Attached files
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EX-32 - EXHIBIT 32 - CORPORATE PROPERTY ASSOCIATES 14 INC | c92325exv32.htm |
EX-31.2 - EXHIBIT 31.2 - CORPORATE PROPERTY ASSOCIATES 14 INC | c92325exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - CORPORATE PROPERTY ASSOCIATES 14 INC | c92325exv31w1.htm |
EX-10.1 - EXHIBIT 10.1 - CORPORATE PROPERTY ASSOCIATES 14 INC | c92325exv10w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-25771
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
(Exact name of registrant as specified in its charter)
Maryland (State of incorporation) |
13-3951476 (I.R.S. Employer Identification No.) |
|
50 Rockefeller Plaza New York, New York (Address of principal executive offices) |
10020 (Zip Code) |
Investor Relations (212) 492-8920
(212) 492-1100
(Registrants telephone numbers, including area code)
(212) 492-1100
(Registrants telephone numbers, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No
þ
Registrant had 85,974,381 shares of common stock, $.001 par value, outstanding at November 9,
2009.
INDEX
Page No. | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
19 | ||||||||
30 | ||||||||
31 | ||||||||
32 | ||||||||
32 | ||||||||
33 | ||||||||
Exhibit 10.1 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 |
Forward Looking Statements
This Quarterly Report on Form 10-Q, including Managements Discussion and Analysis of Financial
Condition and Results of Operations in Item 2 of Part I of this Report, contains forward-looking
statements within the meaning of the federal securities laws. It is important to note that our
actual results could be materially different from those projected in such forward-looking
statements. You should exercise caution in relying on forward-looking statements as they involve
known and unknown risks, uncertainties and other factors that may materially affect our future
results, performance, achievements or transactions. Information on factors which could impact
actual results and cause them to differ from what is anticipated in the forward-looking statements
contained herein is included in this Report as well as in our other filings with the Securities and
Exchange Commission (the SEC), including but not limited to those described in Item 1A. Risk
Factors in our Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the
SEC on March 26, 2009 (the 2008 Annual Report). We do not undertake to revise or update any
forward-looking statements. Additionally, a description of our critical accounting estimates is
included in the Managements Discussion and Analysis of Financial Condition and Results of
Operations section of our 2008 Annual Report. There has been no significant change in our critical
accounting estimates.
CPA®:14 9/30/2009 10-Q 1
Table of Contents
PART I
Item 1. Financial Statements
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Consolidated Balance Sheets (Unaudited)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
September 30, 2009 | December 31, 2008 | |||||||
Assets |
||||||||
Investments in real estate: |
||||||||
Real estate, at cost |
$ | 1,288,040 | $ | 1,275,775 | ||||
Accumulated depreciation |
(211,872 | ) | (188,739 | ) | ||||
Net investment in properties |
1,076,168 | 1,087,036 | ||||||
Net investment in direct financing leases |
114,975 | 124,731 | ||||||
Equity investments in real estate |
153,586 | 156,344 | ||||||
Net investments in real estate |
1,344,729 | 1,368,111 | ||||||
Cash and cash equivalents |
95,303 | 125,746 | ||||||
Intangible assets, net |
67,994 | 72,877 | ||||||
Other assets, net |
78,295 | 70,696 | ||||||
Total assets |
$ | 1,586,321 | $ | 1,637,430 | ||||
Liabilities and Equity |
||||||||
Liabilities: |
||||||||
Non-recourse debt |
$ | 811,902 | $ | 810,794 | ||||
Accounts payable, accrued expenses and other liabilities |
23,422 | 19,149 | ||||||
Prepaid and deferred rental income and security deposits |
31,331 | 25,650 | ||||||
Due to affiliates |
16,005 | 21,322 | ||||||
Distributions payable |
17,043 | 17,315 | ||||||
Total liabilities |
899,703 | 894,230 | ||||||
Commitments and contingencies |
||||||||
Equity: |
||||||||
CPA®:14 shareholders equity: |
||||||||
Common stock, $0.001 par value; 120,000,000 shares authorized; 94,731,383
and 93,654,012
shares issued, respectively |
95 | 94 | ||||||
Additional paid-in capital |
929,957 | 916,069 | ||||||
Distributions in excess of accumulated earnings |
(166,173 | ) | (127,093 | ) | ||||
Accumulated other comprehensive income |
9,185 | 4,427 | ||||||
773,064 | 793,497 | |||||||
Less, treasury stock at cost, 8,915,862 and 5,804,003 shares, respectively |
(104,959 | ) | (66,845 | ) | ||||
Total CPA®:14 shareholders equity |
668,105 | 726,652 | ||||||
Noncontrolling interests |
18,513 | 16,548 | ||||||
Total equity |
686,618 | 743,200 | ||||||
Total liabilities and equity |
$ | 1,586,321 | $ | 1,637,430 | ||||
See Notes to Consolidated Financial Statements
CPA®:14 9/30/2009 10-Q 2
Table of Contents
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Consolidated Statements of Operations (Unaudited)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenues |
||||||||||||||||
Rental income |
$ | 38,723 | $ | 35,803 | $ | 110,383 | $ | 107,836 | ||||||||
Interest income from direct financing leases |
3,550 | 3,849 | 10,790 | 11,498 | ||||||||||||
Other operating income |
2,461 | 95 | 4,933 | 2,457 | ||||||||||||
44,734 | 39,747 | 126,106 | 121,791 | |||||||||||||
Operating Expenses |
||||||||||||||||
Depreciation and amortization |
(11,533 | ) | (8,092 | ) | (27,376 | ) | (24,603 | ) | ||||||||
Property expenses |
(10,038 | ) | (6,693 | ) | (31,742 | ) | (22,911 | ) | ||||||||
General and administrative |
(1,593 | ) | (1,411 | ) | (4,936 | ) | (6,556 | ) | ||||||||
Impairment charges |
(20,879 | ) | (1,029 | ) | (20,879 | ) | (1,029 | ) | ||||||||
(44,043 | ) | (17,225 | ) | (84,933 | ) | (55,099 | ) | |||||||||
Other Income and Expense |
||||||||||||||||
Advisor settlement (Note 9) |
| | | 10,868 | ||||||||||||
Income from equity investments in real estate |
3,878 | 1,541 | 10,982 | 7,668 | ||||||||||||
Other interest income |
419 | 1,116 | 1,200 | 3,539 | ||||||||||||
Other income and (expenses) |
376 | 629 | 250 | 1,791 | ||||||||||||
Interest expense |
(16,607 | ) | (15,598 | ) | (46,691 | ) | (47,392 | ) | ||||||||
(11,934 | ) | (12,312 | ) | (34,259 | ) | (23,526 | ) | |||||||||
(Loss) income from continuing operations before income taxes |
(11,243 | ) | 10,210 | 6,914 | 43,166 | |||||||||||
Provision for income taxes |
(942 | ) | (579 | ) | (2,512 | ) | (2,117 | ) | ||||||||
(Loss) income from continuing operations |
(12,185 | ) | 9,631 | 4,402 | 41,049 | |||||||||||
Discontinued Operations |
||||||||||||||||
Income from operations of discontinued properties |
146 | 558 | 782 | 2,209 | ||||||||||||
Gain on sale of real estate |
| | 8,611 | 159 | ||||||||||||
Income from discontinued operations |
146 | 558 | 9,393 | 2,368 | ||||||||||||
Net (Loss) Income |
(12,039 | ) | 10,189 | 13,795 | 43,417 | |||||||||||
Less: Net income attributable to noncontrolling interests |
(94 | ) | (576 | ) | (1,360 | ) | (1,393 | ) | ||||||||
Net (Loss) Income Attributable to CPA®:14 Shareholders |
$ | (12,133 | ) | $ | 9,613 | $ | 12,435 | $ | 42,024 | |||||||
Earnings Per Share |
||||||||||||||||
(Loss) income from continuing operations attributable to
CPA®:14 shareholders |
$ | (0.14 | ) | $ | 0.10 | $ | 0.03 | $ | 0.45 | |||||||
Income from
discontinued operations attributable to CPA®:14 shareholders |
| 0.01 | 0.11 | 0.03 | ||||||||||||
Net (loss) income attributable to CPA®:14 shareholders |
$ | (0.14 | ) | $ | 0.11 | $ | 0.14 | $ | 0.48 | |||||||
Weighted Average Shares Outstanding |
86,893,294 | 88,211,026 | 87,442,533 | 88,141,817 | ||||||||||||
Amounts Attributable to CPA®:14 Shareholders |
||||||||||||||||
(Loss) income from continuing operations, net of tax |
$ | (12,279 | ) | $ | 9,055 | $ | 3,042 | $ | 39,656 | |||||||
Income from discontinued operations, net of tax |
146 | 558 | 9,393 | 2,368 | ||||||||||||
Net (loss) income |
$ | (12,133 | ) | $ | 9,613 | $ | 12,435 | $ | 42,024 | |||||||
Distributions Declared Per Share |
$ | 0.1986 | $ | 0.1964 | $ | 0.5943 | $ | 0.5877 | ||||||||
See Notes to Consolidated Financial Statements
CPA®:14 9/30/2009 10-Q 3
Table of Contents
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Consolidated Statements of Comprehensive (Loss) Income (Unaudited)
(in thousands)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net (Loss) Income |
$ | (12,039 | ) | $ | 10,189 | $ | 13,795 | $ | 43,417 | |||||||
Other Comprehensive (Loss) Income: |
||||||||||||||||
Foreign currency translation adjustment |
2,295 | (7,780 | ) | 2,225 | (4,030 | ) | ||||||||||
Change in unrealized gain (loss) on marketable securities |
770 | (508 | ) | 825 | (1,583 | ) | ||||||||||
Change in unrealized gain (loss) on derivative instruments |
348 | (374 | ) | 1,731 | (197 | ) | ||||||||||
3,413 | (8,662 | ) | 4,781 | (5,810 | ) | |||||||||||
Comprehensive (loss) income |
(8,626 | ) | 1,527 | 18,576 | 37,607 | |||||||||||
Amounts Attributable to Noncontrolling Interests: |
||||||||||||||||
Net income |
(94 | ) | (576 | ) | (1,360 | ) | (1,393 | ) | ||||||||
Change in unrealized gain on marketable securities |
(9 | ) | | (23 | ) | | ||||||||||
Comprehensive income attributable to noncontrolling interests |
(103 | ) | (576 | ) | (1,383 | ) | (1,393 | ) | ||||||||
Comprehensive (Loss) Income Attributable to CPA®:14 Shareholders |
$ | (8,729 | ) | $ | 951 | $ | 17,193 | $ | 36,214 | |||||||
See Notes to Consolidated Financial Statements
CPA®:14 9/30/2009 10-Q 4
Table of Contents
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Nine months ended September 30, | ||||||||
2009 | 2008 | |||||||
Cash Flows Operating Activities |
||||||||
Net income |
$ | 13,795 | $ | 43,417 | ||||
Adjustments to net income: |
||||||||
Depreciation and amortization, including intangible assets and deferred financing costs |
28,399 | 28,695 | ||||||
Straight-line rent adjustments |
1,908 | (1,626 | ) | |||||
Income from equity investments in real estate in excess of distributions received |
350 | 2,584 | ||||||
Issuance of shares to affiliate in satisfaction of fees due |
7,108 | 9,175 | ||||||
Realized gain on foreign currency transactions, derivative instruments and other, net |
(154 | ) | (1,618 | ) | ||||
Realized gain on sale of real estate |
(8,611 | ) | (698 | ) | ||||
Unrealized (gain) loss on foreign currency transactions, derivative instruments and other, net |
(96 | ) | 354 | |||||
Realized gain on sale of securities |
| (708 | ) | |||||
Reversal of unrealized gain on derivatives |
| 708 | ||||||
Impairment charges |
20,879 | 1,029 | ||||||
Change in other operating assets and liabilities, net |
987 | 2,989 | ||||||
Net cash provided by operating activities |
64,565 | 84,301 | ||||||
Cash Flows Investing Activities |
||||||||
Equity distributions received in excess of equity income in real estate |
9,652 | 4,884 | ||||||
Contributions to equity investments |
(5,344 | ) | | |||||
Capital expenditures |
(2,855 | ) | | |||||
Proceeds from sale of real estate and securities |
26,247 | 7,211 | ||||||
Increase in cash due to consolidation of a venture |
309 | | ||||||
Payment of deferred acquisition fees to an affiliate |
(3,638 | ) | (3,846 | ) | ||||
Net cash provided by investing activities |
24,371 | 8,249 | ||||||
Cash Flows Financing Activities |
||||||||
Distributions paid |
(51,787 | ) | (51,540 | ) | ||||
Distributions paid to noncontrolling interests |
(1,197 | ) | (2,737 | ) | ||||
Proceeds from mortgages |
27,750 | 9,740 | ||||||
Prepayment of mortgage principal |
(22,219 | ) | (14,212 | ) | ||||
Scheduled payments of mortgage principal |
(40,301 | ) | (13,035 | ) | ||||
Deferred financing costs and mortgage deposits |
(760 | ) | (1,130 | ) | ||||
Proceeds from stock issuance, net of costs |
6,781 | 6,840 | ||||||
Purchase of treasury stock |
(38,114 | ) | (11,153 | ) | ||||
Net cash used in financing activities |
(119,847 | ) | (77,227 | ) | ||||
Change in Cash and Cash Equivalents During the Period |
||||||||
Effect of exchange rate changes on cash |
468 | (492 | ) | |||||
Net (decrease) increase in cash and cash equivalents |
(30,443 | ) | 14,831 | |||||
Cash and cash equivalents, beginning of period |
125,746 | 122,503 | ||||||
Cash and cash equivalents, end of period |
$ | 95,303 | $ | 137,334 | ||||
See Notes to Consolidated Financial Statements
CPA®:14 9/30/2009 10-Q 5
Table of Contents
CORPORATE PROPERTY ASSOCIATES 14 INCORPORATED
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Business
Corporate Property Associates 14 Incorporated (together with its consolidated subsidiaries and
predecessors, we, us or our) is a publicly owned, non-actively traded real estate investment
trust (REIT) that 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. 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. As of September 30, 2009, our portfolio was comprised of our full or partial ownership
interests in 314 properties, substantially all of which were triple-net leased to 87 tenants, and
totaled approximately 29 million square feet (on a pro rata basis) with an occupancy rate of 96%.
