|
(10,868 |
) |
|
|
|
|
|
|
|
|
|
|
Adjusted cash flow from operating activities |
|
$ |
101,561 |
|
|
$ |
101,198 |
|
|
$ |
98,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions declared (weighted average share basis) |
|
$ |
69,397 |
|
|
$ |
69,088 |
|
|
$ |
69,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In 2009, an adjustment to exclude the impact of escrow funds
was introduced to our adjusted cash flow from operating activities
supplemental measure as more often than not these funds are released
to the lender. |
While we believe our FFO, AFFO and Adjusted cash flow from operating activities are important
supplemental measures, they should not be considered as alternatives to net income as an indication
of a companys operating performance or to cash flow from operating activities as a measure of
liquidity. These non-GAAP measures should be used in conjunction with net income and cash flow from
operating activities as defined by GAAP. FFO, AFFO and Adjusted cash flow from operating
activities, or similarly titled measures disclosed by other REITs may not be comparable to our FFO,
AFFO and Adjusted cash flow from operating activities measures.
|
|
|
Item 7A. |
|
Quantitative and Qualitative Disclosures About Market Risk |
Market Risks
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency
exchange rates and equity prices. The primary risks to which we are exposed are interest rate risk
and foreign currency exchange risk. We are also exposed to market risk as a result of
concentrations in certain tenant industries.
We do not generally use derivative financial instruments to manage foreign currency exchange rate
risk exposure and do not use derivative instruments to hedge credit/market risks or for speculative
purposes.
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, loan defaults could occur and result in
our recognition of credit losses, which could adversely affect our liquidity and operating results.
Further, such defaults could have an adverse effect on the spreads between interest-earning assets
and interest-bearing liabilities.
We hold a participation in Carey Commercial Mortgage Trust (CCMT), a mortgage pool consisting of
$172.3 million of mortgage debt collateralized by properties and lease assignments on properties
owned by us and two affiliates. With our affiliates, we also purchased subordinated interests
totaling $24.1 million, in which we own a 25% interest, and we acquired an additional 30% interest
in the subordinated interests from CPA®:12 in connection with the 2006 Merger. The
subordinated interests are payable only after all other classes of ownership receive their stated
interest and related principal payments. The subordinated interests, therefore, could be affected
by any defaults or nonpayment by lessees. At December 31, 2010, there have been no defaults. We
account for the CCMT as a security that we expect to hold on a long-term basis. The value of the
CCMT is subject to fluctuation based on changes in interest rates, economic conditions and the
creditworthiness of lessees at the mortgaged properties. At December 31, 2010, we estimate that our
total interest in CCMT had a fair value of $13.1 million, an increase of $0.9 million from the fair
value at December 31, 2009.
CPA®:14 2010 10-K 46
We are exposed to the impact of interest rate changes primarily through our borrowing activities.
To limit this exposure, we attempt to obtain mortgage financing on a long-term, fixed-rate basis.
However, from time to time, we or our venture partners may obtain
variable-rate non-recourse mortgage loans and, as a result, may enter into interest rate swap
agreements or interest rate cap agreements with lenders that effectively convert the variable-rate
debt service obligations of the loan to a fixed rate. Interest rate swaps are agreements in which
one party exchanges a stream of interest payments for a counterpartys stream of cash flow over a
specific period, and interest rate caps limit the 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 such derivatives is to limit our exposure to interest rate
movements. We estimate that the fair value of our interest rate swaps, which are included in
Accounts payable, accrued expenses and other liabilities in the consolidated financial statements,
was in a net liability position of $1.7 million at December 31, 2010 (Note 9).
In connection with a German transaction in 2007, two ventures in which we have a total effective
ownership interest of 32% 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. These derivatives generated total unrealized losses of
$0.8 million, $1.1 million and $3.5 million during 2010, 2009 and 2008, respectively, representing
the total amounts attributable to the ventures, not our proportionate share. Because of current
market volatility, we are experiencing significant fluctuation in the unrealized gains or losses
generated from these derivatives and expect this trend to continue until market conditions
stabilize.
At December 31, 2010, substantially all of our non-recourse debt bore interest at fixed rates, was
swapped to a fixed rate or bore interest at a fixed rate but was scheduled to convert to variable
rates during their term. The annual interest rates on our fixed-rate debt at December 31, 2010
ranged from 5.2% to 8.3%. The annual interest rates on our variable-rate debt at December 31, 2010
ranged from 2.0% to 6.8%. Our debt obligations are more fully described in Financial Condition in
Item 7 above. The following table presents principal cash flows based upon expected maturity dates
of our debt obligations outstanding at December 31, 2010 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
Thereafter |
|
|
Total |
|
|
Fair value |
|
Fixed rate debt |
|
$ |
189,089 |
|
|
$ |
124,531 |
|
|
$ |
6,398 |
|
|
$ |
21,602 |
|
|
$ |
14,928 |
|
|
$ |
217,020 |
|
|
$ |
573,568 |
|
|
$ |
563,687 |
|
Variable rate debt |
|
$ |
5,530 |
|
|
$ |
5,572 |
|
|
$ |
6,018 |
|
|
$ |
6,466 |
|
|
$ |
11,320 |
|
|
$ |
80,790 |
|
|
$ |
115,696 |
|
|
$ |
115,012 |
|
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 swap agreements is affected by changes in interest rates. A decrease or increase in
interest rates of 1% would change the estimated fair value of such debt at December 31, 2010 by an
aggregate increase of $19.9 million or an aggregate decrease of $18.7 million, respectively. Annual
interest expense on our unhedged variable-rate debt that does not bear interest at fixed rates at
December 31, 2010 would increase or decrease by $0.2 million for each respective 1% change in
annual interest rates. As more fully described in Summary of Financing in Item 7 above, a
significant portion of the debt classified as variable rate bore interest at fixed rates at
December 31, 2010 but has interest rate reset features that will change the fixed interest rates to
variable rates at some point in the 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 as a result we are subject to risk from the effects
of exchange rate movements, primarily in the Euro, which may affect future costs and cash flows. We
manage foreign currency exchange rate movements by generally placing both our debt obligations to
the lender and the tenants rental obligations to us in the same currency. For the year ended
December 31, 2010, Carrefour France SAS, which leases properties from us in France, contributed 16%
of lease revenues. We are generally a net receiver of the foreign currency (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 year ended
December 31, 2010, we recognized net realized foreign currency transaction losses of $0.3 million
and net unrealized foreign currency transaction gains of less than $0.1 million. These gains or
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 accrued interest receivable
on notes receivable from wholly-owned subsidiaries.
CPA®:14 2010 10-K 47
Through the date of this Report, we had not entered into any foreign currency forward exchange
contracts to hedge the effects of adverse fluctuations in foreign currency exchange rates. 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.
Scheduled future minimum rents, exclusive of renewals, under non-cancelable operating leases, for
our foreign operations during each of the next five years and thereafter, are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Revenues(a) |
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
Thereafter |
|
|
Total |
|
Euro |
|
$ |
22,820 |
|
|
$ |
21,575 |
|
|
$ |
21,892 |
|
|
$ |
22,100 |
|
|
$ |
13,819 |
|
|
$ |
33,933 |
|
|
$ |
136,139 |
|
British pound sterling |
|
|
464 |
|
|
|
464 |
|
|
|
464 |
|
|
|
464 |
|
|
|
144 |
|
|
|
|
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
23,284 |
|
|
$ |
22,039 |
|
|
$ |
22,356 |
|
|
$ |
22,564 |
|
|
$ |
13,963 |
|
|
$ |
33,933 |
|
|
$ |
138,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled debt service payments (principal and interest) for the mortgage notes payable for
our foreign operations during each of the next five years and thereafter, are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Service(a) (b) |
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
Thereafter |
|
|
Total |
|
Euro |
|
$ |
13,799 |
|
|
$ |
13,550 |
|
|
$ |
13,558 |
|
|
$ |
13,652 |
|
|
$ |
13,552 |
|
|
$ |
106,788 |
|
|
$ |
174,899 |
|
British pound sterling |
|
|
445 |
|
|
|
447 |
|
|
|
447 |
|
|
|
447 |
|
|
|
446 |
|
|
|
5,734 |
|
|
|
7,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14,244 |
|
|
$ |
13,997 |
|
|
$ |
14,005 |
|
|
$ |
14,099 |
|
|
$ |
13,998 |
|
|
$ |
112,522 |
|
|
$ |
182,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Based on the applicable exchange rate at December 31, 2010. Contractual rents and debt
obligations are denominated in the functional currency of the country of each property. |
|
(b) |
|
Interest on unhedged variable-rate debt obligations was calculated using the applicable
annual interest rates and balances outstanding at December 31, 2010. |
Other
We own stock warrants that were granted to us by lessees in connection with structuring initial
lease transactions and that are defined as derivative instruments because they are readily
convertible to cash or provide for net settlement upon conversion. Changes in the fair value of
these derivative instruments are determined using an option pricing model and are recognized
currently in earnings as gains or losses. At December 31, 2010, warrants issued to us were
classified as derivative instruments and had an aggregate estimated fair value of $1.6 million.
CPA®:14 2010 10-K 48
|
|
|
Item 8. |
|
Financial Statements and Supplementary Data. |
The following financial statements and schedule are filed as a part of this Report:
|
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
|
|
51 |
|
|
|
|
|
|
|
|
|
52 |
|
|
|
|
|
|
|
|
|
53 |
|
|
|
|
|
|
|
|
|
54 |
|
|
|
|
|
|
|
|
|
55 |
|
|
|
|
|
|
|
|
|
57 |
|
|
|
|
|
|
|
|
|
83 |
|
|
|
|
|
|
|
|
|
86 |
|
Financial statement schedules other than those listed above are omitted because the required
information is given in the financial statements, including the notes thereto, or because the
conditions requiring their filing do not exist.
CPA®:14 2010 10-K 49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Corporate Property Associates 14 Incorporated:
In our opinion, the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of Corporate Property Associates 14
Incorporated and its subsidiaries (the Company) at December 31, 2010 and 2009, and the results of
their operations and their cash flows for each of the three years in the period ended December 31,
2010 in conformity with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 25, 2011
CPA®:14 2010 10-K 50
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Assets |
|
|
|
|
|
|
|
|
Investments in real estate: |
|
|
|
|
|
|
|
|
Real estate, at cost |
|
$ |
1,161,139 |
|
|
$ |
1,255,966 |
|
Accumulated depreciation |
|
|
(221,824 |
) |
|
|
(215,967 |
) |
|
|
|
|
|
|
|
Net investments in properties |
|
|
939,315 |
|
|
|
1,039,999 |
|
Net investments in direct financing leases |
|
|
107,352 |
|
|
|
112,428 |
|
Assets held for sale |
|
|
18,913 |
|
|
|
8,651 |
|
Equity investments in real estate |
|
|
105,767 |
|
|
|
149,393 |
|
|
|
|
|
|
|
|
Net investments in real estate |
|
|
1,171,347 |
|
|
|
1,310,471 |
|
Cash and cash equivalents |
|
|
124,693 |
|
|
|
93,310 |
|
Intangible assets, net |
|
|
56,912 |
|
|
|
63,804 |
|
Other assets, net |
|
|
69,029 |
|
|
|
84,384 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,421,981 |
|
|
$ |
1,551,969 |
|
|
|
|
|
|
|
|
Liabilities and Equity |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Non-recourse debt |
|
$ |
689,264 |
|
|
$ |
805,663 |
|
Accounts payable, accrued expenses and other liabilities |
|
|
14,048 |
|
|
|
19,975 |
|
Prepaid and deferred rental income and security deposits |
|
|
26,764 |
|
|
|
28,108 |
|
Due to affiliates |
|
|
13,183 |
|
|
|
16,380 |
|
Distributions payable |
|
|
17,463 |
|
|
|
17,143 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
760,722 |
|
|
|
887,269 |
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 13) |
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
CPA®:14 shareholders equity: |
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 120,000,000 shares authorized;
96,404,073 and 95,058,267 shares issued, respectively |
|
|
96 |
|
|
|
95 |
|
Additional paid-in capital |
|
|
949,791 |
|
|
|
934,117 |
|
Distributions in excess of accumulated earnings |
|
|
(192,995 |
) |
|
|
(190,437 |
) |
Accumulated other comprehensive income |
|
|
4,515 |
|
|
|
8,838 |
|
|
|
|
|
|
|
|
|
|
|
761,407 |
|
|
|
752,613 |
|
Less, treasury stock at cost, 9,133,838 and 8,955,254 shares,
respectively |
|
|
(107,413 |
) |
|
|
(105,419 |
) |
|
|
|
|
|
|
|
Total CPA®:14 shareholders equity |
|
|
653,994 |
|
|
|
647,194 |
|
Noncontrolling interests |
|
|
7,265 |
|
|
|
17,506 |
|
|
|
|
|
|
|
|
Total equity |
|
|
661,259 |
|
|
|
664,700 |
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
1,421,981 |
|
|
$ |
1,551,969 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
CPA®:14 2010 10-K 51
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
|
$ |
133,779 |
|
|
$ |
136,992 |
|
|
$ |
128,972 |
|
Interest income from direct financing leases |
|
|
13,744 |
|
|
|
14,356 |
|
|
|
15,359 |
|
Other operating income |
|
|
9,753 |
|
|
|
5,292 |
|
|
|
5,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157,276 |
|
|
|
156,640 |
|
|
|
149,854 |
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
(30,118 |
) |
|
|
(32,618 |
) |
|
|
(29,551 |
) |
Property expenses |
|
|
(31,658 |
) |
|
|
(31,710 |
) |
|
|
(32,816 |
) |
General and administrative |
|
|
(8,105 |
) |
|
|
(6,682 |
) |
|
|
(8,279 |
) |
Impairment charges |
|
|
(8,460 |
) |
|
|
(10,093 |
) |
|
|
(110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(78,341 |
) |
|
|
(81,103 |
) |
|
|
(70,756 |
) |
|
|
|
|
|
|
|
|
|
|
Other Income and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Income from equity investments in real estate |
|
|
20,616 |
|
|
|
13,845 |
|
|
|
637 |
|
Other interest income |
|
|
1,738 |
|
|
|
1,558 |
|
|
|
4,106 |
|
Other income and (expenses) |
|
|
(1,777 |
) |
|
|
1,446 |
|
|
|
3,309 |
|
Gain on sale of investment in direct financing lease and land swap |
|
|
351 |
|
|
|
|
|
|
|
538 |
|
Advisor settlement (Note 14) |
|
|
|
|
|
|
|
|
|
|
10,868 |
|
Interest expense |
|
|
(50,998 |
) |
|
|
(56,211 |
) |
|
|
(56,374 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,070 |
) |
|
|
(39,362 |
) |
|
|
(36,916 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
48,865 |
|
|
|
36,175 |
|
|
|
42,182 |
|
Provision for income taxes |
|
|
(3,084 |
) |
|
|
(3,279 |
) |
|
|
(2,207 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
45,781 |
|
|
|
32,896 |
|
|
|
39,975 |
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations of discontinued properties |
|
|
5,020 |
|
|
|
(4,254 |
) |
|
|
7,731 |
|
Gain on deconsolidation of a subsidiary |
|
|
12,870 |
|
|
|
|
|
|
|
|
|
Gain on extinguishment of debt |
|
|
10,573 |
|
|
|
|
|
|
|
|
|
(Loss) gain on sale of real estate |
|
|
(2,837 |
) |
|
|
8,611 |
|
|
|
524 |
|
Impairment charges |
|
|
(1,671 |
) |
|
|
(30,252 |
) |
|
|
(1,029 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
|
23,955 |
|
|
|
(25,895 |
) |
|
|
7,226 |
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
69,736 |
|
|
|
7,001 |
|
|
|
47,201 |
|
Less: Net income attributable to noncontrolling interests |
|
|
(2,819 |
) |
|
|
(1,685 |
) |
|
|
(2,037 |
) |
|
|
|
|
|
|
|
|
|
|
Net Income Attributable to CPA®:14 Shareholders |
|
$ |
66,917 |
|
|
$ |
5,316 |
|
|
$ |
45,164 |
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable to CPA®:14 shareholders |
|
$ |
0.49 |
|
|
$ |
0.36 |
|
|
$ |
0.43 |
|
Income (loss) from discontinued operations attributable to CPA®:14
shareholders |
|
|
0.28 |
|
|
|
(0.30 |
) |
|
|
0.08 |
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to CPA®:14 shareholders |
|
$ |
0.77 |
|
|
$ |
0.06 |
|
|
$ |
0.51 |
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding |
|
|
86,757,502 |
|
|
|
87,078,468 |
|
|
|
88,174,907 |
|
|
|
|
|
|
|
|
|
|
|
Amounts Attributable to CPA®:14 Shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of tax |
|
$ |
42,949 |
|
|
$ |
31,445 |
|
|
$ |
37,975 |
|
Income (loss) from discontinued operations, net of tax |
|
|
23,968 |
|
|
|
(26,129 |
) |
|
|
7,189 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
66,917 |
|
|
$ |
5,316 |
|
|
$ |
45,164 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
CPA®:14 2010 10-K 52
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Net Income |
|
$ |
69,736 |
|
|
$ |
7,001 |
|
|
$ |
47,201 |
|
Other Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(4,057 |
) |
|
|
823 |
|
|
|
(9,006 |
) |
Change in unrealized gain (loss) on marketable securities |
|
|
816 |
|
|
|
1,199 |
|
|
|
(2,385 |
) |
Change in unrealized (loss) gain on derivative instruments |
|
|
(1,072 |
) |
|
|
2,426 |
|
|
|
(2,256 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,313 |
) |
|
|
4,448 |
|
|
|
(13,647 |
) |
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
65,423 |
|
|
|
11,449 |
|
|
|
33,554 |
|
|
|
|
|
|
|
|
|
|
|
Amounts Attributable to Noncontrolling Interests: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
(2,819 |
) |
|
|
(1,685 |
) |
|
|
(2,037 |
) |
Change in unrealized gain on marketable securities |
|
|
(10 |
) |
|
|
(37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to noncontrolling interests |
|
|
(2,829 |
) |
|
|
(1,722 |
) |
|
|
(2,037 |
) |
|
|
|
|
|
|
|
|
|
|
Comprehensive Income Attributable to CPA®:14
Shareholders |
|
$ |
62,594 |
|
|
$ |
9,727 |
|
|
$ |
31,517 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
CPA®:14 2010 10-K 53
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONSOLIDATED STATEMENTS OF EQUITY
For the years ended December 31, 2010, 2009 and 2008
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPA:14 Shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions |
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
in Excess of |
|
|
Other |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
Paid-In |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Treasury |
|
|
CPA®:14 |
|
|
Noncontrolling |
|
|
|
|
|
|
Shares |
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
Income |
|
|
Stock |
|
|
Shareholders |
|
|
Interests |
|
|
Total |
|
Balance at January 1, 2008 |
|
|
87,818,071 |
|
|
$ |
92 |
|
|
$ |
894,773 |
|
|
$ |
(103,207 |
) |
|
$ |
18,074 |
|
|
$ |
(46,772 |
) |
|
$ |
762,960 |
|
|
$ |
18,033 |
|
|
$ |
780,993 |
|
Shares issued $0.001 par, at $14.00 $14.50 per share, net of
offering costs |
|
|
691,750 |
|
|
|
1 |
|
|
|
9,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,148 |
|
|
|
|
|
|
|
9,148 |
|
Shares, $0.001 par, issued to the advisor at $14.00 - $14.50 per share |
|
|
850,258 |
|
|
|
1 |
|
|
|
12,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,150 |
|
|
|
|
|
|
|
12,150 |
|
Distributions declared ($0.7848 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(69,050 |
) |
|
|
|
|
|
|
|
|
|
|
(69,050 |
) |
|
|
|
|
|
|
(69,050 |
) |
Distributions to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,522 |
) |
|
|
(3,522 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,164 |
|
|
|
|
|
|
|
|
|
|
|
45,164 |
|
|
|
2,037 |
|
|
|
47,201 |
|
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,006 |
) |
|
|
|
|
|
|
(9,006 |
) |
|
|
|
|
|
|
(9,006 |
) |
Change in unrealized loss on marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,385 |
) |
|
|
|
|
|
|
(2,385 |
) |
|
|
|
|
|
|
(2,385 |
) |
Change in unrealized loss on derivative instrument |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,256 |
) |
|
|
|
|
|
|
(2,256 |
) |
|
|
|
|
|
|
(2,256 |
) |
Repurchase of shares |
|
|
(1,510,070 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,073 |
) |
|
|
(20,073 |
) |
|
|
|
|
|
|
(20,073 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
87,850,009 |
|
|
|
94 |
|
|
|
916,069 |
|
|
|
(127,093 |
) |
|
|
4,427 |
|
|
|
(66,845 |
) |
|
|
726,652 |
|
|
|
16,548 |
|
|
|
743,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued $0.001 par, at $13.00 and $14.00 per share, net of
offering costs |
|
|
667,773 |
|
|
|
|
|
|
|
8,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,844 |
|
|
|
|
|
|
|
8,844 |
|
Shares, $0.001 par, issued to the advisor at $13.00 per share |
|
|
736,482 |
|
|
|
1 |
|
|
|
9,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,205 |
|
|
|
|
|
|
|
9,205 |
|
Distributions declared ($0.7934 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68,660 |
) |
|
|
|
|
|
|
|
|
|
|
(68,660 |
) |
|
|
|
|
|
|
(68,660 |
) |
Distributions to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,543 |
) |
|
|
(2,543 |
) |
Consolidation of a venture |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,779 |
|
|
|
1,779 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,316 |
|
|
|
|
|
|
|
|
|
|
|
5,316 |
|
|
|
1,685 |
|
|
|
7,001 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
823 |
|
|
|
|
|
|
|
823 |
|
|
|
|
|
|
|
823 |
|
Change in unrealized gain on marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,162 |
|
|
|
|
|
|
|
1,162 |
|
|
|
37 |
|
|
|
1,199 |
|
Change in unrealized gain on derivative instrument |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,426 |
|
|
|
|
|
|
|
2,426 |
|
|
|
|
|
|
|
2,426 |
|
Repurchase of shares |
|
|
(3,151,251 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,574 |
) |
|
|
(38,574 |
) |
|
|
|
|
|
|
(38,574 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
86,103,013 |
|
|
|
95 |
|
|
|
934,117 |
|
|
|
(190,437 |
) |
|
|
8,838 |
|
|
|
(105,419 |
) |
|
|
647,194 |
|
|
|
17,506 |
|
|
|
664,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued $0.001 par, at $11.80 and $13.00 per share, net of
offering costs |
|
|
648,044 |
|
|
|
|
|
|
|
7,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,411 |
|
|
|
|
|
|
|
7,411 |
|
Shares, $0.001 par, issued to the advisor at $11.80 per share |
|
|
697,762 |
|
|
|
1 |
|
|
|
8,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,264 |
|
|
|
|
|
|
|
8,264 |
|
Distributions declared ($0.7999 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(69,475 |
) |
|
|
|
|
|
|
|
|
|
|
(69,475 |
) |
|
|
|
|
|
|
(69,475 |
) |
Distributions to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,207 |
) |
|
|
(15,207 |
) |
Contributions from noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,137 |
|
|
|
2,137 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,917 |
|
|
|
|
|
|
|
|
|
|
|
66,917 |
|
|
|
2,819 |
|
|
|
69,736 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,057 |
) |
|
|
|
|
|
|
(4,057 |
) |
|
|
|
|
|
|
(4,057 |
) |
Change in unrealized gain on marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
806 |
|
|
|
|
|
|
|
806 |
|
|
|
10 |
|
|
|
816 |
|
Change in unrealized gain on derivative instrument |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,072 |
) |
|
|
|
|
|
|
(1,072 |
) |
|
|
|
|
|
|
(1,072 |
) |
Repurchase of shares |
|
|
(178,584 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,994 |
) |
|
|
(1,994 |
) |
|
|
|
|
|
|
(1,994 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
|
87,270,235 |
|
|
$ |
96 |
|
|
$ |
949,791 |
|
|
$ |
(192,995 |
) |
|
$ |
4,515 |
|
|
$ |
(107,413 |
) |
|
$ |
653,994 |
|
|
$ |
7,265 |
|
|
$ |
661,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
CPA®:14 2010 10-K 54
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Cash Flows Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
69,736 |
|
|
$ |
7,001 |
|
|
$ |
47,201 |
|
Adjustments to net income: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization, including intangible assets and deferred financing costs |
|
|
33,346 |
|
|
|
35,955 |
|
|
|
34,494 |
|
Straight-line rent and financing lease adjustments |
|
|
(4,501 |
) |
|
|
7,932 |
|
|
|
1,936 |
|
Income from equity investments in real estate in excess of distributions received |