We were formed in 1997 and are managed by W. P. Carey & Co. LLC (WPC) and its subsidiaries
(collectively, the advisor).
Note 2. Basis of Presentation
Our interim consolidated financial statements have been prepared, without audit, in accordance with
the instructions to Form 10-Q and therefore do not necessarily include all information and
footnotes necessary for a fair statement of our consolidated financial position, results of
operations and cash flows in accordance with accounting principles generally accepted in the United
States of America (GAAP).
In the opinion of management, the unaudited financial information for the interim periods presented
in this Report reflects all normal and recurring adjustments necessary for a fair statement of
results of operations, financial position and cash flows. Our interim consolidated financial
statements should be read in conjunction with our audited consolidated financial statements and
accompanying notes for the year ended December 31, 2008, which are included in our 2008 Annual
Report, as certain disclosures that would substantially duplicate those contained in the audited
consolidated financial statements have not been included in this Report. Operating results for
interim periods are not necessarily indicative of operating results for an entire fiscal year.
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts
in our consolidated financial statements and the accompanying notes. Actual results could differ
from those estimates. Certain prior year amounts have been reclassified to conform to the current
year presentation. The consolidated financial statements included in this Report have been
retrospectively adjusted to reflect the adoption of certain new accounting pronouncements during
the nine months ended September 30, 2009 (Note 10).
In May 2009, the Financial Accounting Standards Board (FASB) issued authoritative guidance for
subsequent events, which we adopted as required in the second quarter of 2009. The guidance
establishes general standards of accounting for and disclosures of events that occur after the
balance sheet date but before financial statements are issued or are available to be issued. We
evaluated subsequent events through November 13, 2009, the date on which we filed this Report with
the SEC.
Basis of Consolidation
The consolidated financial statements include all of our accounts and 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. Under current authoritative guidance,
we have determined that we are not the primary beneficiary of, nor do we hold a significant
variable interest in, any variable interest entity (VIE). We hold investments in tenant-in-common
interests, which we account for as equity investments in real estate under current authoritative
accounting guidance.
Information about International Geographic Areas
As of September 30, 2009, our international investments were comprised of investments in the
European Union. Revenues from these investments totaled $8.8 million and $7.1 million for the three
months ended September 30, 2009 and 2008, respectively, and $22.8 million for both the nine months
ended September 30, 2009 and 2008. Our net investments in real estate for these
investments totaled $215.0 million and $214.5 million as of September 30, 2009 and December 31,
2008, respectively.
CPA®:14
9/30/2009 10-Q 6
Table of Contents
Notes to Consolidated Financial Statements
Future Accounting Requirements
In June 2009, the FASB issued amended guidance related to the consolidation of VIEs. These
amendments require an enterprise to qualitatively assess the determination of the primary
beneficiary of a VIE based on whether the entity (1) has the power to direct matters that most
significantly impact the activities of the VIE, and (2) has the obligation to absorb losses or the
right to receive benefits of the VIE that could potentially be significant to the VIE. The
amendments change the consideration of kick-out rights in determining if an entity is a VIE, which
may cause certain additional entities to now be considered VIEs. Additionally, they require an
ongoing reconsideration of the primary beneficiary and provide a framework for the events that
trigger a reassessment of whether an entity is a VIE. This guidance will be effective for us
beginning January 1, 2010. We are currently in the process of evaluating the impact that the
adoption of this guidance will have on our financial position and results of operations.
Note 3. Agreements and Transactions with Related Parties
We have an advisory agreement with the advisor whereby the advisor performs certain services for us
for a fee. Under the terms of this agreement, which was amended and renewed effective October 1,
2009, the advisor manages our day-to-day operations, for which we pay the advisor asset management
and performance fees, and structures and negotiates the purchase and sale of investments and debt
placement transactions for us, for which we pay the advisor structuring and subordinated
disposition fees. In addition, we reimburse the advisor for certain administrative duties
performed on our behalf. We also have certain agreements with joint ventures. These transactions
are described below.
Asset Management and Performance Fees
Under the advisory agreement, we pay the advisor asset management and performance fees, each of
which are 1/2 of 1% per annum of our average invested assets and are
computed as provided for in the advisory agreement. The performance fees are subordinated to the
performance criterion, a cumulative annual rate of cash flow from operations of 7%. The asset
management and performance fees are payable in cash or restricted shares of our common stock at the
advisors option. If the advisor elects to receive all or a portion of its fees in restricted
shares, the number of restricted shares issued is determined by dividing the dollar amount of fees
by our most recently published estimated net asset value per share as approved by our board of
directors. For both 2009 and 2008, the advisor elected to receive its
asset management fees in cash. For 2009, the advisor elected to receive 80% of its performance fees from us in
restricted shares of our common stock, with the remaining 20% payable in cash. For 2008, the
advisor elected to receive all of its performance fees in restricted shares of our common stock. We
incurred base asset management fees of $2.7 million and $3.0 million for the three months ended
September 30, 2009 and 2008, respectively, and $8.2 million and $9.1 million for the nine months
ended September 30, 2009 and 2008, respectively, with performance fees in like amounts, both of
which are included in Property expenses in the consolidated financial statements. As of
September 30, 2009, the advisor owned 7,169,344 shares (8%) of our common stock.
Transaction Fees
Under the advisory agreement, we also pay the advisor acquisition fees for structuring and
negotiating investments and related mortgage financing on our behalf. Acquisition fees average 4.5%
or less of the aggregate cost of investments acquired and are comprised of a current portion of
2.5%, which is paid at the date the property is purchased, and a deferred portion of 2%, which is
payable in equal annual installments each January of the seven calendar years following the date a
property was purchased, subject to satisfying the 7% performance criterion. Interest on unpaid
installments is 6% per year. In connection with our merger with Corporate Property Associates 12
Incorporated (CPA®:12) on December 1, 2006 (the Merger), we assumed deferred fees
incurred by CPA®:12 totaling $2.7 million, with an annual interest rate of 7% per year
and have scheduled installment payments through 2013. During the nine months ended September 30,
2009, we incurred both current and deferred acquisition fees, each of which were less than $0.1
million. We did not incur any current or deferred acquisition fees during the three months ended
September 30, 2009 or the three and nine months ended September 30, 2008. Unpaid installments of
deferred acquisition fees totaled $6.9 million and $10.5 million as of September 30, 2009 and
December 31, 2008, respectively, and are included in Due to affiliates in the consolidated
financial statements. We paid annual deferred acquisition fee installments of $3.6 million and $3.8
million in cash to the advisor in January 2009 and 2008, respectively. We also pay the advisor
mortgage refinancing fees, which totaled less than $0.1 million for the three months ended
September 30, 2009 and $0.2 million and $0.7 million for the nine months ended September 30, 2009
and 2008, respectively. No such mortgage refinancing fees were paid during the three months ended
September 30, 2008.
We also pay fees to the advisor for services provided to us in connection with the disposition of
investments, excluding investments acquired in the Merger. These fees, which are subordinated to
the performance criterion, are deferred and are payable to the advisor only in connection with a
liquidity event. Subordinated disposition fees totaled $5.7 million and $5.1 million at
September 30, 2009 and December 31, 2008, respectively.
CPA®:14
9/30/2009 10-Q 7
Table of Contents
Notes to Consolidated Financial Statements
Other Expenses
We reimburse the advisor for various expenses it incurs in the course of providing services to us.
We reimburse certain third-party expenses paid by the advisor on our behalf, including
property-specific costs, professional fees, office expenses and business development expenses. In
addition, we reimburse the advisor for the allocated costs of personnel and overhead in providing
management of our day-to-day operations, including accounting services, shareholder services,
corporate management, and property management and operations. We do not reimburse the advisor for
the cost of personnel if these personnel provide services for transactions for which the advisor
receives a transaction fee, such as acquisitions, dispositions and refinancings. We incurred
personnel reimbursements of $0.6 million for each of the three months ended September 30, 2009 and
2008 and $1.8 million and $2.0 million for the nine months ended September 30, 2009 and 2008,
respectively, which are included in General and administrative expenses in the consolidated
financial statements.
Joint Ventures and Other Transactions with Affiliates
Together with certain affiliates, we participate in an entity that leases office space used for the
administration of real estate entities. 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 $0.2 million
for each of the three months ended September 30, 2009 and 2008 and $0.5 million for each of the
nine months ended September 30, 2009 and 2008. Based on gross revenues through September 30, 2009,
our current share of future minimum lease payments under this agreement would be $0.6 million
annually through 2016.
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 entities (Note 2) and account for the remainder under
the equity method of accounting (Note 5).
Note 4. Real Estate
Real Estate
Real estate, which consists of land and buildings leased to others, at cost, and accounted for as
operating leases, is summarized as follows (in thousands):
September 30, 2009 | December 31, 2008 | |||||||
Land |
$ | 232,326 | $ | 231,325 | ||||
Buildings |
1,055,714 | 1,044,450 | ||||||
Less: Accumulated depreciation |
(211,872 | ) | (188,739 | ) | ||||
$ | 1,076,168 | $ | 1,087,036 | |||||
Impairment Charges
We assess whether there are any indicators that the value of our real estate properties may be
impaired or that their carrying value may not be recoverable. 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. If this amount is less
than the carrying value, the property is considered to be impaired, and we then measure the loss as
the excess of the carrying value of the property over the estimated fair value of the property,
which is primarily determined using market information from outside sources such as recent
comparable sales or broker quotes. If relevant market information is not available, we then perform
a future net cash flow analysis discounted for inherent risk associated with each asset.
In the
third quarter of 2009, we incurred impairment charges totaling
$20.9 million, which are
reflected in both the three and nine months ended September 30, 2009. We recognized an impairment
charge of $16.9 million on a property previously leased to Nortel Networks Inc. to reduce its
carrying value to its estimated fair value based on a discounted cash
flow analysis. Nortel Networks
filed for bankruptcy and disaffirmed its lease with us in the first quarter of 2009. During the
second quarter of 2009, we entered into a direct lease with the existing subtenant at the former
Nortel Networks property; however, the new tenant has defaulted on its rental obligation. We also
recognized an impairment charge of $4.0 million on a 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.
During the third quarter
of 2008, we incurred an impairment charge of $1.0 million on a domestic property to reduce the
propertys carrying value to its estimated fair value, which is
reflected in both the three and nine months ended September
30, 2008.
CPA®:14 9/30/2009 10-Q 8
Table of Contents
Notes to Consolidated Financial Statements
Acquisition Costs
The FASB has revised its guidance for business combinations. The revised guidance establishes
principles and requirements for how the acquirer in a business combination must recognize and
measure in its financial statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interests in the entity acquired, and goodwill acquired in a business combination.
Additionally, the revised guidance requires that an acquiring entity must immediately expense all
acquisition costs and fees associated with a business combination, while such costs are capitalized
for transactions deemed to be acquisitions. We adopted the revised guidance as required on January
1, 2009. To the extent we make investments that are deemed to be business combinations, our results
of operations will be negatively impacted by the immediate expensing of acquisition costs and fees
incurred in accordance with the revised guidance, whereas in the past such costs and fees would
have been capitalized and allocated to the cost basis of the acquisition. Post acquisition, there
will be a subsequent positive impact on our results of operations through a reduction in
depreciation expense over the estimated life of the properties. For those investments that are not
deemed to be a business combination, the revised guidance is not expected to have a material impact
on our consolidated financial statements. During the nine months ended September 30, 2009, we
completed a domestic investment for $2.5 million that was deemed to be a real estate asset
acquisition and, as such, capitalized acquisition fees of $0.1 million in connection with this
investment. We did not make any investments that were deemed to be business combinations during the
nine months ended September 30, 2009.
Tenant Matters
We have six tenants that operated under bankruptcy during some or all of 2009. During the three and
nine months ended September 30, 2009, uncollected rent expense increased by $2.2 million and $7.5
million as compared to the same prior year periods, related to such tenants. During the nine months ended September 30, 2009,
three of these tenants disaffirmed their leases with us in bankruptcy court, and the properties are
vacant as of September 30, 2009. These three tenants previously accounted for $4.3 million, or
2.3%, of aggregate annualized lease revenues. As a result of these corporate defaults, during the
third quarter of 2009 we suspended debt service on three non-recourse mortgage loans regarding
these properties, which had an aggregate outstanding balance of $40.8 million at September 30,
2009.
Other
In connection with our acquisition of properties, we have recorded net lease intangibles of $86.5
million, which are being amortized over periods ranging from nine to 40 years. Amortization of
below-market and above-market rent intangibles is recorded as an adjustment to lease revenues,
while amortization of in-place lease and tenant relationship intangibles is included in
Depreciation and amortization. Below-market rent intangibles are included in Prepaid and deferred
rental income and security deposits in the consolidated financial statements. Net amortization of
intangibles, including the effect of foreign currency translation, was $5.5 million and
$1.6 million for the three months ended September 30, 2009 and 2008, respectively, and $8.6 million
and $4.7 million for the nine months ended September 30, 2009 and 2008, respectively.
Note 5. Equity Investments in Real Estate
We own interests in single-tenant net leased properties leased to corporations through
noncontrolling interests in (i) partnerships and limited liability companies in which our ownership
interests are 67% or less but over which we exercise significant influence, and (ii) as
tenants-in-common subject to common control (Note 2). All of the underlying investments are
generally owned with affiliates that have similar investment objectives to ours. We account for
these investments under the equity method of accounting (i.e., at cost, increased or decreased by
our share of earnings or losses, less distributions plus fundings).
CPA®:14 9/30/2009 10-Q 9
Table of Contents
Notes to Consolidated Financial Statements
The following table sets forth our ownership interests in our equity investments in real estate and
their respective carrying values. The carrying value of ventures is affected by the timing and
nature of distributions (dollars in thousands):
Ownership Interest at | Carrying Value | |||||||||||
Lessee | September 30, 2009 | September 30, 2009 | December 31, 2008 | |||||||||
True Value Company |
50 | % | $ | 31,564 | $ | 31,916 | ||||||
Advanced Micro Devices, Inc. (a) |
67 | % | 33,876 | 29,579 | ||||||||
Hellweg Die Profi-Baumarkte GmbH & Co. KG (b) |
32 | % | 16,981 | 19,399 | ||||||||
U-Haul Moving Partners, Inc. and Mercury Partners, LP |
12 | % | 12,736 | 12,992 | ||||||||
Best Buy Co., Inc. |
37 | % | 11,652 | 12,469 | ||||||||
The Upper Deck Company |
50 | % | 12,336 | 11,673 | ||||||||
LifeTime Fitness, Inc. and Town Sports International Holdings, Inc. |
56 | % | 10,583 | 10,898 | ||||||||
Compucom Systems, Inc. (c) |
67 | % | 8,834 | 10,958 | ||||||||
Del Monte Corporation |
50 | % | 7,444 | 8,135 | ||||||||
ShopRite Supermarkets, Inc. |
45 | % | 6,712 | 6,696 | ||||||||
Checkfree Holdings, Inc. |
50 | % | 1,471 | 1,653 | ||||||||
Amylin Pharmaceuticals, Inc. (formerly Sicor, Inc.) (d) |
50 | % | | 493 | ||||||||
Dicks Sporting Goods, Inc. (e) |
45 | % | (603 | ) | (517 | ) | ||||||
$ | 153,586 | $ | 156,344 | |||||||||
(a) | In 2008, we contributed $11.9 million to this venture to refinance its then existing $59.8 million non-recourse mortgage loan for new non-recourse financing of $43.0 million. In July 2009, the venture restructured its existing debt and made an $8.0 million partial paydown of the loan, reducing the balance to $33.9 million as of September 30, 2009. | |
(b) | Carrying value of investment is affected by the impact of fluctuations in the exchange rate of the Euro. | |
(c) | In April 2009, this venture refinanced its existing non-recourse mortgage debt of $18.7 million, which was scheduled to mature in May 2009, for new non-recourse financing of $22.6 million. The venture distributed the net proceeds of the financing to the venture partners. | |
(d) | In 2007, this venture completed the refinancing of an existing $2.5 million non-recourse mortgage with new non-recourse financing of $35.4 million based on the appraised value of the underlying real estate of the venture. As a result of the refinancing, we became the general partner of the venture. In the third quarter of 2009, we recorded an adjustment to record the venture under the consolidation method as we have control over the venture. | |
(e) | In 2007, this venture obtained non-recourse mortgage financing of $23.0 million based on the appraised value of the underlying real estate of the venture and distributed the proceeds to the venture partners. |
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):
September 30, 2009 | December 31, 2008 | |||||||
Assets |
$ | 1,724,266 | $ | 1,685,258 | ||||
Liabilities |
(959,074 | ) | (1,007,937 | ) | ||||
Partners/members equity |
$ | 765,192 | $ | 677,321 | ||||
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenue |
$ | 37,008 | $ | 36,660 | $ | 113,751 | $ | 119,112 | ||||||||
Expenses |
(23,760 | ) | (23,870 | ) | (65,081 | ) | (70,782 | ) | ||||||||
Net income |
$ | 13,248 | $ | 12,790 | $ | 48,670 | $ | 48,330 | ||||||||
We recognized income from these equity investments in real estate of $3.9 million and $1.5 million
for the three months ended September 30, 2009 and 2008, respectively, and $11.0 million and $7.7
million for the nine months ended September 30, 2009 and 2008, respectively. These amounts
represent our share of the income of these ventures as well as certain depreciation and
amortization adjustments related to purchase accounting and other-than-temporary impairment
charges.
CPA®:14 9/30/2009 10-Q 10
Table of Contents
Notes to Consolidated Financial Statements
Note 6. Interest in Mortgage Loan Securitization
We account for our subordinated interest in the Carey Commercial Mortgage Trust (CCMT) mortgage
securitization as an available-for-sale marketable security, which is measured at fair value with
all gains and losses from changes in fair value reported as a component of Accumulated other
comprehensive income as part of shareholders equity. Our interest in CCMT consists of interests in
Class IO and Class E certificates. Our interest in the Class IO certificates, which are rated Aaa
by Moodys Investors Service, Inc. and AAA by Fitch, Inc., had an estimated fair value of $1.0
million and $1.6 million as of September 30, 2009 and December 31, 2008, respectively. Our interest
in the Class E certificates, which are rated between Baa3 and Caa by Moodys and between BBB- and
CCC by Fitch, had an estimated fair value of $10.9 million and $9.8 million at September 30, 2009
and December 31, 2008, respectively. As of September 30, 2009 and December 31, 2008, the total
estimated fair value of our interest was $11.9 million and $11.4 million, respectively, and
reflected an aggregate unrealized gain of $0.5 million and an aggregate unrealized loss of $0.3
million, respectively, and a cumulative net amortization of $1.3 million and $1.1 million,
respectively. 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 the subordinated interest is current interest
rates. The following table presents a sensitivity analysis of the fair value of our interest at
September 30, 2009 based on adverse changes in market interest rates of 1% and 2% (in thousands):
Fair value as of | 1% adverse | 2% adverse | ||||||||||
September 30, 2009 | change | change | ||||||||||
Fair value of our interest in CCMT |
$ | 11,936 | $ | 11,653 | $ | 11,377 |
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.
In April 2009, the FASB amended the existing guidance related to other-than-temporary impairments
for debt securities to make the guidance more operational and to improve the presentation and
disclosure of other-than-temporary impairments on debt and equity securities. The new guidance does
not amend existing recognition and measurement guidance related to other-than-temporary impairments
of equity securities. We adopted the new guidance as required in the second quarter of 2009. The
adoption of the new guidance did not have a material effect on our financial position and results
of operations.
Note 7. Fair Value Measurements
In September 2007, the FASB issued authoritative guidance for using fair value to measure assets
and liabilities, which we adopted as required on January 1, 2008, with the exception of
nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value
on a recurring basis, which we adopted as required on January 1, 2009. In April 2009, the FASB
provided additional guidance for estimating fair value when the volume and level of activity for
the asset or liability have significantly decreased, which we adopted as required in the second
quarter of 2009. Fair value is defined as the exit price, or the amount that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants
as of the measurement date. The guidance also establishes a three-tier fair value hierarchy based
on the inputs used in measuring fair value. These tiers are: Level 1, for which quoted market
prices for identical instruments are available in active markets, such as money market funds,
equity securities and U.S. Treasury securities; Level 2, for which there are inputs other than
quoted prices included within Level 1 that are observable for the instrument, such as certain
derivative instruments including interest rate caps and swaps; and Level 3, for which little or no
market data exists, therefore requiring us to develop our own assumptions, such as certain
marketable securities.
CPA®:14 9/30/2009 10-Q 11
Table of Contents
Notes to Consolidated Financial Statements
The following tables set forth our assets and liabilities that were accounted for at fair value on
a recurring basis as of September 30, 2009 and December 31, 2008 (in thousands):
Fair Value Measurements at Reporting Date Using: | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||||||
Identical Assets | Observable Inputs | Inputs | ||||||||||||||
Description | September 30, 2009 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Assets: |
||||||||||||||||
Money market funds |
$ | 88,680 | $ | 88,680 | $ | | $ | | ||||||||
Marketable securities |
14,585 | 238 | | 14,347 | ||||||||||||
Derivative assets |
1,626 | | | 1,626 | ||||||||||||
$ | 104,891 | $ | 88,918 | $ | | $ | 15,973 | |||||||||
Liabilities: |
||||||||||||||||
Derivative liabilities |
$ | (1,478 | ) | $ | | $ | (1,478 | ) | $ | | ||||||
Fair Value Measurements at Reporting Date Using: | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||||||
Identical Assets | Observable Inputs | Inputs | ||||||||||||||
Description | December 31, 2008 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Assets: |
||||||||||||||||
Money market funds |
$ | 99,180 | $ | 99,180 | $ | | $ | | ||||||||
Marketable securities |
13,968 | 181 | | 13,787 | ||||||||||||
Derivative assets |
1,601 | | | 1,601 | ||||||||||||
$ | 114,749 | $ | 99,361 | $ | | $ | 15,388 | |||||||||
Liabilities: |
||||||||||||||||
Derivative liabilities |
$ | (2,256 | ) | $ | | $ | (2,256 | ) | $ | | ||||||
Assets and liabilities presented above exclude assets and liabilities owned by unconsolidated
ventures.
Fair Value Measurements Using Significant | ||||||||||||||||||||||||
Unobservable Inputs (Level 3 Only) | ||||||||||||||||||||||||
Marketable | Derivative | Marketable | Derivative | |||||||||||||||||||||
Securities | Assets | Total Assets | Securities | Assets | Total Assets | |||||||||||||||||||
Three months ended September 30, 2009 | Three months ended September 30, 2008 | |||||||||||||||||||||||
Beginning balance |
$ | 13,659 | $ | 1,395 | $ | 15,054 | $ | 15,134 | $ | 1,601 | $ | 16,735 | ||||||||||||
Total gains or losses (realized and unrealized): |
||||||||||||||||||||||||
Included in earnings |
| 231 | 231 | | | | ||||||||||||||||||
Included in other comprehensive income |
749 | | 749 | (398 | ) | | (398 | ) | ||||||||||||||||
Amortization and accretion |
(61 | ) | | (61 | ) | (119 | ) | | (119 | ) | ||||||||||||||
Purchases, issuances, and settlements |
| | | | | | ||||||||||||||||||
Ending balance |
$ | 14,347 | $ | 1,626 | $ | 15,973 | $ | 14,617 | $ | 1,601 | $ | 16,218 | ||||||||||||
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 |
$ | | $ | 231 | $ | 231 | $ | | $ | | $ | | ||||||||||||
CPA®:14 9/30/2009 10-Q 12
Table of Contents
Notes to Consolidated Financial Statements
Fair Value Measurements Using Significant | ||||||||||||||||||||||||
Unobservable Inputs (Level 3 Only) | ||||||||||||||||||||||||
Marketable | Derivative | Marketable | Derivative | |||||||||||||||||||||
Securities | Assets | Total Assets | Securities | Assets | Total Assets | |||||||||||||||||||
Nine months ended September 30, 2009 | Nine months ended September 30, 2008 | |||||||||||||||||||||||
Beginning balance |
$ | 13,787 | $ | 1,601 | $ | 15,388 | $ | 16,408 | $ | 2,564 | $ | 18,972 | ||||||||||||
Total gains or losses (realized and unrealized): |
||||||||||||||||||||||||
Included in earnings |
| 182 | 182 | (96 | ) | (255 | ) | (351 | ) | |||||||||||||||
Included in other comprehensive income |
767 | | 767 | (1,453 | ) | | (1,453 | ) | ||||||||||||||||
Amortization and accretion |
(207 | ) | | (207 | ) | (242 | ) | | (242 | ) | ||||||||||||||
Purchases, issuances, and settlements |
| (157 | ) | (157 | ) | | (708 | ) | (708 | ) | ||||||||||||||
Ending balance |
$ | 14,347 | $ | 1,626 | $ | 15,973 | $ | 14,617 | $ | 1,601 | $ | 16,218 | ||||||||||||
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 |
$ | | $ | 66 | $ | 66 | $ | (96 | ) | $ | (963 | ) | $ | (1,059 | ) | |||||||||
Gains and losses (realized and unrealized) included in earnings are reported in Other income and
(expenses) in the consolidated financial statements.