|
|
5,395 |
|
|
|
1,476 |
|
|
|
12,447 |
|
Issuance of shares to affiliate in satisfaction of fees due |
|
|
8,264 |
|
|
|
9,204 |
|
|
|
12,150 |
|
Realized loss (gain) on foreign currency transactions, derivative instruments and other, net |
|
|
286 |
|
|
|
(227 |
) |
|
|
(4,143 |
) |
Realized loss (gain) on sale of real estate |
|
|
2,486 |
|
|
|
(8,611 |
) |
|
|
(1,062 |
) |
Realized gain on extinguishment of debt |
|
|
(10,573 |
) |
|
|
|
|
|
|
|
|
Gain on deconsolidation of a subsidiary |
|
|
(12,870 |
) |
|
|
|
|
|
|
|
|
Unrealized (gain) loss on foreign currency transactions, derivative instruments and other, net |
|
|
1,491 |
|
|
|
(1,219 |
) |
|
|
356 |
|
Reversal of unrealized gain on derivative instruments |
|
|
|
|
|
|
|
|
|
|
708 |
|
Impairment charges |
|
|
10,131 |
|
|
|
40,345 |
|
|
|
1,139 |
|
Change in other operating assets and liabilities, net |
|
|
6,097 |
|
|
|
(3,956 |
) |
|
|
5,471 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
109,288 |
|
|
|
87,900 |
|
|
|
110,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Equity distributions received in excess of equity income in real estate |
|
|
42,039 |
|
|
|
12,313 |
|
|
|
7,921 |
|
Acquisitions of real estate and other capitalized costs |
|
|
(953 |
) |
|
|
(2,914 |
) |
|
|
|
|
Contributions to equity investments in real estate |
|
|
(4,833 |
) |
|
|
(5,344 |
) |
|
|
(11,928 |
) |
Purchase of a FDIC guaranteed unsecured note |
|
|
|
|
|
|
(5,000 |
) |
|
|
|
|
Proceeds from repayment of notes receivable |
|
|
7,000 |
|
|
|
|
|
|
|
|
|
Proceeds from sale of real estate and securities |
|
|
19,463 |
|
|
|
26,247 |
|
|
|
15,765 |
|
Increase in cash due to consolidation of a venture |
|
|
|
|
|
|
309 |
|
|
|
|
|
Payment of deferred acquisition fees to an affiliate |
|
|
(2,645 |
) |
|
|
(3,638 |
) |
|
|
(3,846 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
60,071 |
|
|
|
21,973 |
|
|
|
7,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Distributions paid |
|
|
(69,155 |
) |
|
|
(68,832 |
) |
|
|
(68,851 |
) |
Distributions
paid to noncontrolling interests, net |
|
|
(13,070 |
) |
|
|
(2,543 |
) |
|
|
(3,522 |
) |
Proceeds from mortgages |
|
|
112,200 |
|
|
|
27,750 |
|
|
|
9,740 |
|
Prepayment of mortgage principal |
|
|
(16,698 |
) |
|
|
(22,219 |
) |
|
|
(20,510 |
) |
Scheduled payments of mortgage principal |
|
|
(154,126 |
) |
|
|
(44,873 |
) |
|
|
(17,383 |
) |
Deferred financing costs and mortgage deposits |
|
|
(1,477 |
) |
|
|
(962 |
) |
|
|
(576 |
) |
Proceeds from stock issuance, net of costs |
|
|
7,411 |
|
|
|
8,844 |
|
|
|
9,148 |
|
Purchase of treasury stock |
|
|
(1,994 |
) |
|
|
(38,574 |
) |
|
|
(20,073 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(136,909 |
) |
|
|
(141,409 |
) |
|
|
(112,027 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Cash and Cash Equivalents During the Year |
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
(1,067 |
) |
|
|
(900 |
) |
|
|
(3,339 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
31,383 |
|
|
|
(32,436 |
) |
|
|
3,243 |
|
Cash and cash equivalents, beginning of year |
|
|
93,310 |
|
|
|
125,746 |
|
|
|
122,503 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
124,693 |
|
|
$ |
93,310 |
|
|
$ |
125,746 |
|
|
|
|
|
|
|
|
|
|
|
(Continued)
CPA®:14 2010 10-K 55
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Supplemental cash flow information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Interest paid |
|
$ |
53,542 |
|
|
$ |
58,411 |
|
|
$ |
61,316 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
3,756 |
|
|
$ |
4,412 |
|
|
$ |
631 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental noncash investing activities (in thousands):
During 2010, we deconsolidated a wholly-owned subsidiary as a result of losing control over the
activities that most significantly impact its economic performance following possession of the
property by the receiver (Note 17). The following table presents the assets and liabilities of the
subsidiary on the date of deconsolidation:
|
|
|
|
|
Assets: |
|
|
|
|
Net investments in properties |
|
$ |
6,627 |
|
Other assets, net |
|
|
597 |
|
|
|
|
|
Total |
|
$ |
7,224 |
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
Non-recourse debt |
|
$ |
(19,363 |
) |
Accounts payable, accrued expenses and other liabilities |
|
|
(731 |
) |
|
|
|
|
Total |
|
$ |
(20,094 |
) |
|
|
|
|
See Notes to Consolidated Financial Statements.
CPA®:14 2010 10-K 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business and Organization
Corporate Property Associates 14 Incorporated is a publicly owned, non-listed REIT that invests
primarily 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, on a
triple-net leased basis, which requires the tenant to pay substantially all of the costs associated
with operating and maintaining the property. Revenue is subject to fluctuation because of the
timing of new lease transactions, lease terminations, lease expirations, contractual rent
increases, tenant defaults and sales of properties. At December 31, 2010, our portfolio was
comprised of our full or partial ownership interests in 304 properties, substantially all of which
were triple-net leased to 82 tenants, and totaled approximately 28 million square feet (on a pro
rata basis) with an occupancy rate of approximately 94% (occupancy rate and square footage are
unaudited). We were formed in June 1997 and are managed by the advisor.
Note 2. Summary of Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements reflect all of our accounts, including those of our
majority-owned and/or controlled subsidiaries. The portion of equity in a subsidiary that is not
attributable, directly or indirectly, to us is presented as noncontrolling interests. All
significant intercompany accounts and transactions have been eliminated.
In June 2009, the FASB issued amended guidance related to the consolidation of 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 (i) has the power to direct the activities that most significantly
impact the economic performance of the VIE, and (ii) 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 VIEs. We do not have any previously
consolidated VIEs. 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 the consolidation of VIEs, we performed
an analysis of all of our subsidiary entities, including our venture entities with other parties
and our stake in Rave Reviews Cinemas LLC, 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 assessment to determine whether these entities are VIEs, we identified one
unconsolidated venture that was deemed to be a VIE (Note 6).
We have investments in tenant-in-common interests in various domestic and international properties.
Consolidation of these investments is not required as they do not qualify as VIEs and do not meet
the control requirement required for consolidation. Accordingly, we account for these investments
using the equity method of accounting. We use the equity method of accounting because the shared
decision-making involved in a tenant-in-common interest investment creates an opportunity for us to
have significant influence on the operating and financial decisions of these investments and
thereby creates some responsibility by us for a return on our investment. Additionally, we own
interests in single-tenant net leased properties leased to corporations through noncontrolling
interests in partnerships and limited liability companies that we do not control but over which we
exercise significant influence. We account for these investments under the equity method of
accounting. At times the carrying value of our equity investments may fall to below zero for
certain investments. We are obligated to fund future operating losses for these investments.
We have several interests in consolidated ventures that have noncontrolling interests with finite
lives. As these are not considered to be mandatorily redeemable noncontrolling interests, we have
reflected them as Noncontrolling interests in equity in the consolidated financial statements. The
carrying value of these noncontrolling interests at December 31, 2010 and 2009 was $11.0 million
and $11.4 million, respectively. The fair value of these noncontrolling interests at December 31,
2010 and 2009 was $27.6 million and $24.8 million, respectively.
CPA®:14 2010 10-K 57
Notes to Consolidated Financial Statements
Out-of-Period Adjustment
During the fourth quarter of 2010, we identified an error in the consolidated financial statements
for the year ended December 31, 2009. As a result of an error pertaining to the misapplication of
guidance for accounting for the other-than-temporary impairment of a cost method investment in
2009, net income was overstated by $1.3 million in 2009. We concluded that this adjustment was not
material to the prior periods consolidated financial statements. As such, a cumulative correction
was recorded in the statement of operations in the fourth quarter of 2010, rather than restating
the prior period. This correction resulted in a net decrease of $1.3 million to income from
operations for the year ended December 31, 2010.
During the third quarter of 2010, we identified an error in the consolidated financial statements
for the year ended December 31, 2009. As a result of an error pertaining to amortization on an
asset not properly being adjusted to reflect an impairment charge, net income was understated by
$0.9 million in 2009. We concluded that this adjustment was not material to the prior periods
consolidated financial statements. As such, a cumulative correction was recorded in the statement
of operations in the third quarter of 2010, rather than restating the prior period. This
correction resulted in a net decrease of $0.9 million to income from operations for the year ended
December 31, 2010.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts
in our consolidated financial statements and the accompanying notes. Actual results could differ
from those estimates.
Reclassifications and Revisions
Certain prior year amounts have been reclassified to conform to the current year presentation. The
consolidated financial statements included in this Report have been retrospectively adjusted to
reflect the disposition (or planned disposition) of certain properties as discontinued operations
for all periods presented.
Purchase Price Allocation
When we acquire properties accounted for as operating leases, including those properties acquired
in the 2006 Merger, we allocate the purchase costs to the tangible and intangible assets and
liabilities acquired based on their estimated fair values. We determine the value of the tangible
assets, consisting of land and buildings, as if vacant, and record intangible assets, including the
above-market and below-market value of leases, the value of in-place leases and the value of tenant
relationships, at their relative estimated fair values. See Real Estate Leased to Others and
Depreciation below for a discussion of our significant accounting policies related to tangible
assets. We include the value of below-market leases in Prepaid and deferred rental income and
security deposits in the consolidated financial statements.
We record above-market and below-market lease values for owned properties based on the present
value (using an interest rate reflecting the risks associated with the leases acquired) of the
difference between (i) the contractual amounts to be paid pursuant to the leases negotiated and in
place at the time of acquisition of the properties and (ii) our estimate of fair market lease rates
for the property or equivalent property, both of which are measured over a period equal to the
estimated market lease term. We amortize the capitalized above-market lease value as a reduction of
rental income over the estimated market lease term. We amortize the capitalized below-market lease
value as an increase to rental income over the initial term and any fixed rate renewal periods in
the respective leases.
We allocate the total amount of other intangibles to in-place lease values and tenant relationship
intangible values based on our evaluation of the specific characteristics of each tenants lease
and our overall relationship with each tenant. The characteristics we consider in allocating these
values include estimated market rent, the nature and extent of the existing relationship with the
tenant, the expectation of lease renewals, estimated carrying costs of the property if vacant and
estimated costs to execute a new lease, among other factors. We determine these values using our
estimates or relying in part upon third-party appraisals. We amortize the capitalized value of
in-place lease intangibles to expense over the remaining initial term of each lease. We amortize
the capitalized value of tenant relationships to expense over the initial and expected renewal
terms of the lease. No amortization period for intangibles will exceed the remaining depreciable
life of the building.
If a lease is terminated, we charge the unamortized portion of each intangible, including
above-market and below-market lease values, in-place lease values and tenant relationship values,
to expense.
CPA®:14 2010 10-K 58
Notes to Consolidated Financial Statements
Cash and Cash Equivalents
We consider all short-term, highly liquid investments that are both readily convertible to cash and
have a maturity of three months or less at the time of purchase to be cash equivalents. Items
classified as cash equivalents include commercial paper and money-market funds. Our cash and cash
equivalents are held in the custody of several financial institutions, and these balances, at
times, exceed federally insurable limits. We seek to mitigate this risk by depositing funds only
with major financial institutions.
Marketable Securities
Marketable securities, which consist of an interest in collateralized mortgage obligations (Note 8)
and common stock in publicly-traded companies, are classified as available for sale securities and
reported at fair value, with any unrealized gains and losses on these securities reported as a
component of OCI until realized.
Other Assets and Other Liabilities
We include escrow balances and tenant security deposits held by lenders, restricted cash balances,
common stock warrants, prepaid expenses, marketable securities, deferred charges, deferred rental
income and notes receivable in Other assets. We include derivative instruments and miscellaneous
amounts held on behalf of tenants in Other liabilities. Deferred charges are costs incurred in
connection with mortgage financings and refinancings that are amortized over the terms of the
mortgages and included in Interest expense in the consolidated financial statements. Deferred
rental income is the aggregate cumulative difference for operating leases between scheduled rents
that vary during the lease term, and rent recognized on a straight-line basis.
Deferred Acquisition Fees Payable to Affiliate
Fees payable to the advisor for structuring and negotiating investments and related mortgage
financing on our behalf are included in Due to affiliates. A portion of these fees is payable in
equal annual installments each January of the seven calendar years following the date on which a
property was purchased. Payment of such fees is subject to the performance criterion (Note 3).
Treasury Stock
Treasury stock is recorded at cost.
Real Estate Leased to Others
We lease real estate to others primarily on a triple-net leased basis, whereby the tenant is
generally responsible for all operating expenses relating to the property, including property
taxes, insurance, maintenance, repairs, renewals and improvements. We charge expenditures for
maintenance and repairs, including routine betterments, to operations as incurred. We capitalize
significant renovations that increase the useful life of the properties. For the years ended
December 31, 2010, 2009 and 2008, although we are legally obligated for payment, pursuant to our
lease agreements with our tenants, lessees were responsible for the direct payment to the taxing
authorities of real estate taxes of $18.8 million, $17.6 million and $19.0 million, respectively.
We diversify our real estate investments among various corporate tenants engaged in different
industries, by property type and by geographic area. Substantially all of our leases provide for
either scheduled rent increases, periodic rent adjustments based on formulas indexed to changes in
the CPI or similar indices or percentage rents. CPI-based adjustments are contingent on future
events and are therefore not included in straight-line rent calculations. We recognize rents from
percentage rents as reported by the lessees, which is after the level of sales requiring a rental
payment to us is reached.
We account for leases as operating or direct financing leases as described below:
Operating leases We record real estate at cost less accumulated depreciation; we recognize
future minimum rental revenue on a straight-line basis over the term of the related leases and
charge expenses (including depreciation) to operations as incurred (Note 4).
Direct financing leases We record leases accounted for under the direct financing method at
their net investment (Note 5). We defer and amortize unearned income to income over the lease term
so as to produce a constant periodic rate of return on our net investment in the lease.
CPA®:14 2010 10-K 59
Notes to Consolidated Financial Statements
On an ongoing basis, we assess our ability to collect rent and other tenant-based receivables and
determine an appropriate allowance for uncollected amounts. Because we have a limited number of
lessees (18 lessees represented 64% of lease revenues during 2010), we believe that it is necessary
to evaluate the collectability of these receivables based on the facts and circumstances of each
situation rather than solely using statistical methods. Therefore, in recognizing our provision for
uncollected rents and other tenant receivables, we evaluate actual past due amounts and make
subjective judgments as to the collectability of those amounts based on factors including, but not
limited to, our knowledge of a lessees circumstances, the age of the receivables, the tenants
credit profile and prior experience with the tenant. Even if a lessee has been making payments, we
may reserve for the entire receivable amount if we believe there has been significant or continuing
deterioration in the lessees ability to meet its lease obligations.
Acquisition Costs
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 for our owned portfolio 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. Subsequent to the acquisition, there will be a 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 under the revised guidance.
Depreciation
We compute depreciation of building and related improvements using the straight-line method over
the estimated useful lives of the properties or improvements, which range from 3 to 40 years. We
compute depreciation of tenant improvements using the straight-line method over the lesser of the
remaining term of the lease or the estimated useful life.
Impairments
On a quarterly basis, we assess whether there are any indicators that the value of our long-lived
assets may be impaired or that their carrying value may not be recoverable. These impairment
indicators include, but are not limited to, the vacancy of a property that is not subject to a
lease; a lease default by a tenant that is experiencing financial difficulty; the termination of a
lease by a tenant or the rejection of a lease in a bankruptcy proceeding. We may incur impairment
charges on long-lived assets, including real estate, direct financing leases, assets held for sale
and equity investments in real estate. We may also incur impairment charges on marketable
securities. Our policies for evaluating whether these assets are impaired are presented below.
Real Estate
For real estate assets in which an impairment indicator is identified, we follow a two-step process
to determine whether an asset is impaired and to determine the amount of the charge. First, we
compare the carrying value of the property to the future net undiscounted cash flow that we expect
the property will generate, including any estimated proceeds from the eventual sale of the
property. The undiscounted cash flow analysis requires us to make our best estimate of market
rents, residual values and holding periods. Depending on the assumptions made and estimates used,
the future cash flow projected in the evaluation of long-lived assets can vary within a range of
outcomes. We consider the likelihood of possible outcomes in determining the best possible estimate
of future cash flows. If the future net undiscounted cash flow of the property is less than the
carrying value, the property is considered to be impaired. We then measure the loss as the excess
of the carrying value of the property over its estimated fair value.
Direct Financing Leases
We review our direct financing leases at least annually to determine whether there has been an
other-than-temporary decline in the current estimate of residual value of the property. The
residual value is our estimate of what we could realize upon the sale of the property at the end of
the lease term, based on market information. If this review indicates that a decline in residual
value has occurred that is other-than-temporary, we recognize an impairment charge and revise the
accounting for the direct financing lease to reflect a portion of the future cash flow from the
lessee as a return of principal rather than as revenue. While we evaluate direct financing leases
if there are any indicators that the residual value may be impaired, the evaluation of a direct
financing lease can be affected by changes in projected long-term market conditions even though the
obligations of the lessee are being met.
CPA®:14 2010 10-K 60
Notes to Consolidated Financial Statements
Assets Held for Sale
We classify real estate assets that are accounted for as operating leases as held for sale when we
have entered into a contract to sell the property, all material due diligence requirements have
been satisfied and we believe it is probable that the disposition will occur within one year. When
we classify an asset as held for sale, we calculate its estimated fair value as the expected sale
price, less expected selling costs. We then compare the assets estimated fair value to its
carrying value, and if the estimated fair value is less than the propertys carrying value, we
reduce the carrying value to the estimated fair value. We will continue to review the property for
subsequent changes in the estimated fair value and may recognize an additional impairment charge if
warranted.
Equity Investments in Real Estate
We evaluate our equity investments in real estate on a periodic basis to determine if there are any
indicators that the value of our equity investment may be impaired and whether or not that
impairment is other-than-temporary. To the extent impairment has occurred, we measure the charge as
the excess of the carrying value of our investment over its estimated fair value, which is
determined by multiplying the estimated fair value of the underlying ventures net assets by our
ownership interest percentage.
Marketable Securities
We evaluate our marketable securities for impairment if a decline in estimated fair value below
cost basis is considered other-than-temporary. In determining whether the decline is
other-than-temporary, we consider the underlying cause of the decline in value, the estimated
recovery period, the severity and duration of the decline, as well as whether we plan to sell the
security or will more likely than not be required to sell the security before recovery of its cost
basis. If we determine that the decline is other-than-temporary, we record an impairment charge to
reduce our cost basis to the estimated fair value of the security. Beginning in 2009, the credit
component of an other-than-temporary impairment is recognized in earnings while the non-credit
component is recognized in OCI. Prior to 2009, all portions of other-than-temporary impairments
were recorded in earnings.
Assets Held for Sale
We classify assets that are accounted for as operating leases as held for sale when we have entered
into a contract to sell the property, all material due diligence requirements have been satisfied
and we believe it is probable that the disposition will occur within one year. Assets held for sale
are recorded at the lower of carrying value or estimated fair value, which is generally calculated
as the expected sale price, less expected selling costs. The results of operations and the related
gain or loss on sale of properties that have been sold or that are classified as held for sale are
included in discontinued operations (Note 17).