At September 30, 2009, we performed our quarterly assessment of the value of certain of our real
estate investments in accordance with current authoritative accounting guidance. The valuation of
these assets was determined using widely accepted valuation techniques, including discounted cash
flow on the expected cash flows of each asset as well as the income capitalization approach, which
considers prevailing market capitalization rates. We reviewed each investment based on the highest
and best use of the investment and market participation assumptions. We determined that the
significant inputs used to value these investments fall within Level 3. Based on this valuation,
during the nine months ended September 30, 2009 we recorded impairment charges totaling $20.9
million as described in Note 4, calculated based on market conditions and assumptions at September
30, 2009. Actual results may differ materially if market conditions or the underlying assumptions
change.
In April 2009, the FASB amended the existing guidance for disclosing the fair value of financial
instruments to require disclosing the fair value of financial instruments for interim reporting
periods as well as in annual financial statements. The new guidance also amended the existing
guidance for interim financial reporting to require those disclosures in summarized financial
information at interim reporting periods. The disclosures required by this guidance as of September
30, 2009 and December 31, 2008 are presented below (in thousands):
September 30, 2009 | December 31, 2008 | |||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
Non-recourse debt |
$ | 811,902 | $ | 774,859 | $ | 810,794 | $ | 791,337 | ||||||||
Marketable securities (a) |
14,000 | 14,585 | 14,208 | 13,968 |
(a) | Carrying value represents historical cost for marketable securities. |
The estimated fair value of our debt instruments was determined 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 September 30, 2009 and
December 31, 2008.
Note 8. Risk Management and Use of Derivative Financial Instruments
Risk Management
In the normal course of our on-going business operations, we encounter economic risk. There are
three main components of economic risk: interest rate risk, credit risk and market risk. We are
subject to interest rate risk on our interest-bearing liabilities. Credit risk is the risk of
default on our operations and tenants inability or unwillingness to make contractually required
payments. Market risk includes changes in the value of our properties and related loans as well as
changes in the value of our marketable securities due to changes in interest rates or other market
factors. In addition, we own investments in the European Union and are subject to the risks
associated with changing foreign currency exchange rates.
CPA®:14 9/30/2009 10-Q 13
Table of Contents
Notes to Consolidated Financial Statements
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
In March 2008, the FASB amended the existing guidance for accounting for derivative instruments and
hedging activities to require additional disclosures that are intended to help investors better
understand how derivative instruments and hedging activities affect an entitys financial position,
financial performance and cash flows. The enhanced disclosure requirements primarily surround the
objectives and strategies for using derivative instruments by their underlying risk as well as a
tabular format of the fair values of the derivative instruments and their gains and losses. The
required additional disclosures are presented below.
When we use derivative instruments, it is generally to reduce our exposure to fluctuations in
interest rates. We have not entered, and do not plan to enter into financial instruments for
trading or speculative purposes. In addition to derivative instruments that we entered into on our
own behalf, we may also be a party to derivative instruments that are embedded in other contracts,
and we may own common stock warrants, granted to us by lessees when structuring lease transactions,
that are considered to be derivative instruments. The primary risks related to our use of
derivative instruments are that a counterparty to a hedging arrangement could default on its
obligation or that the credit quality of the counterparty may be downgraded to such an extent that
it impairs our ability to sell or assign our side of the hedging transaction. While we seek to
mitigate these risks by entering into hedging arrangements with counterparties that are large
financial institutions that we deem to be credit worthy, it is possible that our hedging
transactions, which are intended to limit losses, could adversely affect our earnings. Furthermore,
if we terminate a hedging arrangement, we may be obligated to pay certain costs, such as
transaction or breakage fees. We have established policies and procedures for risk assessment and
the approval, reporting and monitoring of derivative financial instrument activities.
We measure derivative instruments at fair value and record them as assets or liabilities, depending
on our rights or obligations under the applicable derivative contract. Derivatives that are not
designated as hedges must be adjusted to fair value through earnings. If a derivative is
designated as a hedge, depending on the nature of the hedge, changes in the fair value of the
derivative will either be offset against the change in fair value of the hedged asset, liability,
or firm commitment through earnings, or recognized in Other comprehensive income (OCI) until the
hedged item is recognized in earnings. The ineffective portion of a derivatives change in fair
value will be immediately recognized in earnings. The following table sets forth our derivative
instruments at September 30, 2009 and December 31, 2008 (in thousands):
Balance Sheet | Asset Derivatives Fair Value at | Liability Derivatives Fair Value at | ||||||||||||||||||
Location | September 30, 2009 | December 31, 2008 | September 30, 2009 | December 31, 2008 | ||||||||||||||||
Derivatives designated as hedging
instruments |
||||||||||||||||||||
Interest rate swap |
Other liabilities | $ | | $ | | $ | (626 | ) | $ | (2,256 | ) | |||||||||
Derivatives not designated as hedging
instruments |
||||||||||||||||||||
Stock warrants |
Other assets | 1,626 | 1,601 | | | |||||||||||||||
Interest rate swap |
Other liabilities | | | (852 | ) | | ||||||||||||||
Total derivatives |
$ | 1,626 | $ | 1,601 | $ | (1,478 | ) | $ | (2,256 | ) | ||||||||||
CPA®:14 9/30/2009 10-Q 14
Table of Contents
Notes to Consolidated Financial Statements
The following tables present the impact of derivative instruments on, and their location
within, the consolidated financial statements (in thousands):
Amount of Gain (Loss) Recognized in | ||||||||||||||||||||
OCI on Derivative (Effective Portion) | ||||||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||
Derivatives in Cash Flow Hedging Relationships | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||
Interest rate swaps |
$ | 578 | $ | (374 | ) | $ | 1,629 | $ | (197 | ) |
During the three and nine months ended September 30, 2009 and 2008, no gains or losses were
reclassified from OCI into income related to either (i) ineffective portions of hedging
relationships or (ii) amounts excluded from effectiveness testing.
Amount of Gain (Loss) Recognized in | ||||||||||||||||||
Income on Derivatives | ||||||||||||||||||
Derivatives not in Cash | Location of Gain (Loss) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
Flow Hedging Relationships | Recognized in Income | 2009 | 2008 | 2009 | 2008 | |||||||||||||
Stock warrants |
Other income and (expenses) | $ | 231 | $ | | $ | 182 | $ | (255 | ) | ||||||||
Interest rate swap (a) |
Interest expense | (852 | ) | | (852 | ) | | |||||||||||
Total |
$ | (621 | ) | $ | | $ | (670 | ) | $ | (255 | ) | |||||||
(a) | During the third quarter of 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 in May 2009. 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.
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 instrument that we had outstanding at September 30, 2009 that was
designated as a cash flow hedge and is summarized as follows (dollars in thousands):
Notional | Effective | Effective | Expiration | Fair Value at | ||||||||||||||||||
Type | Amount | Interest Rate | Date | Date | September 30, 2009 | |||||||||||||||||
1-Month LIBOR |
Pay-fixed swap | 6,402 | 6.4 | % | 7/2008 | 7/2018 | $ | (626 | ) |
The interest rate swap derivative instrument that we had outstanding at September 30, 2009 that was
not designated as a hedge is summarized as follows (dollars in thousands):
Notional | Effective | Effective | Expiration | Fair Value at | ||||||||||||||||||
Type | Amount | Interest Rate | Date | Date | September 30, 2009 | |||||||||||||||||
1-Month LIBOR |
Pay-fixed swap | $ | 12,139 | 5.6 | % | 3/2008 | 3/2018 | $ | (852 | ) |
CPA®:14 9/30/2009 10-Q 15
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Notes to Consolidated Financial Statements
Stock Warrants
We own stock warrants that were generally granted to us by lessees in connection with structuring
the initial lease transactions. These warrants are defined as derivative instruments because they
are readily convertible to cash or provide for net settlement upon conversion.
Embedded Credit Derivatives
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 September 30, 2009 and December 31, 2008, and
including the effect of foreign currency translation, the embedded credit derivatives had an
estimated total fair value of $2.0 million and $2.1 million, respectively. For the three months
ended September 30, 2009 and 2008, these derivatives generated total unrealized losses of $1.3
million and $4.2 million, respectively. For the nine months ended September 30, 2009 and 2008,
these derivatives generated total unrealized losses of $0.2 million and $3.0 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.
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. As of September 30, 2009, we estimate
that an additional $0.7 million will be reclassified as interest expense during the next twelve
months.
We have agreements with certain of our derivative counterparties that contain certain credit
contingent provisions that could result in us being declared in default on our derivative
obligations if we either default or are capable of being declared in default on any of our
indebtedness. As of September 30, 2009, we have not been declared in default on any of our
derivative obligations. The estimated fair value of our derivatives that were in a net liability
position was $1.5 million as of September 30, 2009, which includes accrued interest but excludes
any adjustment for nonperformance risk. If we had breached any of these provisions at September 30,
2009, we could have been required to settle our obligations under these agreements at their
termination value of $1.6 million.
Portfolio Concentration Risk
Concentrations of credit risk arise when a group of tenants is engaged in similar business
activities or is subject to similar economic risks or conditions that could cause them to default
on their lease obligations to us. We regularly monitor our portfolio to assess potential
concentrations of credit risk. While we believe our portfolio is reasonably well diversified, it
does contain concentrations in excess of 10% of current annualized lease revenues in certain areas,
as described below. Although we view our exposure from properties that we purchased together with
our affiliates based on our ownership percentage in these properties, the percentages below are
based on our consolidated ownership and not on our actual ownership percentage in these
investments.
At September 30, 2009, the majority of our directly owned real estate properties were located in
the U.S. (79%) with the remainder primarily leased to one tenant located in France, Carrefour
France, SAS (14%). No other tenant accounted for more than 10% of current annualized lease revenue.
As of September 30, 2009, our directly owned real estate properties contained concentrations in the
following asset types: industrial (32%), warehouse/distribution (31%), office (19%) and retail
(10%); and in the following tenant industries: retail (28%), electronics (12%) and automotive
(11%).
At September 30, 2009, a tenant in the automotive industry, Metaldyne Company, LLC, was operating
under bankruptcy protection. This tenant accounted for $1.0 million of lease revenues for each of
the three month periods ended September 30, 2009 and 2008 and $3.0 million and $2.9 million of
lease revenues for the nine months ended September 30, 2009 and 2008, respectively, with an
aggregate carrying value of $20.1 million and $24.6 million at September 30, 2009 and December 31,
2008, respectively. A former tenant, which had been operating under bankruptcy protection,
disaffirmed their lease with us effective September 30, 2009. This lease accounted for $0.4
million of lease revenues for each of the three months ended September 30, 2009 and 2008 and $1.1
million of lease revenues for each of the nine months ended September 30, 2009 and 2008. A second
automotive tenant, Special Devices, Inc., emerged from bankruptcy in August 2009, at which time we
entered into two new leases with this tenant. One lease is scheduled to expire in January 2010 and will generate total lease revenues of $1.8 million, while the second
lease is scheduled to expire in June 2021 and will generate annual lease revenues of $1.0 million.
In addition, another tenant emerged from bankruptcy protection in April 2009 and informed us that
it will not renew its lease with us when the lease expires in December 2009. This lease accounted
for $0.4 million of lease revenues for each of the three months ended September 30, 2009 and 2008
and $1.1 million and $1.6 million of lease revenues for the nine months ended September 30, 2009
and 2008, respectively.