If circumstances arise that we previously considered unlikely and, as a result, we decide not to
sell a property previously classified as held for sale, we reclassify the property as held and
used. We record a property that is reclassified as held and used at the lower of (a) its carrying
amount before the property was classified as held for sale, adjusted for any depreciation expense
that would have been recognized had the property been continuously classified as held and used, or
(b) the estimated fair value at the date of the subsequent decision not to sell.
We recognize gains and losses on the sale of properties when, among other criteria, the parties are
bound by the terms of the contract, all consideration has been exchanged and all conditions
precedent to closing have been performed. At the time the sale is consummated, a gain or loss is
recognized as the difference between the sale price, less any selling costs, and the carrying value
of the property.
Foreign Currency Translation
We have interests in real estate investments in the European Union for which the functional
currencies are the Euro and British pound sterling. We perform the translation from these local
currencies to the U.S. dollar for assets and liabilities using current exchange rates in effect at
the balance sheet date and for revenue and expense accounts using a weighted average exchange rate
during the period. We report the gains and losses resulting from this translation as a component of
OCI in equity. At December 31, 2010 and 2009, the cumulative foreign currency translation
adjustment gain was $4.7 million and $8.7 million, respectively.
CPA®:14 2010 10-K 61
Notes to Consolidated Financial Statements
Foreign currency transactions may produce receivables or payables that are fixed in terms of the
amount of foreign currency that will be received or paid. A change in the exchange rates between
the functional currency and the currency in which a transaction is denominated increases or
decreases the expected amount of functional currency cash flows upon settlement of that
transaction. That increase or decrease in the expected functional currency cash flows is an
unrealized foreign currency transaction gain or loss that
generally will be included in determining net income for the period in which the exchange rate
changes. Likewise, a transaction gain or loss (measured from the transaction date or the most
recent intervening balance sheet date, whichever is later), realized upon settlement of a foreign
currency transaction generally will be included in net income for the period in which the
transaction is settled. Foreign currency transactions that are (i) designated as, and are effective
as, economic hedges of a net investment and (ii) intercompany foreign currency transactions that
are of a long-term nature (that is, settlement is not planned or anticipated in the foreseeable
future), when the entities to the transactions are consolidated or accounted for by the equity
method in our financial statements, are not included in determining net income but are accounted
for in the same manner as foreign currency translation adjustments and reported as a component of
OCI in equity. International equity investments in real estate were funded in part through
subordinated intercompany debt.
Foreign currency intercompany transactions that are scheduled for settlement, consisting primarily
of accrued interest and the translation to the reporting currency of subordinated intercompany debt
with scheduled principal payments, are included in the determination of net income. We recognized
net unrealized gains from such transactions of less than $0.1 million for the year ended December
31, 2010 and unrealized losses of less than $0.1 million for both years ended December 31, 2009 and
2008. For the year ended December 31, 2010, we recognized realized losses of $0.3 million, and for
the years ended December 31, 2009 and 2008, we recognized realized gains of $0.1 million and $3.4
million, respectively, on foreign currency transactions in connection with the transfer of cash
from foreign operations of subsidiaries to the parent company.
Derivative Instruments
We measure derivative instruments at fair value and record them as assets or liabilities, depending
on our rights or obligations under the applicable derivative contract. Derivatives that are not
designated as hedges must be adjusted to fair value through earnings. If a derivative is designated
as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will
either be offset against the change in fair value of the hedged asset, liability, or firm
commitment through earnings, or recognized in OCI until the hedged item is recognized in earnings.
For cash flow hedges, the ineffective portion of a derivatives change in fair value will be
immediately recognized in earnings.
Income Taxes
We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code.
In order to maintain our qualification as a REIT, we are required, among other things, to
distribute at least 90% of our REIT net taxable income to our shareholders and meet certain tests
regarding the nature of our income and assets. As a REIT, we are not subject to federal income tax
with respect to the portion of our income that meets certain criteria and is distributed annually
to shareholders. Accordingly, no provision for federal income taxes is included in the consolidated
financial statements with respect to these operations. We believe we have operated, and we intend
to continue to operate, in a manner that allows us to continue to meet the requirements for
taxation as a REIT.
We conduct business in various states and municipalities within the U.S. and the European Union
and, as a result, we or one or more of our subsidiaries file income tax returns in the U.S. federal
jurisdiction and various state and certain foreign jurisdictions. As a result, we are subject to
certain foreign, state and local taxes and a provision for such taxes is included in the
consolidated financial statements.
Significant judgment is required in determining our tax provision and in evaluating our tax
positions. We establish tax reserves based on a benefit recognition model, which we believe could
result in a greater amount of benefit (and a lower amount of reserve) being initially recognized in
certain circumstances. Provided that the tax position is deemed more likely than not of being
sustained, we recognize the largest amount of tax benefit that is greater than 50 percent likely of
being ultimately realized upon settlement. We derecognize the tax position when it is no longer
more likely than not of being sustained.
Earnings Per Share
We have a simple equity capital structure with only common stock outstanding. As a result, earnings
per share, as presented, represents both basic and dilutive per-share amounts for all periods
presented in the consolidated financial statements.
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. The agreement that is currently in effect was recently renewed for an additional year
pursuant to its terms effective October 1, 2010. Under the terms of this
agreement, the advisor 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, and manages our day-to-day operations, for which we pay the advisor asset
management and performance 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.
CPA®:14 2010 10-K 62
Notes to Consolidated Financial Statements
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 average invested assets and are computed as
provided for in the advisory agreement. The performance fees are subordinated to the performance
criterion, a cumulative rate of cash flow from operations of 7% 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 NAV per share as approved by our board of directors. For 2010, 2009 and 2008,
the advisor elected to receive its asset management fees in cash. For 2010 and 2009, the advisor
elected to receive 80% of its performance fees from us in restricted shares, with the remaining 20%
payable in cash. For 2008, the advisor elected to receive its performance fees in restricted
shares. We incurred base asset management fees of $10.0 million, $11.0 million and $12.1 million in
2010, 2009 and 2008, respectively, with performance fees in like amounts, both of which are
included in Property expenses in the consolidated financial statements. At December 31, 2010, the
advisor owned 8,018,456 shares (9.2%) of our common stock.
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 costs of
investments acquired and are comprised of a current portion of 2.5%, which is paid at the date the
property is purchased, and a deferred portion of 2%, which is payable in equal annual installments
each January of the seven calendar years following the date on which a property was purchased,
subject to satisfying the 7% performance criterion. Interest on unpaid installments is 6% per year.
In connection with the 2006 Merger, we assumed deferred fees incurred by CPA®:12
totaling $2.7 million that bear interest at an annual rate of 7% and have scheduled installment
payments through 2018. During 2009, we incurred both current and deferred acquisition fees of $0.1
million. We did not incur any such fees during 2010 and 2008. Unpaid deferred installments totaled
$4.3 million and $6.9 million at December 31, 2010 and 2009, respectively, and were included in Due
to affiliates in the consolidated financial statements. We paid annual deferred acquisition fee
installments of $2.6 million, $3.6 million and $3.8 million in deferred fees in cash to the advisor
in January 2010, 2009 and 2008, respectively. We also pay the advisor mortgage refinancing fees,
which totaled $0.3 million, $0.4 million and $0.9 million for 2010, 2009 and 2008, respectively.
We also pay fees to the advisor for services provided to us in connection with the disposition of
investments, excluding investments acquired in the 2006 Merger. 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, such as the
Proposed Merger. Subordinated disposition fees totaled $6.1 million and $5.7 million at December
31, 2010 and 2009, respectively.
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 $2.8 million, $2.5 million and $2.6 million in 2010, 2009 and 2008,
respectively, which are included in General and administrative expenses in the consolidated
financial statements.
The advisor is obligated to reimburse us for the amount by which our operating expenses exceed the
2%/25% guidelines (the greater of 2% of average invested assets or 25% of net income) as defined in
the advisory agreement for any twelve-month period. If in any year our operating expenses exceed
the 2%/25% guidelines, the advisor will have an obligation to reimburse us for such excess, subject
to certain conditions. If our independent directors find that the excess expenses were justified
based on any unusual and nonrecurring factors that they deem sufficient, the advisor may be paid in
future years for the full amount or any portion of such excess expenses, but only to the extent
that the reimbursement would not cause our operating expenses to exceed this limit in any such
year. We will record any reimbursement of operating expenses as a liability until any contingencies
are resolved and will record the
reimbursement as a reduction of asset management and performance fees at such time that a
reimbursement is fixed, determinable and irrevocable. Our operating expenses have not exceeded the
amount that would require the advisor to reimburse us.
CPA®:14 2010 10-K 63
Notes to Consolidated Financial Statements
Joint Ventures and Other Transactions with Affiliates
Proposed Merger and Asset Sales
On December 13, 2010, we and CPA®:16 Global entered into a definitive agreement
pursuant to which we will merge with and into a subsidiary of CPA®:16 Global,
subject to the approval of our shareholders. The closing of the Proposed Merger is also subject to
customary closing conditions, as well as the closing of the Asset Sales. If the Proposed Merger is
approved, we currently expect that the closing will occur in the second quarter of 2011, although
there can be no assurance of such timing.
In connection with the Proposed Merger, we have agreed to sell three properties each to the advisor
and CPA®:17 Global for aggregate selling prices of $32.1 million and $57.4 million,
respectively, plus the assumption of indebtedness totaling approximately $64.7 million and $153.9
million, respectively. These Asset Sales are contingent upon the approval of the Proposed Merger by
our shareholders.
If the Proposed Merger is consummated, the advisor will earn $31.2 million of termination fees from
us in connection with the termination of its advisory agreement with us, $15.2 million of
subordinated disposition fees and $6.1 million in fees that we have accrued but have not yet paid
under the advisory agreement. The advisor has elected to receive the $31.2 million of termination
fees in shares of our common stock, for which it has agreed to elect to receive shares of
CPA®:16 Global in the Proposed Merger. If the Proposed Merger is consummated, the
maximum cash required to pay the $1.00 per share special cash distribution would be approximately
$87.3 million, based on our total shares outstanding at December 31, 2010. We expect to fund these
payments with proceeds from the Asset Sales and our existing cash resources. The advisor has agreed
to elect to receive stock of CPA®:16 Global in respect of the shares of our common
stock that it owns if the Proposed Merger is consummated. The advisor has also agreed to waive any
acquisition fees payable by CPA®:16 Global under its advisory agreement with the
advisor in respect of the properties being acquired in the Proposed Merger and has also agreed to
waive any disposition fees that may subsequently be payable by CPA®:16 Global upon a
sale of such assets.
In the Proposed Merger, our shareholders will be entitled to receive $11.50 per share, which is
equal to our NAV per share as of September 30, 2010. The Merger Consideration will be paid to our
shareholders, at their election, in either cash or a combination of the $1.00 per share special
cash distribution and 1.1932 shares of CPA®:16 Global common stock, which equates to
$10.50 based on the $8.80 per share NAV of CPA®:16 Global as of September 30, 2010.
Our advisor computed these NAVs internally, relying in part upon a third-party valuation of each
companys real estate portfolio and indebtedness as of September 30, 2010. If the cash on hand and
available to us and CPA®:16 Global, including the proceeds of the Asset Sales and a
new $300.0 million senior credit facility to be entered into by CPA®:16 Global, is
not sufficient to enable CPA®:16 Global to fulfill cash elections in the Proposed
Merger by our shareholders, the advisor has agreed to purchase a sufficient number of shares of
CPA®:16 Global stock from CPA®:16 Global to enable it to pay such
amounts to our shareholders. Our board of directors and the board of directors of
CPA®:16 Global each have the ability, but not the obligation, to terminate the
transaction if more than 50% of our shareholders elect to receive cash in the Proposed Merger.
The merger agreement also contains certain termination rights for both us and CPA®:16
Global. If the merger agreement is terminated because the closing condition that CPA®:16
Global obtain funding pursuant to the debt financing and, if applicable, the equity financing
described above is not satisfied or waived, the advisor has agreed to pay our out-of-pocket
expenses up to $4.0 million. The advisor has also agreed to pay our out-of-pocket expenses if the
merger agreement is terminated due to more than 50% of our shareholders electing to receive cash in
the Proposed Merger or the failure to obtain the requisite shareholder approval. Costs incurred by
us related to the Proposed Merger totaled approximately $1.2 million through December 31, 2010.
Other Transactions
Together with certain affiliates, we participate in an entity that leases office space used for the
administration of real estate entities. Under the terms of an agreement among the participants in
this entity, rental, occupancy and leasehold improvement costs are allocated among the participants
based on gross revenues and are adjusted quarterly. Our share of expenses incurred was $0.6 million
in 2010 and $0.7 million in each of 2009 and 2008. Based on gross revenues through December 31,
2010, our current share of future minimum lease payments under this agreement would be $0.5 million
annually through 2016.
CPA®:14 2010 10-K 64
Notes to Consolidated Financial Statements
We own interests in entities ranging from 12% to 90%, as well as jointly-controlled
tenant-in-common interests in properties, with the remaining interests generally held by
affiliates. We consolidate certain of these investments (Note 2) and account for the remainder
under the equity method of accounting (Note 6).
Through the 2006 Merger, we acquired 2,559 Class A equity units of a tenant, Rave Reviews Cinemas
LLC. We account for these units as other securities using the lower of cost or fair value method.
At December 31, 2010, we estimate that the value of these securities, which is included in Other
assets, net in the consolidated financial statements, was $2.0 million, reflecting other-than-
temporary impairment charges of $0.4 million recognized in 2010 and $0.1 million recognized in
2008.
Note 4. Net Investments in Properties
Net Investments in Properties
Net investments in properties, which consists of land and buildings leased to others under
operating leases, at cost, is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Land |
|
$ |
214,761 |
|
|
$ |
228,279 |
|
Buildings |
|
|
946,378 |
|
|
|
1,027,687 |
|
Less: Accumulated depreciation |
|
|
(221,824 |
) |
|
|
(215,967 |
) |
|
|
|
|
|
|
|
|
|
$ |
939,315 |
|
|
$ |
1,039,999 |
|
|
|
|
|
|
|
|
We did not acquire real estate assets during the year ended December 31, 2010. Impairment
charges recognized on real estate assets are discussed in Note 11 and assets disposed of and
deconsolidated are discussed in Note 17. The U.S. dollar strengthened against the Euro, as the
end-of-period rate for the U.S. dollar in relation to the Euro at December 31, 2010 decreased by 8%
to $1.3253 from $1.4333 at December 31, 2009. This strengthening had a negative impact on our asset
base as of December 31, 2010 as compared to December 31, 2009.
Scheduled Future Minimum Rents
Scheduled future minimum rents, exclusive of renewals and expenses paid by tenants and future
CPI-based adjustments, under non-cancelable operating leases, at December 31, 2010 are as follows
(in thousands):
|
|
|
|
|
Years ending December 31, |
|
|
|
|
2011 |
|
$ |
127,393 |
|
2012 |
|
|
126,197 |
|
2013 |
|
|
126,174 |
|
2014 |
|
|
124,804 |
|
2015 |
|
|
113,441 |
|
Thereafter through 2036 |
|
|
438,860 |
|
There was no percentage rent revenue for operating leases in 2010. Percentage rent revenue for
operating leases was less than $0.1 million in 2009 and 2008.
Note 5. Finance Receivables
Assets representing rights to receive money on demand or at fixed or determinable dates are
referred to as finance receivables. Our finance receivable portfolios consist of direct financing
leases. Operating leases are not included in finance receivables as such amounts are not recognized
as an asset in the consolidated balance sheets.
CPA®:14 2010 10-K 65
Notes to Consolidated Financial Statements
Net Investment in Direct Financing Leases
Net investment in direct financing leases is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Minimum lease payments receivable |
|
$ |
134,701 |
|
|
$ |
154,586 |
|
Unguaranteed residual value |
|
|
104,153 |
|
|
|
107,588 |
|
|
|
|
|
|
|
|
|
|
|
238,854 |
|
|
|
262,174 |
|
Less: unearned income |
|
|
(131,502 |
) |
|
|
(149,746 |
) |
|
|
|
|
|
|
|
|
|
$ |
107,352 |
|
|
$ |
112,428 |
|
|
|
|
|
|
|
|
During 2010, we sold one of our net investments in a direct financing lease for $3.0 million,
net of selling costs, and recognized a net gain on sale of $0.4 million, excluding impairment
charges of $2.2 million recognized in 2010. During the years ended December 31, 2010, 2009 and
2008, in connection with our annual reviews of the estimated residual values of our properties, we
recorded impairment charges related to four direct financing leases of $2.2 million, $2.6 million
and $0.1 million, respectively. Impairment charges relate primarily to other-than-temporary
declines in the estimated residual values of the underlying properties due to market conditions
(see Note 11). At December 31, 2010 and 2009, Other assets included $0.5 million and $1.3 million,
respectively, of accounts receivable related to amounts billed under these direct financing leases.
Scheduled Future Minimum Rents
Scheduled future minimum rents, exclusive of renewals and expenses paid by tenants, percentage of
sales rents and future CPI-based adjustments, under non-cancelable direct financing leases are as
follows (in thousands):
|
|
|
|
|
Years ending December 31, |
|
|
|
|
2011 |
|
$ |
13,264 |
|
2012 |
|
|
13,264 |
|
2013 |
|
|
13,264 |
|
2014 |
|
|
13,264 |
|
2015 |
|
|
13,342 |
|
Thereafter through 2023 |
|
|
68,303 |
|
There was no percentage rent revenue for direct financing leases in 2010, 2009 and 2008.
Credit Quality of Finance Receivables
We generally seek investments in facilities that we believe are critical to the tenants business
and that we believe have a low risk of tenant defaults. At December 31, 2010, none of the balances
of our finance receivables were past due and we had not established any allowances for credit
losses. Additionally, there have been no modifications of finance receivables. We evaluate the
credit quality of our tenant receivables utilizing an internal 5-point credit rating scale, with 1
representing the highest credit quality and 5 representing the lowest. The credit quality
evaluation of our tenant receivables was last updated in the fourth quarter of 2010.
A summary of our finance receivables by internal credit quality rating at December 31, 2010 is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investments in |
|
Internal Credit |
|
|
|
|
|
Direct Financing |
|
Quality Rating |
|
Number of Tenants |
|
|
Leases |
|
1 |
|
|
1 |
|
|
$ |
25,530 |
|
2 |
|
|
3 |
|
|
|
29,706 |
|
3 |
|
|
3 |
|
|
|
34,421 |
|
4 |
|
|
1 |
|
|
|
17,695 |
|
5 |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
107,352 |
|
|
|
|
|
|
|
|
|
CPA®:14 2010 10-K 66
Notes to Consolidated Financial Statements
Note 6. Equity Investments in Real Estate
We own interests in single-tenant net leased properties leased to corporations through
noncontrolling interests in (i) partnerships and limited liability companies that we do not control
but over which we exercise significant influence, and (ii) as tenants-in-common subject to common
control. Generally, the underlying investments are jointly-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 and other adjustments
required by equity method accounting, such as basis differences from other-than-temporary
impairments).
The following table sets forth our ownership interests in our equity investments in real estate and
their respective carrying values (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership |
|
|
|
|
|
|
Interest at |
|
|
Carrying Value at December 31, |
|
Lessee |
|
December 31, 2010 |
|
|
2010 |
|
|
2009 |
|
True Value Company |
|
|
50 |
% |
|
$ |
30,677 |
|
|
$ |
31,433 |
|
Advanced Micro Devices, Inc. (a) |
|
|
67 |
% |
|
|
15,633 |
|
|
|
33,571 |
|
Hellweg Die Profi-Baumarkte GmbH & Co. KG (b) |
|
|
32 |
% |
|
|
13,552 |
|
|
|
15,369 |
|
U-Haul Moving Partners, Inc. and Mercury Partners, LP |
|
|
12 |
% |
|
|
12,263 |
|
|
|
12,639 |
|
Life Time Fitness, Inc. and Town Sports International Holdings, Inc. |
|
|
56 |
% |
|
|
10,201 |
|
|
|
10,343 |
|
Best Buy Co., Inc. (c) |
|
|
37 |
% |
|
|
10,058 |
|
|
|
11,183 |
|
The Upper Deck Company (d) |
|
|
50 |
% |
|
|
6,681 |
|
|
|
11,491 |
|
Del Monte Corporation (c) |
|
|
50 |
% |
|
|
6,385 |
|
|
|
7,233 |
|
Checkfree Holdings, Inc. (e) |
|
|
50 |
% |
|
|
1,159 |
|
|
|
1,506 |
|
ShopRite Supermarkets, Inc. (f) |
|
|
45 |
% |
|
|
|
|
|
|
6,719 |
|
Compucom Systems, Inc. (f) |
|
|
67 |
% |
|
|
|
|
|
|
8,638 |
|
Dicks Sporting Goods, Inc. (g) |
|
|
45 |
% |
|
|
(842 |
) |
|
|
(732 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
105,767 |
|
|
$ |
149,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In August 2010, this venture refinanced its existing non-recourse mortgage and distributed
the net proceeds to the venture partners. Our share of the distribution was $16.0 million. |
|
(b) |
|
The carrying value of this investment is affected by the impact of fluctuations in the
exchange rate of the Euro. |
|
(c) |
|
The decrease in carrying value was primarily due to amortization of differences between the
fair value of the investment at the date of acquisition of the venture and the carrying value
of its net assets at that date. |
|
(d) |
|
During the third quarter of 2010, we recognized an other-than-temporary impairment charge of
$4.7 million to reduce the carrying value of this venture to its estimated fair value (Note
11). |
|
(e) |
|
The decrease in carrying value was primarily due to cash distributions made to us by the
venture. |
|
(f) |
|
In December 2010, this venture sold its properties and distributed the proceeds to the
venture partners. We have no further economic interest in this venture. |
|
(g) |
|
In 2007, this venture obtained non-recourse mortgage financing of $23.0 million and
distributed the proceeds to the venture partners. Our share of the distribution was $10.3
million, which exceeded our total investment in the venture at that time. |
As discussed in Note 2, we adopted the FASBs amended guidance on the consolidation of 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 Hellweg venture using the equity method of accounting primarily because the partner
of this venture had the power to direct the activities that most significantly impact the entitys
economic performance. 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 the VIE, and there are no
guarantees or other commitments from third parties that would affect the value of or risk related
to our interest in this entity.
CPA®:14 2010 10-K 67
Notes to Consolidated Financial Statements
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):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Assets |
|
$ |
1,194,528 |
|
|
$ |
1,631,111 |
|
Liabilities |
|
|
(907,586 |
) |
|
|
(1,280,887 |
) |
|
|
|
|
|
|
|
Partners/members equity |
|
$ |
286,942 |
|
|
$ |
350,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Revenue |
|
$ |
154,666 |
|
|
$ |
156,841 |
|
|
$ |
159,861 |
|
Expenses |
|
|
(86,506 |
) |
|
|
(86,044 |
) |
|
|
(105,934 |
) |
Gain on sale of real estate (a) |
|
|
28,200 |
|
|
|
|
|
|
|
12,253 |
|
Impairment charge (b) |
|
|
(15,196 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
81,164 |
|
|
$ |
70,797 |
|
|
$ |
66,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In December 2010, the ShopRite Supermarkets venture and the Compucom Systems venture sold
their properties to two unrelated parties and recognized a net gain on sales totaling $28.2
million. During the year ended December 31, 2008, the Starmark Holdings venture sold several
properties and recognized a net gain on sale of $12.3 million. These ventures had no other
assets following the sales. |
|
(b) |
|
In December 2010, the Best Buy venture recognized an impairment charge of $15.2 million as a
result of an other-than-temporary decline in estimated residual value of its properties due to
market conditions. |
We recognized income from these equity investments in real estate of $20.6 million, $13.8 million
and $0.6 million for the years ended December 31, 2010, 2009 and 2008, 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. The increase in income from equity
investments in real estate in 2010 as compared to 2009 was primarily due to our share of the gains
recognized by the ShopRite supermarkets venture and the Compucom Systems venture in connection with
selling their properties.
Note 7. Intangibles
In connection with our acquisition of properties, we have recorded net lease intangibles of $79.7
million, which are being amortized over periods ranging from nine to 40 years. In-place lease,
tenant relationship and above-market rent intangibles are included in Intangible assets, net in the
consolidated financial statements. Below-market rent intangibles are included in Prepaid and
deferred rental income and security deposits in the consolidated financial statements. Intangibles
are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Lease intangibles |
|
|
|
|
|
|
|
|
In-place lease |
|
$ |
36,021 |
|
|
$ |
37,533 |
|
Tenant relationship |
|
|
12,294 |
|
|
|
12,678 |
|
Above-market rent |
|
|
37,246 |
|
|
|
42,057 |
|
Less: accumulated amortization |
|
|
(28,649 |
) |
|
|
(28,464 |
) |
|
|
|
|
|
|
|
|
|
$ |
56,912 |
|
|
$ |
63,804 |
|
|
|
|
|
|
|
|
Below-market rent |
|
$ |
(5,855 |
) |
|
$ |
(5,855 |
) |
Less: accumulated amortization |
|
|
607 |
|
|
|
459 |
|
|
|
|
|
|
|
|
|
|
$ |
(5,248 |
) |
|
$ |
(5,396 |
) |
|
|
|
|
|
|
|
CPA®:14 2010 10-K 68
Notes to Consolidated Financial Statements
Net amortization of intangibles, including the effect of foreign currency translation, was
$6.6 million, $12.7 million and $6.2 million for the years ended December 31, 2010, 2009 and 2008,
respectively. Amortization expenses for two properties previously leased to Special Devices,
Incorporated increased by $4.3 million during 2009 as compared to 2008, reflecting the accelerated
amortization of lease intangible assets as a result of Special Devices not renewing its lease with
us. In addition, 2009 amortization expenses included an additional $1.1 million in amortization as
a result of an adjustment we made in the third quarter of 2009 to consolidate a venture that had
previously been accounted for under the equity method, as well as a write-off of $1.1 million in
intangible assets as a result of a lease restructuring. 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.
Based on the intangibles recorded at December 31, 2010, annual net amortization of intangibles is
expected to be $5.6 million for each of the next five years.
Note 8. Interest in Mortgage Loan Securitization
We account for our subordinated interest in the CCMT mortgage securitization as an
available-for-sale security, which is measured at fair value with all gains and losses from changes
in fair value reported as a component of OCI as part of equity. The following table sets forth
certain information regarding our interest in CCMT (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31, |
|
Certificate Class |
|
2010 |
|
|
2009 |
|
Class IO |
|
$ |
254 |
|
|
$ |
800 |
|
Class E |
|
|
12,796 |
|
|
|
11,363 |
|
|
|
|
|
|
|
|
|
|
$ |
13,050 |
|
|
$ |
12,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
Aggregate unrealized gain |
|
$ |
1,615 |
|
|
$ |
785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative net amortization |
|
$ |
1,315 |
|
|
$ |
1,372 |
|
|
|
|
|
|
|
|
We use a discounted cash flow model with assumptions of market credit spreads and the credit
quality of the underlying lessees to determine the fair value of our interest in CCMT. One key
variable in determining the fair value of our subordinated interest in CCMT is current interest
rates. The following table presents a sensitivity analysis of the fair value of our interest at
December 31, 2010 based on adverse changes in market interest rates of 1% and 2% (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of |
|
|
1% adverse |
|
|
2% adverse |
|
|
|
December 31, 2010 |
|
|
change |
|
|
change |
|
Fair value of our interest in CCMT |
|
$ |
13,050 |
|
|
$ |
12,856 |
|
|
$ |
12,666 |
|
The above sensitivity analysis is hypothetical, and changes in fair value, based on a 1% or 2%
variation, should not be extrapolated because the relationship of the change in assumption to the
change in fair value may not always be linear.
Note 9. 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.
Items Measured at Fair Value on a Recurring Basis
The following methods and assumptions were used to estimate the fair value of each class of
financial instrument:
Money Market Funds and Marketable Securities Our money market funds consisted of government
securities and treasury bills. Our marketable securities consisted of our investments in the common
stock of certain companies. These investments were classified as Level 1 as we used quoted prices
from active markets to determine their fair values.
CPA®:14 2010 10-K 69
Notes to Consolidated Financial Statements
Derivative Liabilities Our derivative liabilities primarily comprised of interest rate swaps or
caps. These derivative instruments were measured at fair value using readily observable market
inputs, such as quotations on interest rates. Our derivative instruments were classified as Level 2
as these instruments are custom, over-the-counter contracts with various bank counterparties that
are not traded in an active market.
Other Securities and Derivative Assets Our other securities are primarily comprised of our
interest in a commercial mortgage loan securitization and our investments in equity units in Rave
Reviews Cinemas. Our derivative assets are consisted of stock warrants that
were granted to us by lessees in connection with structuring initial lease transactions. These
assets are not traded in an active market. We estimated the fair value of these assets using
internal valuation models that incorporate market inputs and our own assumptions about future cash
flows. We classified these assets as Level 3.
The following tables set forth our assets and liabilities that were accounted for at fair value on
a recurring basis at December 31, 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2010 Using: |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
|
|
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
Description |
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
93,836 |
|
|
$ |
93,836 |
|
|
$ |
|
|
|
$ |
|
|
Marketable securities |
|
|
332 |
|
|
|
332 |
|
|
|
|
|
|
|
|
|
Other securities |
|
|
15,075 |
|
|
|
|
|
|
|
|
|
|
|
15,075 |
|
Derivative assets |
|
|
1,626 |
|
|
|
|
|
|
|
|
|
|
|
1,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
110,869 |
|
|
$ |
94,168 |
|
|
$ |
|
|
|
$ |
16,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
(1,688 |
) |
|
$ |
|
|
|
$ |
(1,688 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2009 Using: |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
|
|
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
Description |
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
84,049 |
|
|
$ |
84,049 |
|
|
$ |
|
|
|
$ |
|
|
Marketable securities |
|
|
342 |
|
|
|
342 |
|
|
|
|
|
|
|
|
|
Other securities |
|
|
15,829 |
|
|
|
|
|
|
|
|
|
|
|
15,829 |
|
Derivative assets |
|
|
1,494 |
|
|
|
|
|
|
|
|
|
|
|
1,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
101,714 |
|
|
$ |
84,391 |
|
|
$ |
|
|
|
$ |
17,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
(967 |
) |
|
$ |
|
|
|
$ |
(967 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities presented above exclude financial assets and liabilities owned by
unconsolidated ventures.
CPA®:14 2010 10-K 70
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant |
|
|
|
Unobservable Inputs (Level 3 Only) |
|
|
|
Year ended December 31, 2010 |
|
|
Year ended December 31, 2009 |
|
|
|
Other |
|
|
Derivative |
|
|
|
|
|
|
Other |
|
|
Derivative |
|
|
|
|
|
|
Securities |
|
|
Assets |
|
|
Total Assets |
|
|
Securities |
|
|
Assets |
|
|
Total Assets |
|
Beginning balance |
|
$ |
15,829 |
|
|
$ |
1,494 |
|
|
$ |
17,323 |
|
|
$ |
13,787 |
|
|
$ |
1,601 |
|
|
$ |
15,388 |
|
Total gains or losses (realized and unrealized): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings |
|
|
(1,640 |
)(a) |
|
|
286 |
|
|
|
(1,354 |
) |
|
|
1,254 |
|
|
|
98 |
|
|
|
1,352 |
|
Included in other comprehensive income |
|
|
830 |
|
|
|
|
|
|
|
830 |
|
|
|
1,037 |
|
|
|
|
|
|
|
1,037 |
|
Amortization and accretion |
|
|
56 |
|
|
|
|
|
|
|
56 |
|
|
|
(249 |
) |
|
|
|
|
|
|
(249 |
) |
Settlements |
|
|
|
|
|
|
(154 |
) |
|
|
(154 |
) |
|
|
|
|
|
|
(205 |
) |
|
|
(205 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
15,075 |
|
|
$ |
1,626 |
|
|
$ |
16,701 |
|
|
$ |
15,829 |
|
|
$ |
1,494 |
|
|
$ |
17,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
(1,640 |
) |
|
$ |
132 |
|
|
$ |
(1,508 |
) |
|
$ |
1,254 |
|
|
$ |
(66 |
) |
|
$ |
1,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Other securities amount in 2010 included a $1.3 million out-of-period adjustment to correct
an error in 2009 pertaining the valuation of our cost method investment in Rave Reviews (Note
2) and an other-than-temporary impairment charge of $0.4 million recognized to reflect its
decline in fair value at December 31, 2010. |
We did not have any transfers into or out of Level 1, Level 2 and Level 3 measurements during the
years ended December 31, 2010 and 2009. Gains and losses (realized and unrealized) included in
earnings are included in Other income and (expenses) in the consolidated financial statements.
Our other financial instruments had the following carrying values and fair values as of the dates
shown (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
|
Carrying Value |
|
|
Fair Value |
|
|
Carrying Value |
|
|
Fair Value |
|
Non-recourse debt |
|
$ |
689,264 |
|
|
$ |
678,699 |
|
|
$ |
805,663 |
|
|
$ |
763,456 |
|
We determine 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
estimate that our other financial assets and liabilities (excluding net investments in direct
financing leases) had fair values that approximated their carrying values at both December 31, 2010
and 2009.
Items Measured at Fair Value on a Non-Recurring Basis
We perform an assessment, when required, 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
expected discounted cash flows or an 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 years ended December 31, 2010, 2009 and 2008 based on market conditions and assumptions that
existed at the time. The valuation of real estate is subject to significant judgment and actual
results may differ materially if market conditions or the underlying assumptions change.
CPA®:14 2010 10-K 71
Notes to Consolidated Financial Statements
The following table presents information about our nonfinancial assets that were measured on a fair
value basis for the years ended December 31, 2010, 2009 and 2008. For additional information
regarding these impairment charges, refer to Note 11 for impairment charges from continuing
operations and Note 17 for impairment changes from discontinued operations. All of the impairment
charges were measured using unobservable inputs (Level 3) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2010 |
|
|
Year ended December 31, 2009 |
|
|
Year ended December 31, 2008 |
|
|
|
Total |
|
|
Total |
|
|
Total |
|
|
Total |
|
|
Total |
|
|
Total |
|
|
|
Fair Value |
|
|
Impairment |
|
|
Fair Value |
|
|
Impairment |
|
|
Fair Value |
|
|
Impairment |
|
|
|
Measurements |
|
|
Charges |
|
|
Measurements |
|
|
Charges |
|
|
Measurements |
|
|
Charges |
|
Impairment Charges From Continuing
Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investments in properties |
|
$ |
18,700 |
|
|
$ |
6,251 |
|
|
$ |
13,906 |
|
|
$ |
7,527 |
|
|
$ |
|
|
|
$ |
|
|
Net investments in direct financing
leases |
|
|
3,000 |
|
|
|
2,209 |
|
|
|
4,101 |
|
|
|
2,566 |
|
|
|
3,047 |
|
|
|
110 |
|
Equity investments in real estate |
|
|
6,290 |
|
|
|
4,736 |
|
|
|
11,491 |
|
|
|
671 |
|
|
|
24,940 |
|
|
|
9,820 |
|
Other securities |
|
|
2,026 |
|
|
|
386 |
|
|
|
|
|
|
|
|
|
|
|
2,412 |
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,016 |
|
|
|
13,582 |
|
|
|
29,498 |
|
|
|
10,764 |
|
|
|
30,399 |
|
|
|
10,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment Charges from Discontinued
Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investments in properties |
|
|
7,543 |
|
|
|
1,671 |
|
|
|
23,743 |
|
|
|
30,252 |
|
|
|
5,132 |
|
|
|
1,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,543 |
|
|
|
1,671 |
|
|
|
23,743 |
|
|
|
30,252 |
|
|
|
5,132 |
|
|
|
1,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Impairment Charges |
|
$ |
37,559 |
|
|
$ |
15,253 |
|
|
$ |
53,241 |
|
|
$ |
41,016 |
|
|
$ |
35,531 |
|
|
$ |
11,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10. Risk Management and Use of Derivative Financial Instruments
Risk Management
In the normal course of our ongoing 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
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. We manage
foreign currency exchange rate movements by generally placing both our debt obligation to the
lender and the tenants rental obligation to us in the same currency, but we are subject to foreign
currency exchange rate movements to the extent of the difference in the timing and amount of the
rental obligation and the debt service. We also face challenges with repatriating cash from our
foreign investments. We may encounter instances where it is difficult to repatriate cash because of
jurisdictional restrictions or because repatriating cash may result in current or future tax
liabilities. Realized and unrealized gains and losses recognized in earnings related to foreign
currency transactions are included in Other income and (expenses) in the consolidated financial
statements.
Use of Derivative Financial Instruments
When we use derivative instruments, it is generally to reduce our exposure to fluctuations in
interest rates. We have not entered, and do not plan to enter into financial instruments for
trading or speculative purposes. In addition to derivative instruments that we enter into on our
own behalf, we may also be a party to derivative instruments that are embedded in other contracts,
and we may own common stock warrants, granted to us by lessees when structuring lease transactions,
that are considered to be derivative instruments. The primary risks related to our use of
derivative instruments are that a counterparty to a hedging arrangement could default on its
obligation or that the credit quality of the counterparty may be downgraded to such an extent that
it impairs our ability to sell or assign our side of the hedging transaction. While we seek to
mitigate these risks by entering into hedging arrangements with counterparties that are large
financial institutions that we deem to be creditworthy, 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.
CPA®:14 2010 10-K 72
Notes to Consolidated Financial Statements
We measure derivative instruments at fair value and record them as assets or liabilities, depending
on our rights or obligations under the applicable derivative contract. Derivatives that are not
designated as hedges must be adjusted to fair value through earnings. If a derivative is designated
as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will
either be offset against the change in fair value of the hedged asset, liability, or firm
commitment through earnings or recognized in OCI until the hedged item is recognized in earnings.
For cash flow hedges, 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 December
31, 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives Fair Value |
|
|
Liability Derivatives Fair Value |
|
|
|
Balance Sheet |
|
December 31, |
|
|
December 31, |
|
|
|
Location |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Derivatives Designated as Hedging
Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
Accounts payable, accrued expenses and other liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
(1,688 |
) |
|
$ |
(967 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging
Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock warrants |
|
Other assets, net |
|
|
1,626 |
|
|
|
1,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
|
|
$ |
1,626 |
|
|
$ |
1,494 |
|
|
$ |
(1,688 |
) |
|
$ |
(967 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present the impact of derivative instruments on the consolidated
financial statements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in |
|
|
|
OCI on Derivative (Effective Portion) |
|
|
|
Years ended December 31, |
|
Derivatives in Cash Flow Hedging Relationships |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Interest rate swaps |
|
$ |
(706 |
) |
|
$ |
2,037 |
|
|
$ |
(2,256 |
) |
For the years ended
December 31, 2010, 2009 and 2008, no gains or losses were reclassified
from OCI into income related to effective or ineffective portions of hedging relationship or to
amounts excluded from effectiveness testing.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in |
|
|
|
|
|
Income on Derivatives |
|
Derivatives not in Cash |
|
Location of Gain (Loss) |
|
Years ended December 31, |
|
Flow Hedging Relationships |
|
Recognized in Income |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Stock warrants |
|
Other income and (expenses) |
|
$ |
132 |
|
|
$ |
98 |
|
|
$ |
(255 |
) |
Interest rate swap (a) |
|
Interest expense |
|
|
|
|
|
|
(791 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
132 |
|
|
$ |
(693 |
) |
|
$ |
(255 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
During 2009, we determined that an interest rate swap was no longer designated as a hedging
instrument due to the sale of the property and the payoff of the underlying mortgage loan. As
a result, the change in fair value of the swap was recorded in interest expense. |
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.
CPA®:14 2010 10-K 73
Notes to Consolidated Financial Statements
Interest Rate Swaps
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 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. Our objective in using these derivatives is to limit our
exposure to interest rate movements.
The interest rate swap derivative instruments that we had outstanding at December 31, 2010 were
designated as cash flow hedges and are summarized as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
Effective |
|
|
Effective |
|
|
Expiration |
|
|
Fair Value at |
|
|
|
Type |
|
Amount |
|
|
Interest Rate |
|
|
Date |
|
|
Date |
|
|
December 31, 2010 |
|
1-Month LIBOR |
|
Pay-fixed swap |
|
$ |
11,816 |
|
|
|
5.6 |
% |
|
|
3/2008 |
|
|
|
3/2018 |
|
|
$ |
(1,001 |
) |
1-Month LIBOR |
|
Pay-fixed swap |
|
|
6,250 |
|
|
|
6.4 |
% |
|
|
7/2008 |
|
|
|
7/2018 |
|
|
|
(687 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,688 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded Credit Derivative
In connection with a German transaction in 2007, two unconsolidated ventures in which we have a
total effective ownership interest of 32% obtained non-recourse mortgage financing for which the
interest rate has both fixed and variable components. The lender of this financing entered into
interest rate swap agreements on its own behalf through which the fixed interest rate components on
the financing were converted into variable interest rate instruments. The ventures have the right,
at their sole discretion, to prepay the debt at any time and to participate in any realized gain or
loss on the interest rate swaps at that time. These participation rights are deemed to be embedded
credit derivatives. Based on valuations obtained at December 31, 2010 and 2009, and including the
effect of foreign currency translation, the embedded credit derivatives had an estimated total fair
value of less than $0.1 million and $1.0 million, respectively. For 2010 and 2009, these
derivatives generated total unrealized losses of $0.8 million and $1.1 million, respectively.
Amounts provided are the total amounts attributable to the venture and do not represent our
proportionate share. Changes in the fair value of the embedded credit derivatives are recognized in
the ventures earnings.
Stock Warrants
We own stock warrants that were generally granted to us by lessees in connection with structuring
the initial lease transactions. These warrants are defined as derivative instruments because they
are readily convertible to cash or provide for net settlement upon conversion.
Included in Other income and (expenses) in the consolidated financial statements are unrealized
gains on common stock warrants of $0.1 million for the year ended December 31, 2010 and unrealized
losses of $0.1 million and $1.0 million for the years ended December 31, 2009 and 2008,
respectively. The unrealized losses for 2008 include the reversal of unrealized gains totaling $0.7
million recognized in prior years. We reversed these unrealized gains in connection with a tenants
merger transaction during 2008, prior to which it redeemed its outstanding warrants, including
ours. In connection with the sale of securities related to this warrant exercise, we realized a
gain of $0.9 million, which is included in Other income and (expenses) in the consolidated
financial statements.
Other
Amounts reported in OCI related to derivatives will be reclassified to interest expense as interest
payments are made on our non-recourse variable-rate debt. At December 31, 2010, we estimate that an
additional $0.6 million will be reclassified as interest expense during the next twelve months.
Some of the agreements we have with our derivative counterparties 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 December 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
$1.8 million at December 31, 2010, which includes accrued interest but excludes any adjustment for
nonperformance risk. If we had breached any of these provisions at December 31, 2010, we could have
been required to settle our obligations under these agreements at their termination value of $1.9
million.
CPA®:14 2010 10-K 74
Notes to Consolidated Financial Statements
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 contractual minimum base rent in
certain areas, as described below. The percentages in the paragraph below represent our
directly-owned real estate properties and do not include our pro rata share of equity investments.
At December 31, 2010, the majority of our directly-owned real estate properties were located in the
U.S. (82%) with the remainder primarily leased to one tenant located in France, Carrefour France,
SAS (13.6%). No other tenant accounted for more than 10% of current annualized contractual minimum
base rent. At December 31, 2010, our directly-owned real estate properties contained concentrations
in the following asset types: industrial (31%), warehouse/distribution (31%), office (19%) and
retail (11%); and in the following tenant industries: retail (29%) and electronics (12%).