CPA®:14 9/30/2009 10-Q 16
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Notes to Consolidated Financial Statements
Many companies in automotive related industries (manufacturing, parts, services, etc.) have been
experiencing increasing difficulties for several years, which has resulted in several companies
filing for bankruptcy. As of September 30, 2009, we had five tenants in automotive related
industries, including Metaldyne Company, which filed for bankruptcy in May 2009, and Special
Devices, which emerged from bankruptcy in August 2009 (see above). These five tenants accounted for
lease revenues totaling $3.2 million and $4.2 million for the three months ended September 30, 2009
and 2008, respectively, and $11.5 million and $12.2 million for the nine months ended September 30,
2009 and 2008, respectively, with an aggregate carrying value of $103.6 million and $105.3 million
as of September 30, 2009 and December 31, 2008, respectively.
Note 9. Advisor Settlement
In March 2008, the advisor entered into a settlement with the SEC with respect to all matters
relating to a previously disclosed investigation. In connection with the settlement, we recognized
income of $10.9 million, including interest, from the advisor. We received payment of this amount
from the advisor in April 2008. The settlement is reflected as Advisor settlement in our
Consolidated Statements of Income. For additional information about the SEC investigation and the
settlement, please refer to our 2008 Annual Report.
Note 10. Noncontrolling Interests
Noncontrolling interest is the portion of equity in a subsidiary not attributable, directly or
indirectly, to a parent. In December 2007, the FASB amended the existing authoritative guidance for
accounting for noncontrolling interests in consolidated financial statements, which we adopted as
required on January 1, 2009. The new guidance establishes and expands accounting and reporting
standards for noncontrolling interests and, if applicable, for the deconsolidation of a subsidiary.
The following table presents a reconciliation of total equity, the equity attributable to our
shareholders and the equity attributable to noncontrolling interests (in thousands):
CPA®:14 | Noncontrolling | |||||||||||
Total | Shareholders | Interests | ||||||||||
Balance at January 1, 2008 |
$ | 780,993 | $ | 762,960 | $ | 18,033 | ||||||
Shares issued |
21,298 | 21,298 | | |||||||||
Net income |
47,201 | 45,164 | 2,037 | |||||||||
Distributions |
(72,572 | ) | (69,050 | ) | (3,522 | ) | ||||||
Change in other comprehensive loss |
(13,647 | ) | (13,647 | ) | | |||||||
Shares repurchased |
(20,073 | ) | (20,073 | ) | | |||||||
Balance at January 1, 2009 |
743,200 | 726,652 | 16,548 | |||||||||
Shares issued |
13,889 | 13,889 | | |||||||||
Net income |
13,795 | 12,435 | 1,360 | |||||||||
Distributions |
(52,712 | ) | (51,515 | ) | (1,197 | ) | ||||||
Consolidation of a venture |
1,779 | | 1,779 | |||||||||
Change in other comprehensive income |
4,781 | 4,758 | 23 | |||||||||
Shares repurchased |
(38,114 | ) | (38,114 | ) | | |||||||
Balance at September 30, 2009 |
$ | 686,618 | $ | 668,105 | $ | 18,513 | ||||||
Note 11. Income Taxes
We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code
of 1986, as amended. We believe we have operated, and we intend to continue to operate, in a manner
that allows us to continue to qualify as a REIT. Under the REIT operating structure, we are
permitted to deduct distributions paid to our shareholders and generally will not be required to
pay U.S. federal income taxes. Accordingly, no provision has been made for U.S. federal income taxes in
the consolidated financial statements.
CPA®:14 9/30/2009 10-Q 17
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Notes to Consolidated Financial Statements
We conduct business in various states and municipalities within the U.S. and the European Union,
and as a result, we file income tax returns in the U.S. federal jurisdiction and various state and
certain foreign jurisdictions.
We account for uncertain tax positions in accordance with current authoritative accounting
guidance. At September 30, 2009, we had unrecognized tax benefits of $0.1 million that, if
recognized, would have a favorable impact on the effective income tax rate in future periods. We
recognize interest and penalties related to uncertain tax positions in income tax expense. At
September 30, 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. These audits can often take
years to complete and settle. The tax years 2002 2008 remain open to examination by the major
taxing jurisdictions to which we are subject.
Note 12. Discontinued Operations
From time to time, tenants may vacate space due to lease buy-outs, elections not to renew their
leases, company insolvencies or lease rejections in the bankruptcy process. In these cases, we
assess whether we can obtain the highest value from the property by re-leasing or selling it. In
addition, in certain cases, we may elect to sell a property that is occupied if selling the
property yields the highest value. When it is appropriate to do so under current accounting
guidance for the disposal of long-lived assets, we reclassify the property as an asset held for
sale and the current and prior period results of operations of the property are reclassified as
discontinued operations.
In May 2009, we sold a domestic property to a third party for $22.3 million, net of selling costs,
and recognized a gain on the sale of $8.2 million. This property was encumbered by non-recourse
mortgage debt of $12.2 million. Concurrent with the closing of this sale, we used a portion of the
sale proceeds to defease non-recourse mortgage debt totaling $15.0 million on two unrelated
domestic properties and incurred defeasance charges totaling $0.4 million. 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 February 2009, we sold a property for $3.9 million, net of selling costs, and recognized a gain
on the sale of $0.4 million, excluding impairment charges recognized in prior years totaling $2.9
million. In connection with the sale, we defeased the existing non-recourse mortgage loan of $2.7
million.
In June and December 2008, we sold two properties for a total of $14.9 million, net of selling
costs, and recognized a net gain on the sale 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. Revenues and expenses of these properties are included in the
results of discontinued operations presented below for the three and nine months ended
September 30, 2008.
The results of operations for properties that are held for sale or have been sold are reflected in
the consolidated financial statements as discontinued operations for all periods presented and are
summarized as follows (in thousands):
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenues |
$ | 150 | $ | 910 | $ | 970 | $ | 3,246 | ||||||||
Expenses |
(4 | ) | (352 | ) | (188 | ) | (1,037 | ) | ||||||||
Gain on sale of real estate |
| | 8,611 | 159 | ||||||||||||
Income from discontinued operations |
$ | 146 | $ | 558 | $ | 9,393 | $ | 2,368 | ||||||||
CPA®:14 9/30/2009 10-Q 18
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Managements discussion and analysis of financial condition and results of operations (MD&A) is
intended to provide the reader with information that will assist in understanding our financial
statements and the reasons for changes in certain key components of our financial statements from
period to period. MD&A also provides the reader with our perspective on our financial position and
liquidity, as well as certain other factors that may affect our future results. Our MD&A should be
read in conjunction with our 2008 Annual Report.
Business Overview
We are a publicly owned, non-actively traded REIT that invests in commercial properties leased to
companies domestically and internationally. As a REIT, we are not subject to U.S. federal income
taxation as long as we satisfy certain requirements, principally relating to the nature of our
income, the level of our distributions and other factors. We earn revenue principally by leasing
the properties we own to single corporate tenants, primarily on a triple-net lease basis, which
requires the tenant to pay substantially all of the costs associated with operating and maintaining
the property. Revenue is subject to fluctuation because of the timing of new lease transactions,
lease terminations, lease expirations, contractual rent increases, tenant defaults and sales of
properties. As of September 30, 2009, our portfolio was comprised of our full or partial ownership
interest in 314 properties, substantially all of which were net leased to 87 tenants, and totaled
approximately 29 million square feet (on a pro rata basis) with an occupancy rate of 96%. We were
formed in 1997 and are managed by WPC and its subsidiaries.
Financial Highlights
(In thousands)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Total revenues |
$ | 44,734 | $ | 39,747 | $ | 126,106 | $ | 121,791 | ||||||||
Net (loss) income attributable to CPA®:14 shareholders (a) |
(12,133 | ) | 9,613 | 12,435 | 42,024 | |||||||||||
Cash flow from operating activities (b) |
64,565 | 84,301 |
(a) | The net loss of $12.1 million for the current year quarter and the significant reduction in net income for the comparable nine month periods was primarily due to impairment charges totaling $20.9 million recognized in the third quarter of 2009 and increases in uncollected rent expense of $2.2 million and $7.5 million for the three and nine months ended September 30, 2009 as compared to the same prior year periods. These decreases were partially offset by a gain on the sale of real estate of $8.6 million in the nine months ended September 30, 2009. In addition, net income for the prior year nine month period included income of $10.9 million related to the Advisors SEC settlement. | |
(b) | Cash flow from operating activities for the nine months ended September 30, 2009 was impacted negatively by increases in rent delinquencies and property carrying costs. For the comparable prior year period, cash flow from operating activities included the receipt of $10.9 million related to the advisors SEC Settlement. |
Our quarterly cash distribution increased to $0.1986 per share for the third quarter of 2009, or
$0.79 per share on an annualized basis.
We consider the performance metrics listed above as well as certain non-GAAP performance metrics to
be important measures in the evaluation of our results of operations, liquidity and capital
resources. We evaluate our results of operations with a primary focus on the ability to generate
cash flow necessary to meet our objectives of funding distributions to shareholders and increasing
equity in our real estate.
Current Trends
As of the date of this Report, we are focused on managing our existing portfolio of properties. In
our initial offering documents, we stated our intention to consider liquidity events for investors
generally commencing eight years following the investment of substantially all of the net proceeds
from that offering, which occurred in 2000. As a result, during the first quarter of 2008, the
advisor began actively considering liquidity alternatives on our behalf and discussed with our
board of directors a number of alternatives, including a possible merger with another
CPA® REIT, selling our assets, either on a portfolio basis or individually, or listing
our shares on a stock exchange. However, in light of deteriorating market conditions during 2008,
the advisor recommended, and our board agreed, that further consideration of liquidity alternatives
be postponed until market conditions become more stable. As a result, we are unable to predict when
a liquidity event will occur.
CPA®:14 9/30/2009 10-Q 19
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As of the date of this Report, global economic and financial conditions remain challenging, and
liquidity in the credit and real estate financing markets is scarce. Fewer financial institutions
are offering financing, and the terms of the financing that is available are generally less
advantageous for the borrower when compared to periods prior to the financial crisis. In addition,
our tenants continue to experience increased levels of financial distress, with four tenants filing
for bankruptcy protection or liquidating during the nine months ended September 30, 2009. The full
magnitude, effects and duration of the current financial and economic crisis cannot be predicted
and necessarily renders any discussion of current trends that affect our business segments highly
uncertain. Nevertheless, as of the date of this Report, the impact of current financial and
economic trends on our business, and our response to those trends, is presented below.
Financing Conditions
Current real estate financing markets remain weak as of the date of this Report, and refinancing
maturing debt and obtaining financing on unencumbered properties, both domestically and
internationally, remains more difficult than in periods prior to the current economic crisis. This
weak financing environment has resulted in lenders generally offering shorter maturities, often
subject to variable interest rates. We generally attempt to obtain interest rate caps or swaps to
mitigate the impact of variable rate financing. During the nine months ended September 30, 2009, we
obtained non-recourse mortgage financing totaling $27.8 million in order to refinance maturing debt, with a
weighted average annual interest rate and term of up to 6.7% and 9.8 years, respectively. In
addition, a venture in which we have a 67% interest refinanced
maturing debt with new non-recourse mortgage
financing of $22.6 million with a fixed annual interest rate and term of 5.9% and 10 years,
respectively.
We have no balloon payments due during the remainder of 2009. We have balloon payments totaling
$66.7 million on our consolidated investments that will be due during 2010 and $255.8 million that
will be due during 2011, inclusive of amounts payable by noncontrolling interests totaling $29.3
million. In addition, our share of balloon payments due in 2010 and 2011 on our unconsolidated
ventures is $4.2 million and $9.8 million, respectively. We are actively seeking to refinance this
debt but believe we have sufficient financing alternatives and/or cash resources to make these
payments, if necessary. Our property level debt is generally non-recourse, which means that if we
or the ventures in which we own investments default on a mortgage loan obligation, our exposure is
limited to our equity invested in that property.
Corporate Defaults
Due to the current weak economic environment, we expect that some of our tenants will continue to
experience financial stress and that some will become financially distressed. Tenants in financial
distress may become delinquent on their rent and/or default on their leases and, if they file for
bankruptcy protection, may reject our lease in bankruptcy court, all of which may require us to
incur impairment charges. Even where a default has not occurred and a tenant is continuing to make
the required lease payments, we may restructure or renew leases on less favorable terms, or the
tenants credit profile may deteriorate, which could affect the value of the leased asset and could
in turn require us to incur impairment charges. Based on tenant activity during the nine months
ended September 30, 2009, including lease amendments, early lease renewals and lease rejections in
bankruptcy court, we currently expect that our lease revenue will decrease by approximately 5.5% on
an annualized basis. However, this amount may increase or decrease based on additional tenant
activities and changes in economic conditions, both of which are outside of our control. If the
North American and European economic zones continue to experience the improving economic conditions
that they have experienced very recently, we would expect to see an improvement in the general
business conditions for our tenants, which should result in less stress for them financially.
However, if economic conditions deteriorate, it is likely that our tenants financial condition
will deteriorate as well.