Note 11. 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 such as recent comparable sales or broker quotes. If relevant market information is not
available or 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 years ended December 31, 2010, 2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Net investments in properties |
|
$ |
6,251 |
|
|
$ |
7,527 |
|
|
$ |
|
|
Net investment in direct financing lease |
|
|
2,209 |
|
|
|
2,566 |
|
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
Total impairment charges included in expenses |
|
|
8,460 |
|
|
|
10,093 |
|
|
|
110 |
|
Equity investments in real estate (a) |
|
|
4,736 |
|
|
|
671 |
|
|
|
9,820 |
|
Other securities (b) |
|
|
386 |
|
|
|
|
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
Total impairment charges included in continuing operations |
|
|
13,582 |
|
|
|
10,764 |
|
|
|
10,026 |
|
Impairment charges included in discontinued operations |
|
|
1,671 |
|
|
|
30,252 |
|
|
|
1,029 |
|
|
|
|
|
|
|
|
|
|
|
Total impairment charges |
|
$ |
15,253 |
|
|
$ |
41,016 |
|
|
$ |
11,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Impairment charges on our equity investments are included in Income from equity investments
in real estate in our consolidated statements of operations. |
|
(b) |
|
Impairment charges on other securities are included in Other income and (expenses) in our
consolidated statements of operations. |
CPA®:14 2010 10-K 75
Notes to Consolidated Financial Statements
2010 Impairments:
Metaldyne Company
During 2010, we recognized impairment charges totaling of $2.8 million on a vacant property located
in Illinois (the Illinois property) formerly leased to Metaldyne to reduce its carrying value of
$4.1 million to its estimated selling price of $1.3 million; however, we have not yet sold the
Illinois property and there can be no assurance that we will be able to sell this property. Also
during 2010, we recognized an impairment charge of $1.5 million on another vacant property located
in Michigan (the Michigan property) previously leased to Metaldyne to reduce its carrying value
of $6.1 million to its estimated fair value of $4.6 million, which reflected its appraised value.
Metaldyne filed for bankruptcy protection in May 2009 and subsequently vacated four of the five
properties it leased from us. We entered into direct leases with existing subtenants at two of the
properties vacated by Metaldyne. The Illinois and Michigan properties remain vacant as of the date
of this Report. At December 31, 2010, the Illinois and Michigan properties were classified as Net
investment in properties in the consolidated financial statements.
Nexpak Corporation
During 2010, we recognized impairment charges totaling $1.9 million on a vacant property previously
leased to Nexpak to reduce its carrying value of $7.5 million to its estimated fair value of $5.6
million, which reflected its appraised value. Nexpak vacated the property in 2009 subsequent to
filing for bankruptcy and terminating its lease with us in bankruptcy court. In March 2011, we
returned the property to the lender in exchange for the lenders agreement to release us from all
related non-recourse mortgage loan obligations. At December 31, 2010, this property was classified
as Net investment in properties in the consolidated financial statements.
Atrium Companies, Inc.
During 2010, we recognized an impairment charge of $2.2 million on a property leased to Atrium
Companies, Inc. to reduce its carrying value of $5.2 million to its estimated fair value of $3.0
million, which reflected its estimated selling price. In August 2010, this property was sold to a
third party for $3.0 million. Prior to its disposition, this property was classified as Net
investment in direct financing leases in the consolidated financial statements.
The Upper Deck Company
During 2010, we recognized an other-than-temporary impairment charge of $4.7 million to reflect the
decline in the estimated fair value of the ventures underlying net assets in comparison with the
carrying value of our interest in the venture. At December 31, 2010, this venture was classified as
an Equity investment in real estate in the consolidated financial statements.
Other Securities
During 2010 and 2008, we recognized other-than-temporary impairment charges of $0.4 million and
$0.1 million, respectively, to reflect the lower of cost or fair value of certain securities. At
December 31, 2010, these securities were classified as Other assets, net in the consolidated
financial statements.
Orgill, Inc.
During 2010, we recognized an impairment charge of $1.3 million on a property leased to Orgill,
Inc. to reduce its carrying value of $4.7 million to its estimated fair value of $3.4 million,
which reflected the contracted selling price. In November 2010, this property was sold to a third
party for $3.3 million. The results of operations of this property are included in Income (loss)
from discontinued operations in the consolidated financial statements.
Tower Automotive, Inc.
During 2010, we recognized an impairment charge of $0.4 million on a property leased to Tower
Automotive to reduce its carrying value of $4.9 million to its estimated fair value of $4.5
million, which reflected its estimated selling price. In November 2010, this property was sold for
a net selling price of $4.5 million, including lease termination income of $2.4 million. The
results of operations of this property are included in Income (loss) from discontinued operations
in the consolidated financial statements.
2009 Impairments:
Metaldyne Company
During 2009, we recognized an impairment charge of $4.0 million on the Michigan property leased to
Metaldyne Company to reduce its carrying value to its estimated fair value based on third-party
broker quotes. Metaldyne is operating under bankruptcy protection and its lease expires in April
2010. At December 31, 2009, this property was classified as Net investment in properties in the
consolidated financial statements.
CPA®:14 2010 10-K 76
Notes to Consolidated Financial Statements
Nexpak Corporation
During 2009, we recognized an impairment charge of $3.5 million on a domestic property previously
leased to Nexpak Corporation to reduce its carrying value to its estimated fair value based on
third-party broker quotes. Nexpak filed for bankruptcy in April 2009, terminated its lease in
bankruptcy court and vacated the property. At December 31, 2009, this property was classified as
Net investment in properties in the consolidated financial statements.
The Upper Deck Company
We recognized other-than-temporary impairment charges of $0.7 million and $1.1 million during 2009
and 2008, respectively, to reflect declines in the estimated fair value of the ventures underlying
net assets in comparison with the carrying value of our interest in the venture. This venture is
classified as an Equity investment in real estate in the consolidated financial statements.
Nortel Networks Inc.
During 2009, we incurred impairment charges totaling $22.2 million on a property previously leased
to Nortel to reduce its carrying value to its estimated fair value based on a discounted cash flow
analysis. After Nortel filed for bankruptcy and disaffirmed its lease with us in 2009, we entered
into a direct lease with the existing subtenant; however, the new tenant defaulted on its rental
obligation and vacated the property. In March 2010, we returned the property to the lender in
exchange for the lenders agreement to release us from all mortgage loan obligations. The results
of operations of this property are included in Income (loss) from discontinued operations in the
consolidated financial statements.
Buffets, Inc.
During 2009, we recognized an impairment charge of $8.1 million on a domestic property leased to
Buffets to reduce its carrying value to its estimated fair value based on third-party broker
quotes. Buffets filed for bankruptcy in January 2008, subsequently emerged from bankruptcy in April
2009 and vacated the property during the fourth quarter of 2009. In June 2010, the subsidiary that
holds the property consented to a court order appointing a receiver when we stopped making payments
on the related non-recourse debt obligation as a result of Buffets ceasing to make rent payments to
us. As we no longer have control over the activities that most significantly impact the economic
performance of this subsidiary following possession of the property by the receiver, the subsidiary
was deconsolidated during 2010. The results of operations of this property are included in Income
(loss) from discontinued operations in the consolidated financial statements.
Other
We perform an annual valuation of our assets, relying in part upon third-party appraisals. In
connection with this valuation, during 2009, we recognized impairment charges totaling $2.6 million
on several net investments in direct financing leases as a result of declines in the current
estimate of the residual value of the properties.
2008 Impairments:
In addition to the other-than-temporary impairment charges of $1.1 million described above in Upper
Deck, we recognized impairment charges totaling $8.7 million related to two equity investments in
real estate to reduce their carrying values to the estimated fair value of the ventures underlying
net assets. These ventures are classified as an Equity investment in real estate in the
consolidated financial statements.
During 2008, we recognized an impairment charge of $1.0 million on a domestic property to reduce
the propertys carrying value to its estimated fair value. At December 31, 2008, this property was
classified as Net investment in properties in the consolidated financial statements. In addition,
we recognized an impairment charge of $0.1 million on a domestic property as a result of a decline
in the unguaranteed residual value of the property. At December 31, 2008, this property was
classified as Net investment in direct financing leases in the consolidated financial statements.
CPA®:14 2010 10-K 77
Notes to Consolidated Financial Statements
Note 12. Non-Recourse Debt
Non-recourse debt consists of mortgage notes payable, which are collateralized by an assignment of
real property and direct financing leases with an aggregate carrying value of $924.4 million at
December 31, 2010. Our mortgage notes payable bore interest at fixed annual rates ranging from 5.2%
to 8.3% and variable annual rates ranging from 2.0% to 6.8%, with maturity dates ranging from 2011
to 2037, at December 31, 2010.
Scheduled debt principal payments during each of the next five years following December 31, 2010
and thereafter are as follows (in thousands):
|
|
|
|
|
Years ending December 31, |
|
Total Debt |
|
2011 |
|
$ |
194,619 |
|
2012 |
|
|
130,103 |
|
2013 |
|
|
12,416 |
|
2014 |
|
|
28,068 |
|
2015 |
|
|
26,248 |
|
Thereafter through 2037 |
|
|
297,810 |
|
|
|
|
|
Total |
|
$ |
689,264 |
|
|
|
|
|
Financing Activity
2010 We refinanced maturing non-recourse mortgage loans with new non-recourse financing of
$104.8 million at a weighted average annual interest rate and term of 5.6% and 9.4 years,
respectively.
2009 We refinanced maturing non-recourse mortgage loans with new non-recourse financing of $27.8
million at a weighted average annual interest rate and term of 6.7% and 9.8 years, respectively.
2008 We refinanced maturing non-recourse mortgage loans with new non-recourse financing of $9.7
million at a weighted average annual interest rate and term of 6.1% and 8.7 years, respectively.
Note 13. Commitments and Contingencies
Various claims and lawsuits arising in the normal course of business are pending against us. The
results of these proceedings are not expected to have a material adverse effect on our consolidated
financial position or results of operations.
Proposed Merger and Asset Sales
As discussed in Note 3, in connection with the Proposed Merger, we have agreed to sell three
properties each to the advisor and CPA®:17 Global, for an aggregate selling price of
$32.1 million and $57.4 million, respectively, plus the assumption of approximately $64.7 million
and $153.9 million, respectively, of indebtedness. If the Proposed Merger is consummated, the
maximum cash required to pay the $1.00 per share special cash distribution in connection with the
Proposed Merger would be approximately $87.3 million, based on our total shares outstanding at
December 31, 2010. We expect to fund these payments with proceeds from the Asset Sales and our
existing cash resources.
The merger agreement also contains certain termination rights for both us and CPA®:16
Global. If the merger agreement is terminated because the closing condition that CPA®:16
Global obtain funding pursuant to the debt financing and, if applicable, the equity financing
described above is not satisfied or waived, the advisor has agreed to pay our out-of-pocket
expenses up to $4.0 million. The advisor has also agreed to pay our out-of-pocket expenses if the
merger agreement is terminated due to more than 50% of our shareholders electing to receive cash in
the Proposed Merger or the failure to obtain the requisite shareholder approval. Costs incurred by
us related to the Proposed Merger totaled approximately $1.2 million through December 31, 2010.
Note 14. Advisor Settlement of SEC Investigation
In March 2008, WPC and Carey Financial entered into a settlement with the SEC with respect to all
matters relating to a previously disclosed investigation. In connection with this settlement, WPC
paid us $10.9 million.
CPA®:14 2010 10-K 78
Notes to Consolidated Financial Statements
Note 15. Equity
Distributions
Distributions paid to shareholders consist of ordinary income, capital gains, return of capital or
a combination thereof for income tax purposes. The following table presents distributions per share
reported for tax purposes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Ordinary income |
|
$ |
0.49 |
|
|
$ |
0.59 |
|
|
$ |
0.69 |
|
Return of capital |
|
|
0.26 |
|
|
|
0.11 |
|
|
|
|
|
Capital gains |
|
|
0.05 |
|
|
|
0.09 |
|
|
|
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.80 |
|
|
|
0.79 |
|
|
|
0.76 |
|
Spillover distribution (a) |
|
|
|
|
|
|
|
|
|
|
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.80 |
|
|
$ |
0.79 |
|
|
$ |
0.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
For 2008, this portion of the distribution was paid to shareholders in 2009 as ordinary
income; however, it was taxed in the year the distribution was declared. |
We declared a quarterly distribution of $0.2001 per share in December 2010, which was paid in
January 2011 to shareholders of record at December 31, 2010.
Accumulated Other Comprehensive Income
The following table presents accumulated OCI in equity. Amounts include our proportionate share of
other comprehensive income or loss from our unconsolidated investments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Unrealized gain (loss) on marketable securities |
|
$ |
739 |
|
|
$ |
(67 |
) |
Unrealized (loss) gain on derivative instruments |
|
|
(902 |
) |
|
|
170 |
|
Foreign currency translation adjustment |
|
|
4,678 |
|
|
|
8,735 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
4,515 |
|
|
$ |
8,838 |
|
|
|
|
|
|
|
|
Note 16. Income Taxes
We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code.
We believe we have operated, and we intend to continue to operate, in a manner that allows us to
continue to qualify as a REIT. Under the REIT operating structure, we are permitted to deduct
distributions paid to our shareholders and generally will not be required to pay U.S. federal
income taxes. Accordingly, no provision has been made for U.S. federal income taxes in the
consolidated financial statements.
We conduct business in various states and municipalities within the U.S., the European Union and
certain other foreign countries 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. The following table presents a reconciliation of the beginning and ending amount of
unrecognized tax benefits (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Balance at January 1, |
|
$ |
136 |
|
|
$ |
34 |
|
Additions based on tax positions related to the current year |
|
|
74 |
|
|
|
23 |
|
Additions
for tax positions of prior years |
|
|
46 |
|
|
|
90 |
|
Reductions for expiration of statute of limitations |
|
|
(12 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
Balance at December 31, |
|
$ |
244 |
|
|
$ |
136 |
|
|
|
|
|
|
|
|
CPA®:14 2010 10-K 79
Notes to Consolidated Financial Statements
At December 31, 2010, we had unrecognized tax benefits as presented in the table above that,
if recognized, would have a favorable impact on the effective income tax rate in future periods. We
recognize interest and penalties related to uncertain tax positions in income tax expense. At both
December 31, 2010 and 2009, we had less than $0.1 million of accrued interest related to uncertain
tax positions. Our tax returns are subject to audit by taxing authorities. Such audits can often
take years to complete and settle. The tax years 2003 through 2010 remain open to examination by
the major taxing jurisdictions to which we are subject.
As of December 31, 2010, we had net operating losses (NOLs) in foreign jurisdictions of
approximately $9.1 million, translating to a deferred tax asset before valuation allowance of $2.3
million. Our NOLs begin expiring in 2011 in certain foreign jurisdictions. The utilization of NOLs
may be subject to certain limitations under the tax laws of the relevant jurisdiction. Management
determined that as of December 31, 2010, $2.3 million of deferred tax assets related to losses in
foreign jurisdictions do not satisfy the recognition criteria set forth in accounting guidance for
income taxes. Accordingly, a valuation allowance has been recorded for this amount.
Note 17. Discontinued Operations
From time to time, tenants may vacate space due to lease buy-outs, elections not to renew their
leases, insolvency or lease rejection 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 try 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 classify the property
as an asset held for sale on our consolidated balance sheet and the current and prior period
results of operations of the property are reclassified as discontinued operations.
The results of operations for properties that are held for sale or have been sold are reflected in
the consolidated financial statements as discontinued operations for all periods presented and are
summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Revenues |
|
$ |
9,473 |
|
|
$ |
15,248 |
|
|
$ |
18,560 |
|
Expenses |
|
|
(4,453 |
) |
|
|
(19,502 |
) |
|
|
(10,829 |
) |
Gain on extinguishment of debt |
|
|
10,573 |
|
|
|
|
|
|
|
|
|
Gain on deconsolidation of a subsidiary |
|
|
12,870 |
|
|
|
|
|
|
|
|
|
(Loss) gain on sale of real estate |
|
|
(2,837 |
) |
|
|
8,611 |
|
|
|
524 |
|
Impairment charges |
|
|
(1,671 |
) |
|
|
(30,252 |
) |
|
|
(1,029 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
$ |
23,955 |
|
|
$ |
(25,895 |
) |
|
$ |
7,226 |
|
|
|
|
|
|
|
|
|
|
|
2010 We sold four domestic properties for a total price of $19.5 million, including lease
termination income of $3.2 million and net of selling costs, and recognized a net loss on the sales
of $2.8 million, excluding impairment charges of $1.3 million recognized on the Orgill property and
$0.4 million and $1.0 million recognized on the Tower Automotive property in 2010 and 2008,
respectively. In connection with two of the property sales, we used a portion of the sale proceeds
to defease two non-recourse mortgages totaling $9.1 million on the related properties, and incurred
net loss on extinguishment of debt totaling $0.8 million. All amounts are inclusive of affiliates
noncontrolling interests in the properties.
In June 2010, a consolidated subsidiary consented to a court order appointing a receiver when we
stopped making payments on the related non-recourse debt obligation involving a property that was
previously leased to Buffets. As we no longer have control over the activities that most
significantly impact the economic performance of this subsidiary following possession of the
property by the receiver during June 2010, the subsidiary was deconsolidated during the second
quarter of 2010. At the date of deconsolidation, the property had a carrying value of $6.6 million,
reflecting the impact of impairment charges totaling $8.1 million recognized in 2009, and the
related non-recourse mortgage loan had an outstanding balance of $19.4 million. In connection with
this deconsolidation, we recognized a gain of $12.9 million during the second quarter of 2010. We
believe that our retained interest in this deconsolidated entity had no value at the date of
deconsolidation. We have recorded the income (loss) from operations and gain recognized upon
deconsolidation as discontinued operations, as we have no significant influence on the entity and
there are no continuing cash flows from the property.
In March 2010, we returned a property previously leased to Nortel to the lender in exchange for the
lenders agreement to release us from all related non-recourse mortgage loan obligations. At March
31, 2010, the property had a carrying value of $17.0 million, reflecting the impact of impairment
charges totaling $22.2 million incurred in 2009, and the related non-recourse mortgage loan had an
outstanding balance of $27.6 million. In connection with this disposition, we recognized a gain on
the extinguishment of debt of $11.4 million during the first quarter of 2010.
CPA®:14 2010 10-K 80
Notes to Consolidated Financial Statements
In addition, during 2010 we entered into an agreement to sell a property for approximately $22.0
million; however, this sale has not occurred as of the date of this Report and there can be no
assurance that we will be able to sell this property. This property was classified as Assets held
for sale on our consolidated balance sheet at December 31, 2010.
2009 We sold two properties for a total of $26.2 million, net of selling costs, and recognized a
net gain on these sales of $8.6 million. Concurrent with the closing of one of these sales, we used
a portion of the sale proceeds to defease non-recourse mortgage debt totaling $15.0 million on two
unrelated domestic properties. We then substituted the then-unencumbered properties as collateral
for the existing $12.2 million loan. The terms of the existing loan remain unchanged. In connection
with the second sale, we defeased the existing non-recourse mortgage loan of $2.7 million.
2008 We sold two properties for a total of $14.9 million, net of selling costs, and recognized a
net gain on these sales of $0.5 million. In connection with the sale of one of these properties, we
prepaid the existing non-recourse mortgage loan of $6.5 million and incurred prepayment penalties
of $0.3 million.
Note 18. Segment Information
We have determined that we operate in one business segment, real estate ownership with domestic and
foreign investments. Geographic information for this segment is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
Domestic |
|
|
Foreign (a) |
|
|
Total Company |
|
Revenues |
|
$ |
124,582 |
|
|
$ |
32,694 |
|
|
$ |
157,276 |
|
Total long-lived assets (b) |
|
|
982,801 |
|
|
|
188,546 |
|
|
|
1,171,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
Domestic |
|
|
Foreign (a) |
|
|
Total Company |
|
Revenues |
|
$ |
124,786 |
|
|
$ |
31,854 |
|
|
$ |
156,640 |
|
Total long-lived assets (b) |
|
|
1,101,460 |
|
|
|
209,011 |
|
|
|
1,310,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
Domestic |
|
|
Foreign (a) |
|
|
Total Company |
|
Revenues |
|
$ |
118,873 |
|
|
$ |
30,981 |
|
|
$ |
149,854 |
|
Total long-lived assets (b) |
|
|
1,144,992 |
|
|
|
223,119 |
|
|
|
1,368,111 |
|
|
|
|
(a) |
|
Consists of operations in the United Kingdom, France, Finland, the Netherlands and Germany. |
|
(b) |
|
Consists of real estate, net; net investment in direct financing leases; and equity
investments in real estate. |
Note 19. Selected Quarterly Financial Data (unaudited)
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, 2010 |
|
|
June 30, 2010 |
|
|
September 30, 2010 |
|
|
December 31, 2010 |
|
Revenues (a) |
|
$ |
39,712 |
|
|
$ |
37,187 |
|
|
$ |
37,934 |
|
|
$ |
42,443 |
|
Operating expenses (a) |
|
|
(22,467 |
) |
|
|
(17,437 |
) |
|
|
(19,956 |
) |
|
|
(18,481 |
) |
Net income (b) |
|
|
17,513 |
|
|
|
22,020 |
|
|
|
3,405 |
|
|
|
26,798 |
|
Less: Net income attributable to
noncontrolling interests |
|
|
(752 |
) |
|
|
(601 |
) |
|
|
(697 |
) |
|
|
(769 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to
CPA®:14 shareholders |
|
|
16,761 |
|
|
|
21,419 |
|
|
|
2,708 |
|
|
|
26,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to
CPA®:14 shareholders |
|
|
0.19 |
|
|
|
0.25 |
|
|
|
0.03 |
|
|
|
0.30 |
|
Distributions declared per share |
|
|
0.1996 |
|
|
|
0.2001 |
|
|
|
0.2001 |
|
|
|
0.2001 |
|
CPA®:14 2010 10-K 81
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, 2009 |
|
|
June 30, 2009 |
|
|
September 30, 2009 |
|
|
December 31, 2009 |
|
Revenues (a) |
|
$ |
36,492 |
|
|
$ |
37,424 |
|
|
$ |
41,225 |
|
|
$ |
41,499 |
|
Operating expenses (a) |
|
|
(16,674 |
) |
|
|
(16,384 |
) |
|
|
(23,480 |
) |
|
|
(24,565 |
) |
Net income (loss) (b) |
|
|
6,622 |
|
|
|
19,212 |
|
|
|
(12,039 |
) |
|
|
(6,794 |
) |
Less: Net income attributable to
noncontrolling interests |
|
|
(638 |
) |
|
|
(628 |
) |
|
|
(94 |
) |
|
|
(325 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to CPA®:14
shareholders |
|
|
5,984 |
|
|
|
18,584 |
|
|
|
(12,133 |
) |
|
|
(7,119 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share attributable to
CPA®:14 shareholders |
|
|
0.07 |
|
|
|
0.21 |
|
|
|
(0.14 |
) |
|
|
(0.08 |
) |
Distributions declared per share |
|
|
0.1976 |
|
|
|
0.1981 |
|
|
|
0.1986 |
|
|
|
0.1991 |
|
|
|
|
(a) |
|
Certain amounts from previous quarters have been retrospectively adjusted as discontinued
operations (Note 17). |
|
(b) |
|
Net income for the fourth quarter of 2009 included impairment charges totaling $20.1 million
and $9.8 million, respectively, in connection with several properties and equity investments
in real estate (Note 11). |
Note 20. Subsequent Event
In March 2011, we returned a property previously leased to Nexpak Corporation to the lender in
exchange for the lenders agreement to release us from all related non-recourse mortgage loan
obligations. On the date of disposition, the property had a carrying value of $5.5 million,
reflecting the impact of impairment charges totaling $1.9 million incurred in 2010 and $3.5 million
incurred in 2009, and the related non-recourse mortgage loan had an outstanding balance of $7.1
million.
CPA®:14 2010 10-K 82
SCHEDULE III REAL ESTATE and ACCUMULATED DEPRECIATION
at December 31, 2010
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life on which |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Latest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs Capitalized |
|
|
Increase |
|
|
Gross Amount at which Carried |
|
|
|
|
|
|
|
|
|
|
Statement of |
|
|
|
|
|
|
|
Initial Cost to Company |
|
|
Subsequent to |
|
|
(Decrease) in Net |
|
|
at
Close of Period (c) |
|
|
Accumulated |
|
|
Date |
|
Income is |
|
Description |
|
Encumbrances |
|
|
Land |
|
|
Buildings |
|
|
Acquisition
(a) |
|
|
Investments
(b) |
|
|
Land |
|
|
Buildings |
|
|
Total |
|
|
Depreciation
(c) |
|
|
Acquired |
|
Computed |
|
Real Estate Under Operating Leases: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail store in Torrance, CA |
|
$ |
27,630 |
|
|
$ |
13,060 |
|
|
$ |
6,934 |
|
|
$ |
204 |
|
|
$ |
|
|
|
$ |
13,060 |
|
|
$ |
7,138 |
|
|
$ |
20,198 |
|
|
$ |
2,189 |
|
|
Jul. 1998 |
|
40 yrs. |
Industrial facility in San Clemente, CA |
|
|
|
|
|
|
2,390 |
|
|
|
|
|
|
|
8,958 |
|
|
|
53 |
|
|
|
2,390 |
|
|
|
9,011 |
|
|
|
11,401 |
|
|
|
2,529 |
|
|
Jul. 1998 |
|
40 yrs. |
Industrial facility in Pittsburgh, PA |
|
|
5,777 |
|
|
|
620 |
|
|
|
6,186 |
|
|
|
|
|
|
|
|
|
|
|
620 |
|
|
|
6,186 |
|
|
|
6,806 |
|
|
|
1,862 |
|
|
Dec. 1998 |
|
40 yrs. |
Industrial and warehouse facilities in Burbank, CA and Las Vegas, NV |
|
|
6,452 |
|
|
|
3,860 |
|
|
|
8,263 |
|
|
|
|
|
|
|
2 |
|
|
|
3,860 |
|
|
|
8,265 |
|
|
|
12,125 |
|
|
|
2,406 |
|
|
Mar. 1999, Oct. 1999 |
|
40 yrs. |
Warehouse/distribution facilities in Harrisburg, NC; Atlanta, GA; Cincinnati, OH and Elkwood, VA |
|
|
11,811 |
|
|
|
3,930 |
|
|
|
10,398 |
|
|
|
8,476 |
|
|
|
9 |
|
|
|
3,945 |
|
|
|
18,868 |
|
|
|
22,813 |
|
|
|
4,661 |
|
|
Jun. 1999, Dec. 2001 |
|
40 yrs. |
Warehouse/distribution facilities in Burlington, NJ; Shawnee, KS and Manassas, VA |
|
|
20,003 |
|
|
|
3,604 |
|
|
|
8,613 |
|
|
|
23,709 |
|
|
|
|
|
|
|
4,476 |
|
|
|
31,450 |
|
|
|
35,926 |
|
|
|
8,999 |
|
|
Aug. 1999 |
|
40 yrs. |
Land in Midlothian, VA |
|
|
2,411 |
|
|
|
3,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,515 |
|
|
|
|
|
|
|
3,515 |
|
|
|
|
|
|
Sep. 1999 |
|
N/A |
Office facility in Columbia, MD |
|
|
|
|
|
|
2,623 |
|
|
|
20,233 |
|
|
|
3,113 |
|
|
|
|
|
|
|
2,623 |
|
|
|
23,346 |
|
|
|
25,969 |
|
|
|
6,365 |
|
|
Nov. 1999 |
|
40 yrs. |
Industrial facilities in Murrysville, PA and Wylie, TX |
|
|
12,521 |
|
|
|
1,596 |
|
|
|
23,910 |
|
|
|
875 |
|
|
|
(214 |
) |
|
|
2,059 |
|
|
|
24,108 |
|
|
|
26,167 |
|
|
|
5,704 |
|
|
Nov. 1999, Dec. 2001 |
|
40 yrs. |
Sports facilities in Salt Lake City, UT and St. Charles, MO |
|
|
6,217 |
|
|
|
2,920 |
|
|
|
8,660 |
|
|
|
863 |
|
|
|
|
|
|
|
2,920 |
|
|
|
9,523 |
|
|
|
12,443 |
|
|
|
2,430 |
|
|
Dec. 1999, Dec. 2000 |
|
40 yrs. |
Warehouse/distribution facility in Rock Island, IL |
|
|
|
|
|
|
500 |
|
|
|
9,945 |
|
|
|
1,887 |
|
|
|
|
|
|
|
500 |
|
|
|
11,832 |
|
|
|
12,332 |
|
|
|
2,983 |
|
|
Feb. 2000 |
|
40 yrs. |
Industrial facility in North Amityville, NY |
|
|
9,237 |
|
|
|
2,932 |
|
|
|
16,398 |
|
|
|
18 |
|
|
|
(4,119 |
) |
|
|
1,482 |
|
|
|
13,747 |
|
|
|
15,229 |
|
|
|
3,737 |
|
|
Feb. 2000 |
|
40 yrs. |
Warehouse/distribution facilities in Monon, IN; Champlin, MN; Robbinsville, NJ; Radford, VA and North
Salt Lake City, UT |
|
|
14,468 |
|
|
|
4,580 |
|
|
|
24,844 |
|
|
|
114 |
|
|
|
|
|
|
|
4,580 |
|
|
|
24,958 |
|
|
|
29,538 |
|
|
|
6,622 |
|
|
May. 2000 |
|
40 yrs. |
Warehouse/distribution facility in Lakewood, NJ |
|
|
6,091 |
|
|
|
710 |
|
|
|
4,531 |
|
|
|
3,439 |
|
|
|
|
|
|
|
710 |
|
|
|
7,970 |
|
|
|
8,680 |
|
|
|
2,016 |
|
|
Jun. 2000 |
|
40 yrs. |
Retail facilities in Kennesaw, GA and Leawood, KS |
|
|
13,095 |
|
|
|
6,230 |
|
|
|
15,842 |
|
|
|
108 |
|
|
|
(357 |
) |
|
|
6,230 |
|
|
|
15,593 |
|
|
|
21,823 |
|
|
|
4,110 |
|
|
Jun. 2000 |
|
40 yrs. |
Land in Scottsdale, AZ |
|
|
12,734 |
|
|
|
14,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,600 |
|
|
|
|
|
|
|
14,600 |
|
|
|
|
|
|
Sep. 2000 |
|
N/A |
Industrial facility in Albuquerque, NM |
|
|
4,975 |
|
|
|
1,490 |
|
|
|
4,636 |
|
|
|
7 |
|
|
|
|
|
|
|
1,490 |
|
|
|
4,643 |
|
|
|
6,133 |
|
|
|
1,195 |
|
|
Sep. 2000 |
|
40 yrs. |
Office facility in Houston, TX |
|
|
4,458 |
|
|
|
570 |
|
|
|
6,760 |
|
|
|
|
|
|
|
|
|
|
|
570 |
|
|
|
6,760 |
|
|
|
7,330 |
|
|
|
1,739 |
|
|
Sep. 2000 |
|
40 yrs. |
Warehouse/distribution facilities in Valdosta, GA and Johnson City, TN |
|
|
|
|
|
|
650 |
|
|
|
16,889 |
|
|
|
410 |
|
|
|
|
|
|
|
650 |
|
|
|
17,299 |
|
|
|
17,949 |
|
|
|
4,415 |
|
|
Oct. 2000 |
|
40 yrs. |
Land in Elk Grove Village, IL |
|
|
2,805 |
|
|
|
4,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,100 |
|
|
|
|
|
|
|
4,100 |
|
|
|
|
|
|
Oct. 2000 |
|
N/A |
Industrial facility in Salisbury, NC |
|
|
6,178 |
|
|
|
1,370 |
|
|
|
2,672 |
|
|
|
6,298 |
|
|
|
(51 |
) |
|
|
1,319 |
|
|
|
8,970 |
|
|
|
10,289 |
|
|
|
2,028 |
|
|
Nov. 2000 |
|
40 yrs. |
Office facility in Lafayette, LA |
|
|
2,137 |
|
|
|
660 |
|
|
|
3,005 |
|
|
|
|
|
|
|
|
|
|
|
660 |
|
|
|
3,005 |
|
|
|
3,665 |
|
|
|
754 |
|
|
Dec. 2000 |
|
40 yrs. |
Office facility in Collierville, TN |
|
|
54,000 |
|
|
|
3,154 |
|
|
|
70,646 |
|
|
|
12 |
|
|
|
|
|
|
|
3,154 |
|
|
|
70,658 |
|
|
|
73,812 |
|
|
|
30,104 |
|
|
Dec. 2000 |
|
7 - 40 yrs. |
Multiplex motion picture theater in Port St. Lucie and Pensacola, FL |
|
|
8,306 |
|
|
|
3,200 |
|
|
|
3,066 |
|
|
|
6,800 |
|
|
|
(4,112 |
) |
|
|
3,685 |
|
|
|
5,269 |
|
|
|
8,954 |
|
|
|
1,254 |
|
|
Dec. 2000 |
|
40 yrs. |
Retail and warehouse/distribution facilities in York, PA |
|
|
9,280 |
|
|
|
1,974 |
|
|
|
10,068 |
|
|
|
8,433 |
|
|
|
(5,456 |
) |
|
|
849 |
|
|
|
14,170 |
|
|
|
15,019 |
|
|
|
2,119 |
|
|
Dec. 2000 |
|
40 yrs. |
Office facilities in Lindon, UT |
|
|
|
|
|
|
1,390 |
|
|
|
1,123 |
|
|
|
8,081 |
|
|
|
(428 |
) |
|
|
1,851 |
|
|
|
8,315 |
|
|
|
10,166 |
|
|
|
2,810 |
|
|
Dec. 2000 |
|
40 yrs. |
Office facility in Houston, TX |
|
|
3,423 |
|
|
|
1,025 |
|
|
|
4,530 |
|
|
|
764 |
|
|
|
|
|
|
|
1,025 |
|
|
|
5,294 |
|
|
|
6,319 |
|
|
|
1,220 |
|
|
Dec. 2000 |
|
40 yrs. |
Industrial facility in Doncaster, United Kingdom |
|
|
5,078 |
|
|
|
|
|
|
|
8,383 |
|
|
|
7 |
|
|
|
2,116 |
|
|
|
|
|
|
|
10,506 |
|
|
|
10,506 |
|
|
|
890 |
|
|
Jan. 2001 |
|
21.7 yrs. |
Industrial and office facilities in Elgin, IL; Bozeman, MT and Nashville, TN |
|
|
10,700 |
|
|
|
3,900 |
|
|
|
17,937 |
|
|
|
166 |
|
|
|
(546 |
) |
|
|
3,900 |
|
|
|
17,557 |
|
|
|
21,457 |
|
|
|
4,288 |
|
|
Mar. 2001 |
|
40 yrs. |
Warehouse/distribution facility in Duluth, GA |
|
|
7,141 |
|
|
|
2,167 |
|
|
|
11,446 |
|
|
|
5 |
|
|
|
(5,407 |
) |
|
|
1,105 |
|
|
|
7,106 |
|
|
|
8,211 |
|
|
|
2,697 |
|
|
Mar. 2001 |
|
40 yrs. |
Industrial facilities in City of Industry, CA; Florence, KY; Chelmsford, MA and Lancaster, TX |
|
|
9,338 |
|
|
|
4,398 |
|
|
|
13,418 |
|
|
|
3,745 |
|
|
|
24 |
|
|
|
4,643 |
|
|
|
16,942 |
|
|
|
21,585 |
|
|
|
3,924 |
|
|
Apr. 2001 |
|
7 - 40 yrs. |
Industrial facility in Mesa, AZ |
|
|
17,250 |
|
|
|
4,000 |
|
|
|
14,951 |
|
|
|
10,147 |
|
|
|
(22,597 |
) |
|
|
1,618 |
|
|
|
4,883 |
|
|
|
6,501 |
|
|
|
963 |
|
|
Jun. 2001, Dec. 2006 |
|
34.5 yrs. |
CPA®:14 2010 10-K 83
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION
at December 31, 2010
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life on which |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Latest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs Capitalized |
|
|
Increase |
|
|
Gross Amount at which Carried |
|
|
|
|
|
|
|
|
|
|
Statement of |
|
|
|
|
|
|
|
Initial Cost to Company |
|
|
Subsequent to |
|
|
(Decrease) in Net |
|
|
at Close
of Period (c) |
|
|
Accumulated |
|
|
Date |
|
Income is |
|
Description |
|
Encumbrances |
|
|
Land |
|
|
Buildings |
|
|
Acquisition
(a) |
|
|
Investments
(b) |
|
|
Land |
|
|
Buildings |
|
|
Total |
|
|
Depreciation
(c) |
|
|
Acquired |
|
Computed |
|
Real Estate Under Operating Leases (Continued): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial facilities in South Windsor and Manchester, CT |
|
|
11,265 |
|
|
|
1,555 |
|
|
|
18,823 |
|
|
|
250 |
|
|
|
27 |
|
|
|
1,555 |
|
|
|
19,100 |
|
|
|
20,655 |
|
|
|
4,505 |
|
|
Jul. 2001 |
|
40 yrs. |
Industrial and office facilities in Rome, GA; Niles, IL; Plymouth, MI and Twinsburg, OH |
|
|
14,884 |
|
|
|
4,140 |
|
|
|
23,822 |
|
|
|
1,373 |
|
|
|
(8,370 |
) |
|
|
2,959 |
|
|
|
18,006 |
|
|
|
20,965 |
|
|
|
5,799 |
|
|
Aug. 2001 |
|
40 yrs. |
Industrial facility in Milford, OH |
|
|
|
|
|
|
2,000 |
|
|
|
12,869 |
|
|
|
|
|
|
|
|
|
|
|
2,000 |
|
|
|
12,869 |
|
|
|
14,869 |
|
|
|
2,989 |
|
|
Sep. 2001 |
|
40 yrs. |
Retail facilities in several cities in the following states: Arizona, California, Florida, Illinois, Massachusetts, Maryland, Michigan
and Texas |
|
|
37,404 |
|
|
|
17,100 |
|
|
|
54,743 |
|
|
|
|
|
|
|
(2,747 |
) |
|
|
16,100 |
|
|
|
52,996 |
|
|
|
69,096 |
|
|
|
12,090 |
|
|
Nov. 2001 |
|
40 yrs. |
Office facility in Turku, Finland |
|
|
43,009 |
|
|
|
801 |
|
|
|
23,390 |
|
|
|
12,291 |
|
|
|
10,661 |
|
|
|
1,677 |
|
|
|
45,466 |
|
|
|
47,143 |
|
|
|
9,167 |
|
|
Dec. 2001, Dec. 2007 |
|
25-40 yrs. |
Educational facilities in Union, NJ; Allentown and Philadelphia, PA and Grand Prairie, TX |
|
|
5,235 |
|
|
|
2,486 |
|
|
|
7,602 |
|
|
|
|
|
|
|
3 |
|
|
|
2,486 |
|
|
|
7,605 |
|
|
|
10,091 |
|
|
|
1,719 |
|
|
Dec. 2001 |
|
40 yrs. |
Warehouse/distribution, office and industrial facilities in Perris, CA; Eugene, OR; West Jordan, UT and Tacoma, WA |
|
|
6,084 |
|
|
|
6,050 |
|
|
|
8,198 |
|
|
|
|
|
|
|
(1,845 |
) |
|
|
4,200 |
|
|
|
8,203 |
|
|
|
12,403 |
|
|
|
1,820 |
|
|
Feb. 2002 |
|
40 yrs. |
Warehouse/distribution facilities in Charlotte and Lincolnton, NC and Mauldin, SC |
|
|
8,012 |
|
|
|
1,860 |
|
|
|
12,852 |
|
|
|
|
|
|
|
1 |
|
|
|
1,860 |
|
|
|
12,853 |
|
|
|
14,713 |
|
|
|
2,827 |
|
|
Mar. 2002 |
|
40 yrs. |
Warehouse/distribution facilities in Boe, Carpiquet, Mans, Vendin Le Vieil, Lieusaint, Lagnieu, Luneville and St. Germain de Puy,
France |
|
|
81,127 |
|
|
|
15,724 |
|
|
|
75,211 |
|
|
|
13,755 |
|
|
|
41,780 |
|
|
|
24,665 |
|
|
|
121,805 |
|
|
|
146,470 |
|
|
|
26,250 |
|
|
Mar. 2002 |
|
40 yrs. |
Warehouse/distribution and office facilities in Davenport, IA and Bloomington, MN |
|
|
17,159 |
|
|
|
3,260 |
|
|
|
26,009 |
|
|
|
|
|
|
|
|
|
|
|
3,260 |
|
|
|
26,009 |
|
|
|
29,269 |
|
|
|
5,500 |
|
|
Jul. 2002 |
|
40 yrs. |
Industrial facility in Gorinchem, Netherlands |
|
|
5,872 |
|
|
|
2,374 |
|
|
|
3,864 |
|
|
|
|
|
|
|
2,023 |
|
|
|
3,181 |
|
|
|
5,080 |
|
|
|
8,261 |
|
|
|
1,079 |
|
|
Jul. 2002 |
|
|
|
|
Industrial facilities in Kendallville, IN; Clinton Township, MI and Upper Sandusky, OH |
|
|
10,543 |
|
|
|
4,390 |
|
|
|
30,336 |
|
|
|
|
|
|
|
(7,179 |
) |
|
|
3,550 |
|
|
|
23,997 |
|
|
|
27,547 |
|
|
|
5,224 |
|
|
Aug. 2002 |
|
40 yrs. |
Retail facilities in Fairfax, VA and Lombard, IL |
|
|
11,816 |
|
|
|
13,226 |
|
|
|
18,248 |
|
|
|
|
|
|
|
(1,018 |
) |
|
|
13,226 |
|
|
|
17,230 |
|
|
|
30,456 |
|
|
|
2,095 |
|
|
Dec. 2006 |
|
33.6 yrs. |
Retail facility in South Tulsa, OK |
|
|
5,000 |
|
|
|
1,649 |
|
|
|
3,425 |
|
|
|
225 |
|
|
|
|
|
|
|
1,649 |
|
|
|
3,650 |
|
|
|
5,299 |
|
|
|
469 |
|
|
Dec. 2006 |
|
30 yrs. |
Retail and warehouse/distribution facilities in Johnstown and Whitehall, PA |
|
|
5,000 |
|
|
|
2,115 |
|
|
|
15,945 |
|
|
|
|
|
|
|
(609 |
) |
|
|
2,115 |
|
|
|
15,336 |
|
|
|
17,451 |
|
|
|
2,066 |
|
|
Dec. 2006 |
|
30.3 yrs. |
Warehouse/distribution facility in Dallas, TX |
|
|
6,516 |
|
|
|
323 |
|
|
|
6,784 |
|
|
|
|
|
|
|
|
|
|
|
323 |
|
|
|
6,784 |
|
|
|
7,107 |
|
|
|
820 |
|
|
Dec. 2006 |
|
30.8 yrs. |
Industrial facility in Shelburne, VT |
|
|
1,689 |
|
|
|
955 |
|
|
|
2,919 |
|
|
|
|
|
|
|
|
|
|
|
955 |
|
|
|
2,919 |
|
|
|
3,874 |
|
|
|
390 |
|
|
Dec. 2006 |
|
30.6 yrs. |
Industrial facilities in Fort Dodge, IN and Oconomowoc, WI |
|
|
6,098 |
|
|
|
1,218 |
|
|
|
11,879 |
|
|
|
2,514 |
|
|
|
|
|
|
|
1,218 |
|
|
|
14,393 |
|
|
|
15,611 |
|
|
|
2,263 |
|
|
Dec. 2006 |
|
23.5 yrs. |
Industrial facility in Aurora, IL |
|
|
|
|
|
|
2,730 |
|
|
|
10,391 |
|
|
|
|
|
|
|
|
|
|
|
2,730 |
|
|
|
10,391 |
|
|
|
13,121 |
|
|
|
1,376 |
|
|
Dec. 2006 |
|
30.8 yrs. |
Industrial facility in Houston, TX |
|
|
|
|
|
|
2,299 |
|
|
|
4,722 |
|
|
|
|
|
|
|
|
|
|
|
2,299 |
|
|
|
4,722 |
|
|
|
7,021 |
|
|
|
1,181 |
|
|
Dec. 2006 |
|
16.3 yrs. |
Industrial, warehouse/distribution and office facilities in Waterloo, WI |
|
|
|
|
|
|
922 |
|
|
|
16,824 |
|
|
|
|
|
|
|
(642 |
) |
|
|
922 |
|
|
|
16,182 |
|
|
|
17,104 |
|
|
|
3,250 |
|
|
Dec. 2006 |
|
20.3 yrs. |
Industrial and warehouse/distribution facilities in Westfield, MA |
|
|
6,361 |
|
|
|
1,106 |
|
|
|
9,952 |
|
|
|
|
|
|
|
|
|
|
|
1,106 |
|
|
|
9,952 |
|
|
|
11,058 |
|
|
|
1,173 |
|
|
Dec. 2006 |
|
34.7 yrs. |
Industrial facility in Richmond, MO |
|
|
5,528 |
|
|
|
530 |
|
|
|
6,505 |
|
|
|
|
|
|
|
|
|
|
|
530 |
|
|
|
6,505 |
|
|
|
7,035 |
|
|
|
763 |
|
|
Dec. 2006 |
|
34.8 yrs. |
Retail facilities in Bourne, Sandwich and Chelmsford, MA |
|
|
1,379 |
|
|
|
1,418 |
|
|
|
2,157 |
|
|
|
|
|
|
|
|
|
|
|
1,418 |
|
|
|
2,157 |
|
|
|
3,575 |
|
|
|
283 |
|
|
Dec. 2006 |
|
31.1 yrs. |
Industrial facility in Carlsbad, CA |
|
|
|
|
|
|
2,618 |
|
|
|
4,880 |
|
|
|
|
|
|
|
|
|
|
|
2,618 |
|
|
|
4,880 |
|
|
|
7,498 |
|
|
|
646 |
|
|
Dec. 2006 |
|
30.8 yrs. |
Fitness and recreational facility in Houston, TX |
|
|
3,652 |
|
|
|
1,613 |
|
|
|
3,398 |
|
|
|
|
|
|
|
|
|
|
|
1,613 |
|
|
|
3,398 |
|
|
|
5,011 |
|
|
|
468 |
|
|
Dec. 2006 |
|
29.7 yrs. |
CPA®:14 2010 10-K 84
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION
at December 31, 2010
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life on which |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Latest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs Capitalized |
|
|
Increase |
|
|
Gross Amount at which Carried |
|
|
|
|
|
|
|
|
|
|
Statement of |
|
|
|
|
|
|
|
Initial Cost to Company |
|
|
Subsequent to |
|
|
(Decrease) in Net |
|
|
at Close
of Period (c) |
|
|
Accumulated |
|
|
Date |
|
Income is |
|
Description |
|
Encumbrances |
|
|
Land |
|
|
Buildings |
|
|
Acquisition
(a) |
|
|
Investments
(b) |
|
|
Land |
|
|
Buildings |
|
|
Total |
|
|
Depreciation
(c) |
|
|
Acquired |
|
Computed |
|
Real Estate Under Operating Leases (Continued): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theater in Hickory Creek, TX |
|
|
3,697 |
|
|
|
3,138 |
|
|
|
6,752 |
|
|
|
|
|
|
|
|
|
|
|
3,138 |
|
|
|
6,752 |
|
|
|
9,890 |
|
|
|
811 |
|
|
Dec. 2006 |
|
34 yrs. |
Educational facilities in Chandler, AZ; Fleming Island, FL; Ackworth, GA; Hauppauge and
Patchogue, NY; Sugar Land, TX; Hampton, VA and Silverdale, WA |
|
|
5,778 |
|
|
|
4,312 |
|
|
|
9,963 |
|
|
|
|
|
|
|
(380 |
) |
|
|
4,312 |
|
|
|
9,583 |
|
|
|
13,895 |
|
|
|
1,325 |
|
|
Dec. 2006 |
|
29.6 yrs. |
Industrial facility in Indianapolis, IN |
|
|
1,773 |
|
|
|
1,035 |
|
|
|
6,594 |
|
|
|
|
|
|
|
|
|
|
|
1,035 |
|
|
|
6,594 |
|
|
|
7,629 |
|
|
|
913 |
|
|
Dec. 2006 |
|
29.5 yrs. |
Warehouse/distribution facilities in Greenville, SC |
|
|
4,557 |
|
|
|
625 |
|
|
|
8,178 |
|
|
|
|
|
|
|
|
|
|
|
625 |
|
|
|
8,178 |
|
|
|
8,803 |
|
|
|
1,200 |
|
|
Dec. 2006 |
|
27.8 yrs. |
Industrial and office facilities in San Diego, CA |
|
|
35,197 |
|
|
|
7,247 |
|
|
|
29,098 |
|
|
|
313 |
|
|
|
|
|
|
|
7,247 |
|
|
|
29,411 |
|
|
|
36,658 |
|
|
|
4,350 |
|
|
Dec. 2006 |
|
40 yrs. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
638,151 |
|
|
$ |
212,537 |
|
|
$ |
830,620 |
|
|
$ |
127,360 |
|
|
$ |
(9,378 |
) |
|
$ |
214,761 |
|
|
$ |
946,378 |
|
|
$ |
1,161,139 |
|
|
$ |
221,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amount at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs Capitalized |
|
|
Increase |
|
|
which Carried |
|
|
|
|
|
|
|
|
|
|
Initial Cost to Company |
|
|
Subsequent to |
|
|
(Decrease) in Net |
|
|
at Close of |
|
|
Date |
|
Description |
|
Encumbrances |
|
|
Land |
|
|
Buildings |
|
|
Acquisition
(a) |
|
|
Investments
(b) |
|
|
Period Total |
|
|
Acquired |
|
Direct Financing Method: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial facility in Dallas, TX |
|
$ |
|
|
|
$ |
460 |
|
|
$ |
20,427 |
|
|
$ |
|
|
|
$ |
(8,401 |
) |
|
$ |
12,486 |
|
|
Nov. 1999 |
Multiplex theater facility in Midlothian, VA |
|
|
8,623 |
|
|
|
|
|
|
|
10,819 |
|
|
|
854 |
|
|
|
897 |
|
|
|
12,570 |
|
|
Sep. 1999 |
Office facility in Scottsdale, AZ |
|
|
22,267 |
|
|
|
|
|
|
|
25,415 |
|
|
|
115 |
|
|
|
|
|
|
|
25,530 |
|
|
Sep. 2000 |
Warehouse/distribution facility in Elk Grove Village, IL |
|
|
1,461 |
|
|
|
|
|
|
|
4,172 |
|
|
|
4 |
|
|
|
(2,040 |
) |
|
|
2,136 |
|
|
Oct. 2000 |
Multiplex motion picture theater in Pensacola, FL |
|
|
6,771 |
|
|
|
|
|
|
|
4,112 |
|
|
|
2,542 |
|
|
|
|
|
|
|
6,654 |
|
|
Dec. 2000 |
Industrial and manufacturing facilities in Old Fort and Albemarie, NC; Holmesville, OH and Springfield, TN |
|
|
6,860 |
|
|
|
2,961 |
|
|
|
24,474 |
|
|
|
19 |
|
|
|
(9,759 |
) |
|
|
17,695 |
|
|
Sep. 2001 |