At September 30, 2009, we had one tenant operating under bankruptcy protection, Metaldyne Company,
which accounted for 2.2% of our aggregate 2009 annualized lease revenues. During the nine months
ended September 30, 2009, we incurred impairment charges totaling $20.9 million comprised of an
impairment charge of $16.9 million related to the former Nortel Networks property and $4.0 million
related to Metaldyne (Note 4). Impairment charges do not necessarily reflect the true economic loss
caused by the default of a tenant, which may be greater or less than the impairment amount. In
addition, during the nine months ended September 30, 2009, three tenants disaffirmed their leases with us in bankruptcy court, and as a result the properties
are vacant as of the date of this Report. These three tenants previously accounted for $4.3
million, or 2.3%, of aggregate 2009 annualized lease revenues. During the time that these
properties remain unoccupied, we anticipate that we will incur significant carrying costs. As a
result of these corporate defaults, during the third quarter of 2009 we suspended debt service on
three non-recourse mortgage loans regarding these properties, which had an aggregate outstanding
balance of $40.8 million at September 30, 2009 (Note 8).
During the nine months ended September 30, 2009, two tenants that had been operating under
bankruptcy protection affirmed and amended their leases with us upon emerging from bankruptcy. We
do not anticipate that these lease restructurings will have a material impact on our financial
condition or results of operations.
CPA®:14 9/30/2009 10-Q 20
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To mitigate these risks, we have invested in assets that we believe are critically important to a
tenants operations and have attempted to diversify our portfolio by tenant and tenant industry. We
also monitor tenant performance through review of rent delinquencies as a precursor to a potential
default, meetings with tenant management and review of tenants financial statements and compliance
with any financial covenants. When necessary, our asset management process includes restructuring
transactions to meet the evolving needs of tenants, re-leasing properties, refinancing debt and
selling properties, where possible, as well as protecting our rights when tenants default or enter
into bankruptcy.
Net Asset Values
As a result of market conditions worsening during 2008, asset values declined across all asset
types, and our estimated net asset valuation as of December 31, 2008 declined as well. Our
estimated net asset value per share as of December 31, 2008 decreased to $13.00, a 7.1% decline
from our April 30, 2008 estimated net asset value per share of $14.00, which was calculated as a
basis for consideration of potential liquidity alternatives during 2008, and a 10.3% decline from
our December 31, 2007 estimated net asset value per share of $14.50. Our estimated net asset
valuation, which is generally calculated on an annual basis, is based on a number of variables,
including individual tenant credits, tenant defaults, lease terms, lending credit spreads, and
foreign currency exchange rates. We do not control these variables and, as such, cannot predict how
these variables will change in the future.
Redemptions
We have experienced higher levels of share redemptions during 2008 and 2009, which consume cash. In
general, our redemption plan provides that redemptions are limited to proceeds from our
distribution reinvestment plan plus 1% of the operating cash flow from our previous fiscal year and
is also limited to 5% of outstanding shares on a rolling basis. With the redemption requests for
the third quarter of 2009 fulfilled, we were nearing the 5% limitation. In light of this 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, 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 redemption plan. See
Financial Condition Financing Activities below.
Lease Expirations
Less than 4% of our leases are scheduled to expire during the remainder of 2009 and in 2010. At
September 30, 2009, our leases had a weighted average remaining term of 7 years. Based on
annualized contractual lease revenue, 13% of our leases are scheduled to expire in 2011. We
actively manage our portfolio and begin discussing options with tenants generally three years in
advance of the scheduled lease expiration. In certain cases, we obtain lease renewals from our
tenants. However, tenants may exercise purchase options rather than renew their leases, while in
other cases we may seek replacement tenants or sell the property. We currently expect that most of
our leases due to expire in the remainder of 2009 and 2010 will be renewed by our tenants, on what
we believe are generally competitive terms given current market conditions. We expect that the
leases will be mostly renewed with the existing tenants, which will allow us to avoid downtime,
paying operating costs and paying for tenant improvements in most cases. On the other hand, we
expect that a majority of the leases that are being renewed during the remainder of 2009 and 2010
will be at rents that are below the tenants existing contractual rent.
Inflation and Foreign Exchange Rates
Our leases generally have rent adjustments based on formulas indexed to changes in the consumer
price index (CPI) or other similar indices for the jurisdiction in which the property is located.
Because these rent adjustments may be calculated based on changes in the CPI over a multi-year
period, changes in inflation rates can have a delayed impact on our results of operations. Rent
adjustments during 2008 and the nine months ended September 30, 2009 have generally benefited from
increases in inflation rates during the years prior to the scheduled rent adjustment date. Current
inflation rates in the U.S. and the Euro zone, which are historically low, will impact rent
increases in coming years.
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. Despite the weakening of the U.S. dollar during the third quarter of 2009, the average rate for the U.S.
dollar in relation to the Euro strengthened by approximately 5% and 10%, respectively, during the
three and nine months ended September 30, 2009 in comparison to the same periods in 2008, resulting
in a negative impact on our results of operations for Euro-denominated investments in the current
year periods. Investments denominated in the Euro accounted for approximately 18% and 16% of our
annualized lease revenues for the nine months ended September 30, 2009 and 2008, respectively.
CPA®:14 9/30/2009 10-Q 21
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Results of Operations
Managements evaluation of the sources of lease revenues is as follows (in thousands):
Nine months ended September 30, | ||||||||
2009 | 2008 | |||||||
Rental income |
$ | 110,383 | $ | 107,836 | ||||
Interest income from direct financing leases |
10,790 | 11,498 | ||||||
$ | 121,173 | $ | 119,334 | |||||
During the nine months ended September 30, 2009 and 2008, we earned net lease revenues (i.e.,
rental income and interest income from direct financing leases) from our direct ownership of real
estate from the following lease obligations (in thousands):
Nine months ended September 30, | ||||||||
Lessee | 2009 | 2008 | ||||||
Carrefour France, SAS (a) |
$ | 15,714 | $ | 15,100 | ||||
Petsmart, Inc. (b) |
6,206 | 6,118 | ||||||
Federal Express Corporation (b) |
5,270 | 5,213 | ||||||
Dicks Sporting Goods, Inc. |
5,204 | 5,347 | ||||||
Atrium Companies, Inc. |
3,940 | 3,862 | ||||||
Tower Automotive, Inc. |
3,472 | 3,336 | ||||||
Perkin Elmer, Inc. (a) |
3,334 | 3,713 | ||||||
Katun Corporation (a) |
3,318 | 3,384 | ||||||
Caremark Rx, Inc. |
3,225 | 3,225 | ||||||
Metaldyne Company LLC (c) |
2,978 | 2,892 | ||||||
McLane Company Food Service Inc. |
2,799 | 2,785 | ||||||
Amylin
Pharmaceuticals, Inc. (formerly Sicor, Inc.)
(b)(d) |
2,549 | | ||||||
Amerix Corp.(e) |
2,431 | 2,196 | ||||||
Special Devices, Inc. (f) |
2,078 | 3,139 | ||||||
Builders FirstSource, Inc. (b) |
2,035 | 2,009 | ||||||
Gibson Guitar Corp. (b) |
2,035 | 2,000 | ||||||
Gerber Scientific, Inc. |
2,001 | 1,924 | ||||||
Collins & Aikman Corporation |
1,917 | 1,839 | ||||||
Waddington North America, Inc. |
1,902 | 1,902 | ||||||
Other (a) (b) |
48,765 | 49,350 | ||||||
$ | 121,173 | $ | 119,334 | |||||
(a) | Revenue amounts are subject to fluctuations in foreign currency exchange rates. The average rate for the U.S. dollar in relation to the Euro during the nine months ended September 30, 2009 strengthened by approximately 10% in comparison to the same period in 2008, resulting in a negative impact on lease revenues for our Euro-denominated investments in the current year period. | |
(b) | These revenues are generated in consolidated ventures, generally with our affiliates, and include lease revenues applicable to noncontrolling interests totaling $6.8 million and $5.4 million for the nine months ended September 30, 2009 and 2008, respectively. | |
(c) | Metaldyne continues to operate under bankruptcy protection and as of the date of this Report has not indicated whether it will affirm or disaffirm its lease with us. During the third quarter of 2009, we recognized a $4.0 million impairment charge related to Metaldyne. | |
(d) | As of September 30, 2009, we consolidated this venture. (Note 5) | |
(e) | Increase was due to CPI-based (or equivalent) rent increases. | |
(f) | Special Devices terminated its existing lease and entered into two new leases with us upon emerging from bankruptcy in August 2009. One lease is scheduled to expire in January 2010 and will generate total lease revenues of $1.8 million, while the second lease is scheduled to expire in June 2021 and will generate annual lease revenues of $1.0 million. |
CPA®:14 9/30/2009 10-Q 22
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We recognize income from equity investments in real estate, of which lease revenues are a
significant component. During the nine months ended September 30, 2009 and 2008, net lease revenues
from these ventures are presented below. Amounts provided are the total amounts attributable to the
ventures and do not represent our proportionate share (dollars in thousands):
Ownership Interest at | Nine months ended September 30, | |||||||||||
Lessee | September 30, 2009 | 2009 | 2008 | |||||||||
Hellweg Die Profi-Baumarkte GmbH & Co. KG (a) |
32 | % | $ | 26,362 | $ | 28,845 | ||||||
U-Haul Moving Partners, Inc. and Mercury Partners, L.P. |
12 | % | 22,379 | 21,329 | ||||||||
True Value Company |
50 | % | 10,871 | 11,077 | ||||||||
Advanced Micro Devices, Inc. |
67 | % | 7,449 | 7,449 | ||||||||
LifeTime Fitness, Inc. |
56 | % | 6,954 | 6,954 | ||||||||
CheckFree Holdings, Inc. |
50 | % | 3,714 | 3,609 | ||||||||
Best Buy Co., Inc. |
37 | % | 3,414 | 3,287 | ||||||||
Compucom Systems, Inc. |
67 | % | 3,402 | 3,647 | ||||||||
Del Monte Corporation (b) |
50 | % | 2,645 | 2,360 | ||||||||
The Upper Deck Company |
50 | % | 2,395 | 2,395 | ||||||||
Dicks Sporting Goods, Inc. |
45 | % | 2,347 | 2,347 | ||||||||
ShopRite Supermarkets, Inc. |
45 | % | 1,858 | 1,841 | ||||||||
Town Sports International Holdings, Inc. |
56 | % | 815 | 815 | ||||||||
Amylin Pharmaceuticals, Inc. (formerly Sicor, Inc.) (c) |
50 | % | | 2,507 | ||||||||
$ | 94,605 | $ | 98,462 | |||||||||
(a) | In addition to lease revenues, the venture also earned interest income of $19.9 million and $21.7 million on a note receivable for the nine months ended September 30, 2009 and 2008, respectively. Amounts are subject to fluctuations in foreign currency exchange rates. | |
(b) | Increase was due to CPI-based rent increase. | |
(c) | As of September 30, 2009, we consolidated this venture (Note 5). |
Lease Revenues
Our net leases generally have rent adjustments based on formulas indexed to changes in the CPI or
other similar indices for the jurisdiction in which the property is located, sales overrides or
other periodic increases, which are designed to increase lease revenues in the future. We own
international investments and, therefore, lease revenues from these investments are subject to
fluctuations in exchange rate movements in foreign currencies. In certain cases, although we
recognize lease revenues in connection with our tenants obligation to pay rent, we may also
increase our uncollected rent expense if tenants are experiencing financial distress and have not
paid the rent to us that they owe, as described in Property expenses below.
For the three and nine months ended September 30, 2009 as compared to the same periods in 2008,
lease revenues increased by $2.6 million and $1.8 million, respectively, primarily due to scheduled
rent increases at several properties totaling $2.5 million and $4.4 million, respectively. An
adjustment we made in the third quarter of 2009 to record a venture under the consolidation method
that was previously accounted for under the equity method (Note 5) resulted in an increase
of $2.5 million to lease revenues in both current year periods. These increases were partially
offset by decreases in lease revenues of $2.3 million and
$3.8 million, respectively, as a result of tenants
lease restructurings and lease rejections in bankruptcy court, as
well as decreases of $0.4 million and $1.8
million, respectively, as a result of the negative impact of fluctuations in foreign
currency exchange rates.
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.
For the three and nine months ended September 30, 2009 as compared to the same periods in 2008,
other operating income increased by $2.4 million and $2.5 million, respectively. Upon emerging from
bankruptcy in the third quarter of 2009, Special Devices terminated its existing lease with us and
entered into two new leases expiring in January 2010 and June 2021. In connection with the
restructuring, Special Devices forgave our existing $4.6 million note payable to it effective
January 2010. As a result of the loan forgiveness, we recognized income of $1.2 million, which is
reflected in both the three and nine months ended September 2009, and expect to recognize an
additional $1.9 million in the fourth quarter of 2009. The remaining income will be recognized
between 2010 and 2021 when the second lease expires. In addition, reimbursable tenant costs
for both comparable periods.
CPA®:14 9/30/2009 10-Q 23
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Depreciation and Amortization
For the three and nine months ended September 30, 2009 as compared to the same periods in 2008,
depreciation and amortization increased by $3.4 million and $2.8 million, respectively, primarily
due to depreciation and amortization of $1.9 million from a
venture that was previously accounted for under the equity method (Note 5), as well as increase of $1.6 million in the amortization of lease-related intangible
assets as the result of restructuring several leases. For the nine
months ended September 30, 2009, these increases
were partially offset by a decrease in depreciation of $0.7 million related to a property that was
fully depreciated during the first six months of 2009.
Property Expenses
For the three and nine months ended September 30, 2009 as compared to the same periods in 2008,
property expenses increased by $3.3 million and $8.8 million, respectively, primarily due to
increases in costs related to current and former tenants who have filed for bankruptcy of $2.9
million and $9.1 million, respectively, and increases in reimbursable tenant costs of $0.7 million
and $1.5 million, respectively. Reimbursable tenant costs are recorded as both income and property
expense and, therefore, have no impact on net income. As a result of tenants bankruptcy proceedings, uncollected rent
expense increased by $2.2 million and $7.5 million in the comparable three and nine month periods,
respectively, while professional fees and property carrying costs increased by $0.7 million and
$1.6 million, respectively. Included in uncollected rent expense for the nine months ended
September 30, 2009 is a charge of $3.9 million to write off estimated unrecoverable straight-line
rent receivables, primarily for Nortel Networks Inc., which filed for bankruptcy in January 2009
and disaffirmed its lease with us. In April 2009, we entered into a direct lease agreement with the
existing subtenant at the former Nortel Networks property; however, the tenant defaulted on its
rental obligation in May 2009. These increases were partially offset by
decreases of $0.5 million and $1.7 million, respectively, in asset management and performance fees
payable to the advisor, primarily due to a decline in our annual
estimated net asset valuation at
December 31, 2008 in comparison with the previous years
valuations, as described in Net Asset
Values above.
General and Administrative
For the nine months ended September 30, 2009 as compared to the same period in 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.
Impairment Charges
In the
third quarter of 2009, we recognized impairment charges totaling
$20.9 million, which are reflected in both the three and nine
months ended September 30, 2009. We recognized an impairment charge of $16.9 million on a
property previously leased to Nortel Networks Inc. to reduce its carrying value to its estimated
fair value based on a discounted cash flow analysis. Nortel Networks filed for bankruptcy and
disaffirmed its lease with us in the first quarter of 2009. We also recognized an impairment charge
of $4.0 million on a 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.
For the three and nine months ended September 30, 2008, we incurred an impairment charge of $1.0
million on a domestic property to reduce the propertys carrying value to its estimated fair value.
Advisor Settlement
During the nine months ended September 30, 2008, we recognized income of $10.9 million in
connection with the advisors settlement with the SEC (Note 9). We received payment of this amount
from the advisor in April 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 exercise significant influence.
For the three and nine months ended September 30, 2009 as compared to the same periods in 2008,
income from equity investments in real estate increased by $2.3 million and $3.3 million,
respectively, primarily due to reductions in interest expense of $0.5 million and $1.7 million,
respectively, as a result of several ventures refinancing their mortgage loans during 2008 and
2009, as well as an increase in unrealized gains on embedded credit derivatives of $0.8 million in
both current year periods.
CPA®:14 9/30/2009 10-Q 24
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Other Interest Income
For the three and nine months ended September 30, 2009 as compared to the same periods in 2008,
interest income decreased by $0.7 million and $2.3 million, respectively, primarily due to lower
average cash balances and lower rates of return earned on cash balances as a result of current
market conditions.
Other Income and Expenses
Other income and expenses generally consists of gains and losses on foreign currency transactions
and derivative instruments. We and certain of our foreign consolidated subsidiaries have
intercompany debt and/or advances that are not denominated in the entitys functional currency.
When the intercompany debt or accrued interest thereon is remeasured against the functional
currency of the entity, a gain or loss may result. For intercompany transactions that are of a
long-term investment nature, the gain or loss is recognized as a cumulative translation adjustment
in other comprehensive income (loss). We also recognize gains or losses on foreign currency
transactions when we repatriate cash from our foreign investments. In addition, we have certain
derivative instruments, including common stock warrants, for which realized and unrealized gains
and losses are included in earnings. The timing and amount of such gains and losses cannot always
be estimated and are subject to fluctuation.
For the
nine months ended September 30, 2009 as compared to the same
period in 2008, net other income
decreased by $1.5 million, primarily due to a decrease in realized
gains on foreign currency transactions.
Interest Expense
For the three months ended September 30, 2009 as compared to the same period in 2008, interest
expense increased by $1.0 million, primarily due to interest expense of $1.7 million from a venture
that had previously been accounted for under the equity method but is
now consolidated (Note 5) and $0.9 million from the write-off of an interest rate swap that
was not designated as a hedging instrument at September 30, 2009 (Note 8). These increases were
partially offset by reductions of $0.6 million as a result of repaying or
refinancing debt and of $0.4 million as a result of making scheduled mortgage principal payments
and paying our annual installment of deferred acquisition fees, both of which reduce the balances
on which interest is incurred. In addition, interest expense decreased by $0.4 million as a result
of Special Devices forgiveness of a note payable by us in connection with its lease restructuring.
For the nine months ended September 30, 2009 as compared to the same period in 2008, interest
expense decreased by $0.7 million. Interest expense declined by $1.1 million due
to making scheduled mortgage principal payments; $0.9 million from repaying or refinancing debt; $0.8
million from the impact of fluctuations in foreign currency exchange rates; and $0.4 million as a
result of the loan forgiveness by Special Devices. These decreases were partially offset by
the additional $1.7 million of interest expense from a venture that had previously been accounted for under the
equity method and the $0.9 million write-off of an interest rate swap as described above.
Discontinued Operations
For the nine months ended September 30, 2009 as compared to the same period in 2008, income from
discontinued operations increased by $7.0 million, primarily due to a gain of $8.5 million
recognized in connection with the sale of a property in May 2009.
Net Income Attributable to CPA®:14 Shareholders
For the three and nine months ended September 30, 2009, the resulting net loss/income attributable
to CPA®:14 shareholders was a net loss of $12.1 million and net income of $12.4 million,
respectively, compared to net income of $9.6 million and $42.0 million for the three and nine
months ended September 30, 2008, respectively.
CPA®:14 9/30/2009 10-Q 25
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Financial Condition
Sources and Uses of Cash During the Period
One of our objectives is to use the cash flow from net leases to meet operating expenses, service
debt and fund distributions to shareholders. Our cash flows fluctuate period to period due to a
number of factors, which may include, among other things, the timing of purchases and sales of real
estate, timing of proceeds from non-recourse mortgage loans and receipt of lease revenues, the
advisors annual election to receive fees in restricted shares of our common stock or cash, the
timing and characterization of distributions from equity investments in real estate and payment to
the advisor of the annual installment of deferred acquisition fees and interest thereon in the
first quarter. Despite this fluctuation, we believe that we will generate sufficient cash from
operations and from equity distributions in excess of equity income in real estate to meet our
short-term and long-term liquidity needs. We may also use existing cash resources, the proceeds of
non-recourse mortgage loans and the issuance of additional equity securities to meet such needs. We
assess our ability to access capital on an ongoing basis. Our sources and uses of cash during the
period are described below.
Operating Activities During the nine months ended September 30, 2009, we used cash flows from
operating activities of $64.6 million to fund distributions to shareholders of $51.8 million. We
also made scheduled mortgage principal installments of $40.3 million and paid distributions to
noncontrolling interests of $1.2 million. Cash distributions received from our equity investments
in real estate in excess of cumulative equity income (see Investing Activities below) were also
used to fund these payments.
In 2009, our cash flows from operating activities were negatively affected by increased rent
delinquencies and property carrying costs related to tenants operating under bankruptcy protection.
In addition, for 2009, the advisor has elected to receive 20% of its performance fee from us in
cash with the remaining 80% in our restricted stock while in 2008 the advisor had elected to
receive all of its performance fees from us in our restricted stock. This change by the advisor had
a negative impact on our cash flow of approximately $2.1 million in the current year period. In the
nine months ended September 30, 2008, our cash flows from operating activities benefited from the
receipt of $10.9 million from the advisor in connection with its SEC Settlement. These settlement
proceeds were used to fund a portion of the distribution that was paid to unaffiliated shareholders
in April 2008.
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 the nine months ended September 30,
2009, we received aggregate proceeds of $26.2 million from the sale of two domestic properties. We
used $15.0 million of the sales proceeds from one of these
properties, which had been encumbered by
a $12.2 million non-recourse mortgage loan, to defease non-recourse mortgage debt on two unrelated
domestic properties. We then substituted the then-unencumbered properties as collateral for the
pre-existing $12.2 million loan. We also received distributions from our equity investments in real
estate in excess of cumulative equity income of $9.7 million, including $2.2 million of cash that
was repatriated from a German investment and $1.9 million representing our share of net proceeds
from a ventures mortgage refinancing. In addition, we contributed $5.3 million to an equity
investment to partially paydown its existing mortgage balance in connection with the ventures
restructuring of its non-recourse mortgage debt. Capital expenditures, which totaled $2.9 million,
primarily consisted of $2.5 million to acquire an expansion constructed by a tenant at an existing
property. In January 2009, we paid our annual installment of deferred acquisition fees to the
advisor, which totaled $3.6 million.
Financing Activities In addition to making scheduled mortgage principal payments and paying
distributions to shareholders and noncontrolling interests, we used
$49.3 million to defease or
prepay several mortgage loans, all of which were non-recourse obligations. We defeased debt
totaling $15.0 million on two properties (see Investing Activities above); refinanced mortgage loans totaling $31.6 million, which had scheduled maturity dates ranging from July 2009
to September 2009, for new non-recourse mortgage financing of $27.8 million; and used $2.7 million
to defease a mortgage loan in connection with the sale of a property. We also received $6.8 million
as a result of issuing shares through our distribution reinvestment and stock purchase plan and
used $38.1 million to repurchase our shares through a redemption plan that allows shareholders to
sell shares back to us, subject to certain limitations as described below.
We maintain a quarterly redemption program pursuant to which we may, at the discretion of our board
of directors, redeem shares of our common stock from shareholders seeking liquidity. We limit the
number of shares we may redeem so that the shares we redeem in any quarter, together with the
aggregate number of shares redeemed in the preceding three fiscal quarters, does not exceed a
maximum of 5% of our total shares outstanding as of the last day of the immediately preceding
quarter. In addition, our ability to effect redemptions is subject to our having available cash to
do so (see Current Trends above). We have recently experienced higher levels of redemption requests
as compared to prior years, and 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 currently expect
that our board will re-evaluate the status of the redemption plan in the first quarter of 2010.
However, we can not give any assurances as to the timing of any further actions by the board with
regard to the redemption plan.
CPA®:14 9/30/2009 10-Q 26
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Summary of Financing
The table below summarizes our non-recourse long-term debt as of September 30, 2009 and December
31, 2008 (dollars in thousands):
September 30, 2009 | December 31, 2008 | |||||||
Balance |
||||||||
Fixed rate |
$ | 687,433 | $ | 691,263 | ||||
Variable rate (a) |
124,469 | 119,531 | ||||||
Total |
$ | 811,902 | $ | 810,794 | ||||
Percent of total debt |
||||||||
Fixed rate |
85 | % | 85 | % | ||||
Variable rate (a) |
15 | % | 15 | % | ||||
100 | % | 100 | % | |||||
Weighted average interest rate at end of period |
||||||||
Fixed rate |
7.2 | % | 7.4 | % | ||||
Variable rate (a) |
6.2 | % | 6.2 | % |
(a) | Variable rate debt at September 30, 2009 included (i) $18.5 million that has been effectively converted to fixed rate debt through interest rate swap derivative instruments and (ii) $100.6 million in mortgage obligations that bore interest at fixed rates but that convert to variable rates during their term. The interest rate for one of these loans, which had an outstanding balance of $8.3 million at September 30, 2009, is scheduled to reset to a variable rate in April 2010. |
Cash Resources
As of September 30, 2009, our cash resources consisted of cash and cash equivalents totaling $95.3
million. Of this amount, $4.1 million, at then current exchange rates, was held in foreign bank
accounts, and we could be subject to restrictions or significant costs should we decide to
repatriate these amounts. We also had unleveraged properties that had an aggregate carrying value
of $42.9 million although, given the current economic environment, there can be no assurance that
we would be able to obtain financing for these properties. Our cash resources can be used for
working capital needs and other commitments.
As of the date of this Report, we have one tenant, Metaldyne Company, operating under bankruptcy
protection, which accounted for $3.0 million of lease revenues for the nine months ended
September 30, 2009. In addition, we have three properties that are vacant following the former
tenants termination of their leases with us in bankruptcy court. During the time that these
properties remain unoccupied, we anticipate that we will incur significant carrying costs. If
additional tenants encounter financial difficulties as a result of the current economic
environment, our cash flows could be further impacted.