Educational facility in Mooresville, NC |
|
|
5,131 |
|
|
|
1,600 |
|
|
|
9,276 |
|
|
|
130 |
|
|
|
(524 |
) |
|
|
10,482 |
|
|
Feb. 2002 |
Industrial facility in Ashburn Junction, VA |
|
|
|
|
|
|
4,683 |
|
|
|
15,116 |
|
|
|
|
|
|
|
|
|
|
|
19,799 |
|
|
Dec. 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
51,113 |
|
|
$ |
9,704 |
|
|
$ |
113,811 |
|
|
$ |
3,664 |
|
|
$ |
(19,827 |
) |
|
$ |
107,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPA®:14 2010 10-K 85
NOTES to SCHEDULE III REAL ESTATE and ACCUMULATED DEPRECIATION
(in thousands)
|
|
|
(a) |
|
Consists of the costs of improvements subsequent to purchase and acquisition costs, including
legal fees, appraisal fees, title costs and other related professional fees. |
|
(b) |
|
The increase (decrease) in net investment was primarily due to (i) the amortization of
unearned income from net investment in direct financing leases, which produces a periodic rate
of return that at times may be greater or less than lease payments received, (ii) sales of
properties, (iii) impairment charges, (iv) changes in foreign currency exchange rates and (v)
adjustments in connection with purchasing certain minority interests. |
|
(c) |
|
Reconciliation of real estate and accumulated depreciation (see below): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Real Estate Subject to |
|
|
|
Operating Leases |
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Balance at beginning of year |
|
$ |
1,255,966 |
|
|
$ |
1,275,775 |
|
|
$ |
1,301,505 |
|
Additions |
|
|
839 |
|
|
|
2,921 |
|
|
|
527 |
|
Dispositions |
|
|
(38,610 |
) |
|
|
(23,473 |
) |
|
|
(16,799 |
) |
Reclassification from equity investment, direct financing lease
or funds held in escrow |
|
|
|
|
|
|
45,734 |
|
|
|
|
|
Reclassification to assets held for sale |
|
|
(22,598 |
) |
|
|
(11,421 |
) |
|
|
|
|
Deconsolidation of real estate asset |
|
|
(10,320 |
) |
|
|
|
|
|
|
|
|
Impairment charges |
|
|
(7,922 |
) |
|
|
(37,779 |
) |
|
|
|
|
Foreign currency translation adjustment |
|
|
(16,216 |
) |
|
|
4,209 |
|
|
|
(9,458 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at close of year |
|
$ |
1,161,139 |
|
|
$ |
1,255,966 |
|
|
$ |
1,275,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Accumulated Depreciation |
|
|
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Balance at beginning of year |
|
$ |
215,967 |
|
|
$ |
188,739 |
|
|
$ |
162,374 |
|
Depreciation expense |
|
|
26,774 |
|
|
|
29,614 |
|
|
|
29,527 |
|
Dispositions |
|
|
(11,006 |
) |
|
|
(2,438 |
) |
|
|
(1,883 |
) |
Reclassification from equity investment |
|
|
|
|
|
|
2,217 |
|
|
|
|
|
Reclassification to assets held for sale |
|
|
(3,685 |
) |
|
|
(2,771 |
) |
|
|
|
|
Deconsolidation of real estate asset |
|
|
(3,693 |
) |
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(2,533 |
) |
|
|
606 |
|
|
|
(1,279 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at close of year |
|
$ |
221,824 |
|
|
$ |
215,967 |
|
|
$ |
188,739 |
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, the aggregate cost of real estate, net of accumulated depreciation and
accounted for as operating leases, owned by us and our consolidated subsidiaries for U.S. federal
income tax purposes was $849.3 million.
CPA®:14 2010 10-K 86
|
|
|
Item 9. |
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
|
|
|
Item 9A. |
|
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, as amended (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 chief financial officer, to allow timely decisions regarding required
disclosures.
Our chief executive officer and chief financial officer, after conducting an evaluation, together
with members of our management, of the effectiveness of the design and operation of our disclosure
controls and procedures as of December 31, 2010, have concluded that our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective as of December 31,
2010 at a reasonable level of assurance.
Managements Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial
reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act). Internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in
accordance with U.S. GAAP.
Our internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with U.S.
GAAP, and that our receipts and expenditures are being made only in accordance with authorizations
of our management and directors; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of our assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with policies or procedures may deteriorate.
We assessed the effectiveness of our internal control over financial reporting at December 31,
2010. In making this assessment, we used criteria set forth in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on our assessment, we concluded that, at December 31, 2010, our internal control over
financial reporting is effective based on those criteria.
This Annual Report does not include an attestation report of our independent registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by our independent registered public accounting firm pursuant to temporary
rules of the SEC that permit us to provide only managements report in this Annual Report.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during our most
recently completed fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
|
|
|
Item 9B. |
|
Other Information. |
None.
CPA®:14 2010 10-K 87
PART III
|
|
|
Item 10. |
|
Directors, Executive Officers and Corporate Governance. |
Names of Directors and Biographical Information
The names of our directors, their ages and certain other information about them are set forth
below:
|
|
|
|
|
|
|
Name |
|
Age |
|
|
Office |
|
|
|
|
|
|
|
Wm. Polk Carey
|
|
|
80 |
|
|
Chairman of the Board |
|
|
|
|
|
|
|
James D. Price
|
|
|
72 |
|
|
Director* |
|
|
|
|
|
|
|
Marshall E. Blume
|
|
|
69 |
|
|
Director* |
Wm. Polk Carey
Director since: 1997
Mr. Carey serves as Chairman of our board of directors. Mr. Carey has also served as a director and
Chairman of CPA®:15 since 2001, CPA®:16 Global since 2003,
CPA®:17 Global since October 2007 and WPC since 1996. Mr. Carey was also our Co-Chief
Executive Officer and that of CPA®:15 and CPA®:16 Global from 2002 through
March 2005. He also served as a director and Chairman of CPA®:12 from July 1993 to
December 2006. Mr. Carey has been active in lease financing since 1959 and a specialist in net
leasing of corporate real estate property since 1964. Before founding W. P. Carey & Co., Inc. in
1973, he served as Chairman of the Executive Committee of Hubbard, Westervelt & Mottelay
(subsequently Merrill Lynch Hubbard), head of Real Estate and Equipment Financing at Loeb, Rhoades
& Co., and Vice Chairman of the Investment Banking Board and director of Corporate Finance of
duPont Glore Forgan Inc. A graduate of the University of Pennsylvanias Wharton School, Mr. Carey
also received his Sc.D. honoris causa from Arizona State University, D.C.S. honoris causa from The
City University of New York and D.C.L. honoris causa from the University of the South. He is a
Trustee of The Johns Hopkins University and of other educational and philanthropic institutions. He
serves as Chairman and a Trustee of the W. P. Carey Foundation and has served as Chairman of the
Penn Institute for Economic Research. In the fall of 1999, Mr. Carey was Executive-in-Residence at
Harvard Business School. As founder and Chairman of WPC, our Chairman, Chairman of
CPA®:15, CPA®:16 Global and CPA®:17 Global and through a
long and distinguished record of business success and philanthropic activities, Mr. Carey brings to
the Board demonstrated leadership skills, business expertise and a commitment to community service
that we believe are important qualities of a director of our Company.
James D. Price
Director since: 2006
Mr. Price has served as an independent director and a member of the audit committee of our board of
directors since 2006 (Chairman of the committee since April 2008). He previously served as an
independent director on the audit committee from September 2005 to April 2006. He has also served
as an independent director and a member of the audit committees of CPA®:15 since June
2006 (Chairman of the committee from September 2007 to August 2009), CPA®:16 Global
from September 2005 to September 2007, and CPA®:17 Global since October 2007
(Chairman of the committee since August 2009). Mr. Price also served as an independent director of
CPA®:12 from September 2005 to December 2006. Mr. Price has over 37 years of real estate
experience in the U.S. and foreign markets, including significant experience in structuring
mortgage loans, leveraged leases, credit leases and securitizations involving commercial and
industrial real estate. He is the President of Price & Marshall, Inc., a corporate equipment and
real estate financing boutique which he founded in 1993. From March 1990 to October 1993, he worked
at Bear Stearns & Co., Inc., where he structured and negotiated securitizations of commercial
mortgages and corporate financings of real and personal property. From March 1985 to March 1990, he
served as a Managing Director at Drexel Burnham Lambert Incorporated and as an Executive Vice
President at DBL Realty, its real estate division. He also served in various capacities at Merrill
Lynch & Co., including serving as manager of the Private Placement Department from 1970 to 1980, as
a founder of Merrill Lynch Leasing, Inc. in 1976 and as Chairman of the Merrill Lynch Leasing, Inc.
Investment Committee from 1976 to 1982. He currently serves on the Boards of Pier 1 Funding Corp.
and Manuco Corp., a subsidiary of The Kroger Co., owning food processing companies. He is also on
the Board of Advisors of the Harry Ransom Center at the University of Texas in Austin. Mr. Price
received his B.A. from Syracuse University and his M.B.A. from Columbia University. Mr. Prices
qualifications for election to our Board include his extensive experience in the commercial real
estate business in the U.S. and foreign markets.
CPA®:14 2010 10-K 88
Marshall E. Blume
Director since: 2007
Mr. Blume serves as an independent director and as a member of the audit committee of our board of
directors. Mr. Blume has also served as an independent director and a member of the audit
committees of CPA®:15 from April 2007 to June 2009, CPA®:16 Global from
June 2009 to July 2010 (having previously served in those capacities from April 2007 to April
2008), and CPA®:17 Global since June 2008. Mr. Blume is the Howard Butcher III
Professor of Financial Management at the Wharton School of the University of Pennsylvania and
director of the Rodney L. White Center for Financial Research, also at the Wharton School. Mr.
Blume has been associated with the Wharton School since 1967. Mr. Blume has also been a partner in
Prudent Management Associates, a registered investment advisory firm, since 1982, and Chairman and
President of Marshall E. Blume, Inc., a consulting firm, for over 25 years. He is an Associate
Editor of the Journal of Fixed Income and the Journal of Portfolio Management. He is currently a
member of the Board of Managers of the Measey Foundation, which is dedicated to the support of
medical education in the Philadelphia area. He is a member of the Finance Committee of the Rosemont
School of the Holy Child, the Shadow Financial Regulatory Committee and the Financial Economist
Roundtable. Mr. Blume is a former trustee of Trinity College (Hartford) and the Rosemont School.
Mr. Blume received his S.B. from Trinity College, and both his M.B.A. and Ph.D. from the University
of Chicago. Mr. Blumes qualifications for election to our Board include his distinguished academic
career at a leading educational institution, his expertise in the field of economics and finance
and his involvement in several charitable and industry organizations.
Names of Executive Officers and Biographical Information
We are externally managed and advised by the advisor. All of our current executive officers are
employees of WPC or one or more of its affiliates. The names of our executive officers, their ages
and certain other information about them are set forth below:
|
|
|
|
|
|
|
Name |
|
Age |
|
|
Office |
|
|
|
|
|
|
|
Trevor P. Bond
|
|
|
49 |
|
|
Chief Executive Officer |
|
|
|
|
|
|
|
Gino M. Sabatini
|
|
|
42 |
|
|
President |
|
|
|
|
|
|
|
Mark J. DeCesaris
|
|
|
51 |
|
|
Chief Financial Officer and Managing Director |
|
|
|
|
|
|
|
John D. Miller
|
|
|
65 |
|
|
Chief Investment Officer |
|
|
|
|
|
|
|
Thomas E. Zacharias
|
|
|
57 |
|
|
Chief Operating Officer and Managing Director |
Trevor P. Bond
Mr. Bond has served as our Chief Executive Officer since September 2010, having served as interim
Chief Executive Officer since July 2010. He has also served in the same capacity with WPC,
CPA®:15, CPA®:16 Global and CPA®:17 Global since September
2010 after serving as interim Chief Executive Officer since July 2010. Mr. Bond serves as a
director of WPC and served as our director and a member of our audit committee, as well as a
director and a member of the audit committees of CPA®:15 and CPA®:16
Global, from 2005 to April 2007. Until his appointment as interim Chief Executive Officer of WPC,
Mr. Bond was a member of the Investment Committee of Carey Asset Management Corp. (CAM), which
reviews investments on our behalf and on behalf of the other CPA® REITs. Mr. Bond has
been the managing member of a private investment vehicle investing in real estate limited
partnerships, Maidstone Investment Co., LLC, since 2002. He served in several management capacities
for Credit Suisse First Boston, which is referred to in this Report as CSFB, from 1992 to 2002,
including: Co-founder of CSFBs Real Estate Equity Group, which managed approximately $3 billion of
real estate assets; founding team member of Praedium Recovery Fund, a $100 million fund managing
distressed real estate and mortgage debt; and as a member of the Principal Transactions Group
managing $100 million of distressed mortgage debt. Prior to CSFB, Mr. Bond served as an associate
to the real estate and finance departments of Tishman Realty & Construction Co. and Goldman, Sachs
& Co. in New York. Mr. Bond also founded and managed an international trading company from 1985 to
1987 that sourced industrial products in China for U.S. manufacturers. Mr. Bond has over 25 years
of real estate experience in several sectors, including finance, development, investment and asset
management, across a range of property types, as well as direct experience in Asia. Mr. Bond
received an M.B.A. from Harvard University.
CPA®:14 2010 10-K 89
Gino M. Sabatini
Mr. Sabatini joined WPC in June 2000 as Second Vice President, was promoted to Vice President in
2002, director in 2004, Executive Director in 2007 and Managing Director in 2009. Mr. Sabatini has
served as our President since January 2010. Prior to joining the firm, he operated a theme
restaurant as well as a packaged food manufacturing and distribution business. Mr. Sabatini
graduated in 1991 from the University of Pennsylvania where he was enrolled in the Management and
Technology program and he received a B.S. in Mechanical Engineering from the Engineering School and
a B.S. in Economics from the Wharton School. In 2000, he received an M.B.A. from Harvard Business
School.
Mark J. DeCesaris
Mr. DeCesaris has served as Chief Financial Officer for us and WPC, CPA®:15,
CPA®:16 Global and CPA®:17 Global since July 2010, having previously
served as Acting Chief Financial Officer since November 2005 (and in the case of CPA®:17
Global, since October 2007). He has also served as Chief Administrative Officer and Managing
Director for us, WPC, CPA®:15, and CPA®:16 Global since November 2005 and
for CPA®:17 Global since October 2007. Mr. DeCesaris had previously been a consultant
to WPCs Finance Department since May 2005. Prior to joining WPC, from 2003 to 2004 Mr. DeCesaris
was Executive Vice President for Southern Union Company, a natural gas energy company publicly
traded on the New York Stock Exchange, where his responsibilities included overseeing the
integration of acquisitions and developing and implementing a shared service organization to reduce
annual operating costs. From 1999 to 2003, he was Senior Vice President for Penn Millers Insurance
Company, a property and casualty insurance company where he served as President and Chief Operating
Officer of Penn Software, a subsidiary of Penn Millers Insurance. From 1994 to 1999, he was
President and Chief Executive Officer of System One Solutions, a business consulting firm that he
founded. Mr. DeCesaris is a licensed Certified Public Accountant and started his career with
Coopers & Lybrand in Philadelphia. He graduated from Kings College with a B.S. in Accounting and a
B.S. in Informational Technology. He currently serves as Vice Chairman of the Board of Trustees of
Kings College and as a member of the Board of Trustees of the Chilton Memorial Hospital
Foundation, and he is a member of the American Institute of Certified Public Accountants.
John D. Miller
Mr. Miller has served as our Chief Investment Officer since 2005. He has also served in the same
capacities with WPC, CPA®:15 and CPA®:16 Global since 2005 and with
CPA®:17 Global since October 2007. Mr. Miller joined WPC in 2004 as Vice Chairman of
CAM. Mr. Miller was a Co-founder of StarVest Partners, L.P., a technology oriented venture capital
fund. Mr. Miller continues to retain a Non-Managing Member interest in StarVest. From 1995 to 1998,
he served as President of Rothschild Ventures Inc., the private investment unit of Rothschild North
America. Prior to joining Rothschild in 1995, he held positions at two private equity firms, Credit
Suisse First Bostons Clipper group and Starplough Inc., an affiliate of Rosecliff. Mr. Miller
previously served in investment positions at the Equitable Capital Management Corporation,
including serving as President, Chief Executive Officer, and head of its corporate finance
department. He currently serves on the Board of Circle Entertainment Inc. and Function (X), Inc. He
received his B.S. from the University of Utah and an M.B.A. from the University of Santa Clara.
Thomas E. Zacharias
Mr. Zacharias has served as our Chief Operating Officer and Managing Director since 2005. He has
also served in the same capacities with WPC and CPA®:15 since 2005 and with
CPA®:17 Global since October 2007. Mr. Zacharias joined WPC in 2002, is head of the
Asset Management Department and has served as President of CPA®:16 Global since 2003.
Mr. Zacharias previously served as an independent director of our board from 1997 to 2001 and of
CPA®:15 in 2001. Prior to joining WPC, Mr. Zacharias was a Senior Vice President of
MetroNexus North America, a Morgan Stanley Real Estate Funds Enterprise. Prior to joining
MetroNexus in 2000, Mr. Zacharias was a Principal at Lend Lease Development U.S., a subsidiary of
Lend Lease Corporation, a global real estate investment management company. Between 1981 and 1998,
Mr. Zacharias was a senior officer at Corporate Property Investors, which at the time of its merger
into Simon Property Group in 1998 was one of the largest private equity REITs in the U.S. Mr.
Zacharias received his undergraduate degree, magna cum laude, from Princeton University in 1976 and
a Masters in Business Administration from Yale School of Management in 1979. He is a member of the
Urban Land Institute, International Council of Shopping Centers and NAREIT, and served as a Trustee
of Groton School in Groton, Massachusetts between 2003 and 2007.
CPA®:14 2010 10-K 90
Family Relationships
There is no family relationship between any of our directors or executive officers.
Legal Proceedings
None of our directors or executive officers have been involved in any events enumerated under Item
401(f) of SEC Regulation S-K during the past five years that are material to an evaluation of the
ability or integrity of such persons to be our directors or executive officers.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires that directors, executive officers and persons who are
the beneficial owners of more than 10% of our shares file reports of their ownership and changes in
ownership of our shares with the SEC and to furnish us with copies of all such Section 16 reports
that they file. Based upon a review of the copies of such reports furnished to us as filed with the
SEC and other written representations that no other reports were required to be filed during the
year, we believe that our directors, executive officers and beneficial owners of 10% or more of our
shares were in compliance with the reporting requirements of Section 16(a) of the Exchange Act
during 2010.
Code of Ethics
Our board of directors has adopted a Code of Ethics which sets forth the standards of business
conduct and ethics applicable to all of our employees, including our executive officers and
directors. This code is available on the Companys website (www.cpa14.com) in the Corporate
Governance section. We also intend to post amendments to or waivers from the Code of Ethics at
this location on the website.
Recommendation of Nominees to Our Board of Directors
Information concerning our procedures by which stockholders may recommend nominees to our board of
directors is set forth in our proxy statement relating to our 2010 annual meeting of stockholders
under the heading Nominating Procedures. We have not made any material changes to these
procedures since they were last disclosed in our proxy statement.
Audit Committee and Audit Committee Financial Expert
Our board of directors has established a standing audit committee. The audit committee meets on a
regular basis at least quarterly and throughout the year as necessary. The audit committees
primary function is to assist the board of directors in monitoring the integrity of our financial
statements, the compliance with legal and regulatory requirements and independence qualifications
and performance of our internal audit function and independent registered public accounting firm,
all in accordance with the audit committees charter. The directors who serve on the audit
committee are all independent as defined in our bylaws and the New York Stock Exchange listing
standards and applicable rules of the SEC. The audit committee is currently comprised of Marshall
E. Blume and James D. Price (Chairman). Our board of directors has determined that Mr. Price, an
independent director, is a financial expert as defined in Item 407 of SEC Regulation S-K under
the Securities Act. Our board of directors has adopted a formal written charter for the audit
committee, which can be found on our website (www.cpa14.com) in the Corporate Governance section.
Boards Role in Risk Oversight and Its Leadership Structure
Recently, attention is being given to the subject of risk and how companies assess and manage risk.
Our advisor is charged with assessing and managing risks associated with our business on a
day-to-day basis. We rely on our advisors internal processes to identify, manage and mitigate
material risks and to communicate with our board of directors. The boards role is to oversee the
advisors execution of these responsibilities and to assess the advisors approach to risk
management on our behalf. The board exercises this role periodically as part of its regular
meetings and through meetings of its audit committee. The board and the audit committee receive
reports at their regular meetings from representatives of the advisor on areas of material risk to
us, including operational, financial, legal, regulatory, strategic and reputational risk, in order
to review and understand risk identification, risk management and risk mitigation strategies.
CPA®:14 2010 10-K 91
We maintain separate roles for our Chairman of the Board and Chief Executive Officer. We believe
this structure is currently in our best interest and the best interests of our stockholders. Both
Messrs. Carey and Bond, our Chairman of the board and Chief Executive Officer, respectively,
possess detailed and in-depth knowledge of the issues, opportunities and challenges facing us and
our businesses. We separate the roles of Chairman of the board and Chief Executive Officer in
recognition of the differences between the
two roles. Our Chief Executive Officer, who is also the Chief Executive Officer of the advisor, has
the general responsibility for implementing our policies and for the management of our business and
affairs, while our Chairman of the board presides over meetings of the full board and provides
critical thinking with respect to our strategy and performance. Our independent directors meet
regularly in executive session and maintain an open line of communication with our Chairman and our
Chief Executive Officer. Because our Chairman of the Board is not independent under the applicable
rules promulgated by the SEC, our board has appointed James D. Price as lead independent director.
Mr. Price is well suited to lead independent sessions of the board in this capacity based on his
extensive executive experience.
Our board believes that its current leadership structure separate roles for our Chairman of the
Board and Chief Executive Officer and a lead independent director provides effective corporate
governance at the board level and independent oversight of both our board and our advisor.
Board Meetings and Directors Attendance
There were four regular board meetings, seven additional board meetings, and seven audit committee
meetings held in 2010 and each director attended at least 75% of the aggregate audit committee
meetings and board meetings held while he or she was a director. Our board of directors does not
have standing nominating or compensation committees. Although there is no specific policy regarding
director attendance at meetings of stockholders, directors are invited and encouraged to attend.
All directors attended the annual meeting of stockholders held on June 9, 2010, except Mr. Blume.
|
|
|
Item 11. |
|
Executive Compensation. |
Compensation of Directors and Executive Officers FISCAL 2010
We have no employees. Day-to-day management functions are performed by our advisor. During 2010, we
did not pay any compensation to our executive officers. We have not paid, and do not intend to pay,
any annual compensation to our executive officers for their services as officers; however, we
reimburse our advisor for the services of its personnel, including those who serve as our officers
pursuant to the advisory agreement. Please see Item 13, Certain Relationships and Related
Transactions, and Director Independence for a description of the contractual arrangements between
us and the advisor.
We pay our directors who are not officers an annual cash retainer of $19,333, an additional annual
cash retainer of $6,000 for the Chairman of the audit committee, $1,000 for in-person attendance at
each regular quarterly board meeting, and an annual grant of $10,000 of shares of our common stock,
valued based upon our most recently published NAV. Wm. Polk Carey, the Chairman of the Board, did
not receive compensation for serving as a director.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or |
|
|
|
|
|
|
|
|
|
|
|
|
Paid in Cash |
|
|
Stock Awards |
|
|
All Other Compensation |
|
|
Total |
|
Director |
|
($) |
|
|
($)(a) |
|
|
($)(b) |
|
|
($) |
|
Marshall E. Blume |
|
$ |
22,333 |
|
|
$ |
10,000 |
|
|
$ |
170 |
|
|
$ |
32,502 |
|
James D. Price |
|
|
29,333 |
|
|
|
10,000 |
|
|
|
170 |
|
|
|
39,503 |
|
|
|
|
(a) |
|
Amounts in the Stock Awards column reflect the aggregate grant date fair value of awards of
shares of our common stock granted for 2010, computed in accordance with FASB ASC Topic 718,
related to the annual grant of $10,000 of shares of our common stock on July 1, 2010. The
grant date fair values of awards were calculated by multiplying the number of shares granted
by our most recently published NAV per share of $11.80 on that date. |
|
(b) |
|
All Other Compensation reflects dividends paid on the stock awards set forth in the table. |
Board Report on Executive Compensation
SEC regulations require the disclosure of the compensation policies applicable to executive
officers in the form of a report by the compensation committee of the board of directors (or a
report of the full board of directors in the absence of a compensation committee). As noted above,
we have no employees and pay no direct compensation. As a result, we have no compensation committee
and the board of directors has not considered a compensation policy for employees and has not
included a report with this Annual Report on Form 10-K. Pursuant to the advisory agreement, we
reimburse CAM, an affiliate of WPC, for our proportional share of the cost incurred by affiliates
of WPC, in paying Wm. Polk Carey, in connection with his services on our behalf, other than his
service as a director. Please see Item 13, Certain Relationships and Related Transactions, and
Director Independence for additional details regarding reimbursements to the advisor.
CPA®:14 2010 10-K 92
Compensation Committee Interlocks and Insider Participation
As noted above, our board of directors has not appointed a compensation committee. None of the
members of our board of directors are involved in a relationship requiring disclosure as an
interlocking executive officer/director or under Item 404 of SEC Regulation S-K or as our former
officer or employee.
|
|
|
Item 12. |
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
Beneficial Ownership as used herein has been determined in accordance with the rules and
regulations of the SEC and is not to be construed as a representation that any of such shares are
in fact beneficially owned by any person. The following table shows how many shares of our common
stock the directors and executive officers beneficially owned as of the record date. As of March
18, 2011, Wm. Polk Carey owned 9.34% of our common stock. No other director or executive officer
beneficially owned more than 1% of our common stock. The directors and executive officers as a
group beneficially owned 9.34% of our common stock on that date. Directors and executive officers
who did not own shares are not listed in the table. The business address of the directors and
executive officers listed below is the address of our principal executive office, 50 Rockefeller
Plaza, New York, NY 10020.
|
|
|
|
|
|
|
|
|
|
|
Amount and Nature of |
|
|
|
|
Name of Beneficial Owner |
|
Beneficial Ownership |
|
|
Percentage of Class |
|
Wm. Polk Carey |
|
|
8,164,117 |
(a) |
|
|
9.34 |
% |
James D. Price |
|
|
4,205 |
|
|
|
* |
|
Marshall E. Blume |
|
|
2,917 |
|
|
|
* |
|
Trevor P. Bond |
|
|
1 |
|
|
|
* |
|
Thomas E. Zacharias |
|
|
1,869 |
|
|
|
* |
|
All Directors and Executive Officers as a Group (8 Individuals) |
|
|
8,173,109 |
|
|
|
9.35 |
% |
|
|
|
* |
|
Less than 1% |
|
(a) |
|
Includes 5,977,270 shares owned by Carey REIT II, Inc., a subsidiary of WPC, 2,088,364 shares
owned by CAM, 89,472 shares owned by W. P. Carey International LLC, 7,733 shares owned by
Corporate Property Advisors and 1,278 shares owned by W. P. Carey & Co., Inc. The inclusion of
these shares in the table shown above is not to be construed as a representation that Mr.
Carey beneficially owns such shares. |
|
|
|
Item 13. |
|
Certain Relationships and Related Transactions, and Director Independence. |
Wm. Polk Carey is the Chairman of our board of directors. During 2010, we retained the advisor to
provide advisory services in connection with identifying, evaluating, negotiating, financing,
purchasing and disposing of investments and performing day-to-day management services and certain
administrative duties for us pursuant to an advisory agreement. CAM is a Delaware corporation and
wholly-owned subsidiary of WPC, a Delaware limited liability company of which Wm. Polk Carey is
Chairman of the board of directors and the beneficial owner of over 10% of its equity securities.
For the services provided to us, the advisor earns asset management and performance fees, each of
which is equal to one-half of 1% per annum of our average invested assets. The performance fees are
subordinated to the performance criterion, a cumulative rate of cash flow from operations of 7% per
annum. Asset management and performance fees are payable in cash or restricted shares of our common
stock at the option of the advisor. During 2010, the asset management and performance fees earned
by the advisor totaled $20.0 million. For 2010, the advisor elected to receive 80% of its
performance fees in restricted shares of our common stock and the remaining 20% of its performance
fees in cash.
In addition, the advisory agreement provides for the advisor to earn acquisition fees averaging not
more than 4.5%, based on the aggregate cost of investments acquired, of which generally 2% is
deferred and payable in equal annual installments each January over no less than eight years
beginning in January of the year following that in which a property was purchased. Unpaid
installments bear interest at 6% per annum. An annual installment of $2.6 million in deferred fees
was paid in cash to the advisor in January 2010. Unpaid installments of deferred acquisition fees
totaled $4.3 million as of December 31, 2010, and are included in due to affiliates in the
consolidated financial statements. During 2010, we paid mortgage financing fees to the advisor
totaling $0.3 million in connection with the refinancing of mortgages.
The advisor is entitled to receive subordinated disposition fees based upon the cumulative proceeds
arising from the sale of our assets since inception, subject to certain conditions. Pursuant to the
subordination provisions of the advisory agreement, the disposition fees may be paid only after the
stockholders receive 100% of their initial investment from the proceeds of asset sales and a
cumulative annual distribution return of 6% (based on an initial share price of $10) since our
inception. The advisors interest in such disposition
fees amounted to $6.1 million as of December 31, 2010. Payment of such amount, will be made if the
Proposed Merger is consummated.
CPA®:14 2010 10-K 93
Because we do not have our own employees, the advisor employs officers and other personnel to
provide services to us, including our executive officers. During 2010, $2.8 million was paid to the
advisor by us to cover such personnel expenses, which amount includes both cash compensation and
employee benefits. In addition, pursuant to a cost-sharing arrangement among the CPA®
REITs and the advisor, we pay our proportionate share, based on adjusted revenues, of office rental
expenses and of certain other overhead expenses. Under this arrangement, our share of office rental
expenses for 2010 was $0.6 million.
We own interests in property-owning entities ranging from 12% to 90%, with the remaining interests
generally held by other CPA® REITs and affiliates of our advisor.
Policies and Procedures With Respect to Related Party Transactions
Our bylaws generally provide that all of the transactions that we enter into with our affiliates,
such as our directors and officers and the advisor and their respective affiliates, must be, after
disclosure of such affiliation, approved or ratified by a majority of our independent directors and
a majority of the directors who are not otherwise interested in the transaction. In addition, such
directors and independent directors must determine that (1) the transaction is in all respects on
such terms as, at the time of the transaction and under the circumstances then prevailing, fair and
reasonable to our stockholders and (2) the terms of such transaction are at least as favorable as
the terms then prevailing for comparable transactions made on an arms-length basis.
|
|
|
Item 14. |
|
Principal Accountant Fees and Services |
Audit Fees
From our inception, we have engaged the firm of PricewaterhouseCoopers LLP as our independent
registered public accounting firm. Our audit committee has engaged PricewaterhouseCoopers LLP as
our auditors for 2011. PricewaterhouseCoopers LLP also serves as auditors for WPC,
CPA®:15, CPA®:16 Global and CPA®:17 Global.
The following table sets forth the approximate aggregate fees billed to us during fiscal years 2010
and 2009 by PricewaterhouseCoopers LLP, categorized in accordance with SEC definitions and rules:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Audit Fees(a) |
|
$ |
528,052 |
|
|
$ |
424,396 |
|
Audit Related Fees(b) |
|
|
|
|
|
|
|
|
Tax Fees(c) |
|
|
3,900 |
|
|
|
|
|
All Other Fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fees |
|
$ |
531,952 |
|
|
$ |
424,396 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Audit Fees: This category consists of fees for professional services rendered for the audits
of our audited 2010 and 2009 financial statements and the review of the financial statements
included in our Quarterly Reports on Form 10-Q for the quarter ended March 31, June 30, and
September 30 for each of the 2010 and 2009 fiscal years and other audit services. |
|
(b) |
|
Audit Related Fees: This category consists of audit-related services performed by
PricewaterhouseCoopers LLP. No fees were billed for assurance and audit related services
rendered by PricewaterhouseCoopers LLP for the years ended 2010 and 2009. |
|
(c) |
|
Tax Fees: This category consists of fees billed to us by PricewaterhouseCoopers LLP for tax
compliance and consultation services. |
Pre-Approval by Audit Committee
The audit committees policy is to pre-approve all audit and permissible non-audit services
provided by the independent registered public accounting firm. These services may include audit
services, audit-related services, tax services and other services. Pre-approval is generally
provided for up to one year and any pre-approval is detailed as to the particular service or
category of services. The independent registered public accounting firm and management are required
to periodically report to the audit committee regarding the extent of services provided by the
independent registered public accounting firm in accordance with this pre-approval, and the fees
for the services performed to date. The audit committee may also pre-approve particular services on
a case-by-case basis.
CPA®:14 2010 10-K 94
PART IV
|
|
|
Item 15. |
|
Exhibits, Financial Statement Schedules. |
(a) (1) and (2) Financial statements and schedules see index to financial statements and
schedule included in Item 8.
(3) Exhibits:
The following exhibits are filed as part of this Report. Documents other than those designated as
being filed herewith are incorporated herein by reference.
|
|
|
|
|
Exhibit No. |
|
Description |
|
Method of Filing |
2.1
|
|
Agreement and Plan of Merger, dated as of December 13, 2010, by and
among Corporate Property Associates 16 Global Incorporated, CPA 16
Acquisition Inc., CPA 16 Holdings Inc., CPA 16 Merger Sub Inc.,
Corporate Property Associates 14 Incorporated, CPA 14 Sub Inc., W. P.
Carey & Co. LLC and, for the limited purposes set forth therein, Carey
Asset Management Corp. and W. P. Carey & Co. B.V.
|
|
Incorporated by reference to the
Current Report on Form 8-K filed
December 14, 2010 |
|
|
|
|
|
3.1
|
|
Articles of Incorporation of Registrant
|
|
Incorporated by reference to
Registration Statement on Form
S-11 (No. 333-31437) filed July
16, 1997 |
|
|
|
|
|
3.2
|
|
Articles of Amendment
|
|
Incorporated by reference to
Registration Statement on Form
S-11 (No. 333-76761) filed
November 16, 1999 |
|
|
|
|
|
3.3
|
|
Amended and Restated Bylaws of Registrant
|
|
Incorporated by reference to
Quarterly Report on Form 10-Q
for the quarter ended June 30,
2009 filed August 14, 2009 |
|
|
|
|
|
4.1
|
|
Dividend Reinvestment and Share Purchase Plan
|
|
Incorporated by reference to
Registration Statement on Form
S-3 (No. 333-170536) filed
November 12, 2010 |
|
|
|
|
|
10.1
|
|
Asset Management Agreement dated as of September 2, 2008 between
Corporate Property Associates 14 Incorporated and W.P. Carey & Co. B.V.
|
|
Incorporated by reference to
Quarterly Report on Form 10-Q
for the quarter ended September
30, 2008 filed November 14, 2008 |
|
|
|
|
|
10.2
|
|
Amended and Restated Advisory Agreement dated as of October 1, 2009
between Corporate Property Associates 14 Incorporated and Carey Asset
Management Corp.
|
|
Incorporated by reference to
Quarterly Report on Form 10-Q
for the quarter ended September
30, 2009 filed November 13, 2009 |
|
|
|
|
|
10.3
|
|
Agreement for Sale and Purchase, dated as of December 13, 2010, by and
among Corporate Property Associates 14 Incorporated and Corporate
Property Associates 17 Global Incorporated.
|
|
Incorporated by reference to the
Current Report on Form 8-K filed
December 14, 2010 |
|
|
|
|
|
10.4
|
|
Agreement for Sale and Purchase, dated as of December 13, 2010, by and
among Corporate Property Associates 14 Incorporated and W. P. Carey &
Co. LLC.
|
|
Incorporated by reference to the
Current Report on Form 8-K filed
December 14, 2010 |
|
|
|
|
|
21.1
|
|
Subsidiaries of Registrant
|
|
Filed herewith |
|
|
|
|
|
23.1
|
|
Consent of PricewaterhouseCoopers LLP
|
|
Filed herewith |
|
|
|
|
|
31.1
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Filed herewith |
|
|
|
|
|
31.2
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Filed herewith |
|
|
|
|
|
32
|
|
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
Filed herewith |
CPA®:14 2010 10-K 95
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
Corporate Property Associates 14 Incorporated
|
|
Date 3/25/2011 |
By: |
/s/ Mark J. DeCesaris
|
|
|
|
Mark J. DeCesaris |
|
|
|
Chief Financial Officer |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ Wm. Polk Carey
Wm. Polk Carey
|
|
Chairman of the Board and Director
|
|
3/25/2011 |
|
|
|
|
|
/s/ Trevor P. Bond
|
|
Chief Executive Officer
|
|
3/25/2011 |
|
|
(Principal
Executive Officer) |
|
|
|
|
|
|
|
/s/ Mark J. DeCesaris
|
|
Chief Financial Officer
|
|
3/25/2011 |
|
|
(Principal
Financial Officer) |
|
|
|
|
|
|
|
/s/ Thomas J. Ridings Jr.
|
|
Chief Accounting Officer
|
|
3/25/2011 |
|
|
(Principal
Accounting Officer) |
|
|
|
|
|
|
|
/s/ Marshall E. Blume
Marshall E. Blume
|
|
Director
|
|
3/25/2011 |
|
|
|
|
|
/s/ James D. Price
James D. Price
|
|
Director
|
|
3/25/2011 |
CPA®:14 2010 10-K 96