Cash Requirements
During the next twelve months, we expect that cash payments will include paying distributions to
shareholders and partners who hold noncontrolling interests in entities we control and making
scheduled mortgage principal payments, as well as other normal recurring operating expenses.
Balloon payments on our consolidated investments totaling $41.4 million will be due during the next
twelve months, consisting of $17.5 million during the first quarter of 2010, $12.2 million in the
second quarter of 2010, and $11.6 million in the third quarter of 2010. We are actively seeking to
refinance certain of these loans and have existing cash resources that can be used to make these
payments.
CPA®:14 9/30/2009 10-Q 27
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Off-Balance Sheet Arrangements and Contractual Obligations
The table below summarizes our off-balance sheet arrangements and contractual obligations as of
September 30, 2009 and the effect that these arrangements and obligations are expected to have on
our liquidity and cash flow in the specified future periods (in thousands):
Less than | More than | |||||||||||||||||||
Total | 1 Year | 1-3 Years | 3-5 Years | 5 years | ||||||||||||||||
Non-recourse debt Principal |
$ | 811,902 | $ | 60,674 | $ | 456,429 | $ | 42,428 | $ | 252,371 | ||||||||||
Deferred acquisition fees Principal |
6,880 | 2,645 | 2,557 | 893 | 785 | |||||||||||||||
Interest on borrowings and deferred acquisition fees (a) |
214,981 | 56,258 | 72,938 | 35,294 | 50,491 | |||||||||||||||
Subordinated disposition fees (b) |
5,722 | | 5,722 | | | |||||||||||||||
Operating and other lease commitments (c) |
4,186 | 545 | 1,129 | 1,170 | 1,342 | |||||||||||||||
$ | 1,043,671 | $ | 120,122 | $ | 538,775 | $ | 79,785 | $ | 304,989 | |||||||||||
(a) | Interest on variable rate debt obligations was calculated using the applicable annual variable interest rates and balances outstanding as of September 30, 2009. | |
(b) | Payable to the advisor, subject to meeting contingencies, in connection with any liquidity event. In the first quarter of 2008, we asked our advisor to begin considering possible liquidity alternatives for us; however, due to deteriorating market conditions during 2008, the advisor recommended, and our board of directors agreed, that further consideration of a liquidity event be postponed until market conditions become more stable. As a result, we are unable to predict when a liquidity event will occur. | |
(c) | Operating and other lease commitments consist primarily of rent obligations under ground leases and our share of future minimum rents payable under an office cost-sharing agreement with certain affiliates for the purpose of leasing office space used for the administration of real estate entities. Amounts under the cost-sharing agreement are allocated among the entities based on gross revenues and are adjusted quarterly. The table above excludes the rental obligations under ground leases of two ventures in which we own a combined interest of 32%. These obligations total approximately $35.4 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 as of September 30, 2009. As of September 30, 2009, we had no material capital
lease obligations for which we are the lessee, either individually or in the aggregate.
We acquired two related investments in 2007 that are accounted for under the equity method of
accounting as we do not have a controlling interest but exercise significant influence. The
remaining ownership of these entities is held by our advisor and certain of our affiliates. The
primary purpose of these investments was to ultimately acquire an interest in the underlying
properties and as such was structured to effectively transfer the economics of ownership to us and
our affiliates while still monetizing the sales value by transferring the legal ownership in the
underlying properties over time. We acquired an interest in a venture (the property venture) that
in turn acquired a 24.7% ownership interest in a limited partnership owning 37 properties
throughout Germany. Concurrently, we also acquired an interest in a second venture (the lending
venture) that made a loan (the note receivable) to the holder of the remaining 75.3% interests
in the limited partnership (the partner). Under the terms of the note receivable, the lending
venture will receive interest that approximates 75% of all income earned by the limited
partnership, less adjustments. Our total effective ownership interest in the ventures is 32%. In
connection with the acquisition, the property venture agreed to an option agreement that gives the
property venture the right to purchase, from the partner, an additional 75% interest in the limited
partnership no later than December 2010 at a price equal to the principal amount of the note
receivable at the time of purchase. Upon exercise of this purchase option, the property venture
would own 99.7% of the limited partnership. The property venture has also agreed to a second
assignable option agreement to acquire the remaining 0.3% interest in the limited partnership by
December 2012. If the property venture does not exercise its option agreements, the partner has
option agreements to put its remaining interests in the limited partnership to the property venture
during 2014 at a price equal to the principal amount of the note receivable at the time of
purchase.
CPA®:14 9/30/2009 10-Q 28
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Upon exercise of the purchase option or the put, in order to avoid circular transfers of cash, the
seller and the lending venture and the property venture agreed that the lending venture or the
seller may elect, upon exercise of the respective purchase option or put option, to have the loan
from the lending venture to the seller repaid by a deemed transfer of cash. The deemed transfer
shall be in amounts necessary to fully satisfy the sellers obligations to the lending venture, and
the lending venture shall be deemed to have transferred such funds up to us and our affiliates as
if we had recontributed them down into the property venture based on our pro rata ownership. Accordingly, at September 30, 2009 (based on the exchange rate of the Euro), the only additional
cash required by us to fund the exercise of the purchase option or the put would be the pro rata
amounts necessary to redeem the advisors interest, the aggregate of which would be approximately
$2.4 million, with our share approximating $0.8 million. In addition, our maximum exposure to loss
on these ventures was approximately $17.8 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. All of the underlying investments are owned with our affiliates. Summarized financial
information for these ventures and our ownership interest in the ventures at September 30, 2009 are
presented below. Summarized financial information provided represents the total amount
attributable to the venture and does not represent our proportionate share (dollars in thousands):
Ownership Interest at | Total Third | |||||||||||||
Lessee | September 30, 2009 | Total Assets | Party Debt | Maturity Date | ||||||||||
ShopRite Supermarkets, Inc. |
45 | % | $ | 15,113 | $ | 9,556 | 7/2010 | |||||||
The Upper Deck Company |
50 | % | 27,428 | 10,542 | 2/2011 | |||||||||
Del Monte Corporation |
50 | % | 16,768 | 10,460 | 8/2011 | |||||||||
Advanced Micro Devices, Inc.(a) |
67 | % | 83,501 | 33,886 | 1/2012 | |||||||||
Best Buy Co., Inc. |
37 | % | 81,479 | 24,887 | 2/2012 | |||||||||
True Value Company |
50 | % | 137,609 | 69,496 | 1/2013 & 2/2013 | |||||||||
U-Haul Moving Partners, Inc. and Mercury Partners, LP |
12 | % | 311,364 | 165,327 | 5/2014 | |||||||||
Checkfree Holdings, Inc. |
50 | % | 35,834 | 29,589 | 6/2016 | |||||||||
LifeTime
Fitness, Inc. and Town Sports International Holdings, Inc. |
56 | % | 118,295 | 83,685 | 12/2016 & 5/2017 | |||||||||
Hellweg Die Profi-Baumarkte GmbH & Co. KG (b) |
32 | % | 490,429 | 411,811 | 4/2017 | |||||||||
Compucom Systems, Inc. (c) |
67 | % | 33,787 | 22,067 | 3/2019 | |||||||||
Dicks Sporting Goods, Inc. |
50 | % | 29,165 | 22,263 | 1/2022 | |||||||||
$ | 1,380,772 | $ | 893,569 | |||||||||||
(a) | In July 2009, this venture restructured its existing non-recourse mortgage debt and made an $8.0 million partial paydown of the loan balance. | |
(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 $343.5 million at September 30, 2009. Dollar amounts shown are based on the exchange rate of the Euro as of September 30, 2009. | |
(c) | In April 2009, this venture refinanced its existing non-recourse mortgage debt for new non-recourse financing of $22.6 million. |
CPA®:14 9/30/2009 10-Q 29
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Market Risk
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency
exchange rates and equity prices. The primary risks to which we are exposed are interest rate risk
and foreign currency exchange risk. We are also exposed to market risk as a result of
concentrations in certain tenant industries, including automotive related industries (see Current
Trends).
We do not generally use derivative financial instruments to manage foreign currency exchange 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 are subject to fluctuations
based on changes in interest rates. The value of our real estate is also subject to fluctuations
based on local and regional economic conditions and changes in the creditworthiness of lessees, all
of which may affect our ability to refinance property-level mortgage debt when balloon payments are
scheduled. Interest rates are highly sensitive to many factors, including governmental monetary and
tax policies, domestic and international economic and political conditions, and other factors
beyond our control. An increase in interest rates would likely cause the value of our owned assets
to decrease. Increases in interest rates may also have an impact on the credit profile of certain
tenants.
Although we have not experienced any credit losses on investments in loan participations, in the
event of a significant rising interest rate environment and given the current economic crisis, loan
defaults could occur and result in our recognition of credit losses, which could adversely affect
our liquidity and operating results. Further, such defaults could have an adverse effect on the
spreads between interest earning assets and interest bearing liabilities.
We hold a participation in CCMT, a mortgage pool consisting of $172.3 million of mortgage debt
collateralized by properties and lease assignments on properties jointly 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 the 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. As
of September 30, 2009, there have been no defaults. We account for the CCMT as a marketable
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 September 30, 2009, we estimate that our total interest in
CCMT had a fair value of $11.9 million, an increase of $0.6 million from the fair value as of
December 31, 2008.
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 mortgage loans and,
as a result, may enter into interest rate swap agreements or interest rate cap agreements with
lenders that effectively convert the variable rate debt service obligations of the loan to a fixed
rate. Interest rate swaps are agreements in which a series of interest rate flows are exchanged
over a specific period, and interest rate caps limit the 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. At September 30, 2009, 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 $1.5 million (Note 8).
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 income
(amounts shown represent the total amount attributable to the ventures, not our proportionate
share) of $0.2 million during each of the three and nine months ended September 30, 2009. 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 September 30, 2009, 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 the term. The estimated fair value of these instruments is affected by changes in
market interest rates. The annual interest rates on our fixed rate debt at September 30, 2009
ranged from 5.5% to 8.9%. The annual interest rates on our variable rate debt at September 30, 2009
ranged from 5.2% to 6.5%. Our debt obligations are more fully described in Financial Condition
above. The following table presents principal cash flows based upon expected maturity dates of our
debt obligations outstanding at September 30, 2009 (in thousands):
2009 | 2010 | 2011 | 2012 | 2013 | Thereafter | Total | Fair value | |||||||||||||||||||||||||
Fixed rate debt |
$ | 3,362 | $ | 80,514 | $ | 265,276 | $ | 156,840 | $ | 4,563 | $ | 176,878 | $ | 687,433 | $ | 652,761 | ||||||||||||||||
Variable rate debt |
$ | 1,348 | $ | 5,633 | $ | 5,890 | $ | 5,930 | $ | 6,415 | $ | 99,253 | $ | 124,469 | $ | 122,098 |
CPA®:14 9/30/2009 10-Q 30
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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 September 30, 2009 by an
aggregate increase of $24.1 million or an aggregate decrease of $22.9 million, respectively. Annual
interest expense on our unhedged variable rate debt that does not bear interest at fixed rates at
September 30, 2009 would increase or decrease by $0.1 million for each respective 1% change in
annual interest rates. As more fully described in Summary of Financing in Item 2 above, a
significant portion of the debt classified as variable rate bears interest at fixed rates at
September 30, 2009 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 exchange movements by generally placing both our debt obligation to the lender and
the tenants rental obligation to us in the same currency. We are generally a net receiver of the
Euro (we receive more cash than we pay out), and therefore our foreign investments benefit from a
weaker U.S. dollar, and are adversely affected by a stronger U.S. dollar, relative to the Euro. For
the nine months ended September 30, 2009, we recognized both net realized and net unrealized
foreign currency translation losses of less than $0.1 million, respectively. These gains and losses
are included in the consolidated financial statements and are primarily due to changes in the value
of the foreign currency on accrued interest receivable on notes receivable from wholly-owned
subsidiaries.
To date, we have 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. For the nine months
ended September 30, 2009, Carrefour France, SAS, which leases properties in France, contributed
13.0% of lease revenues. The leverage on the non-recourse financing of the Carrefour investment is
higher than the average leverage on our domestic real estate investments.
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. As of September 30, 2009, warrants issued to us were
classified as derivative instruments and had an aggregate estimated fair value of $1.6 million.
Item 4T. | Controls and Procedures |
Disclosure Controls and Procedures
Our disclosure controls and procedures include our controls and other procedures designed to
provide reasonable assurance that information required to be disclosed in this and other reports
filed under the Securities Exchange Act of 1934 (the Exchange Act) is accumulated and
communicated to management, including our chief executive officer and acting chief financial
officer, to allow timely decisions regarding required disclosure and to ensure that such
information is recorded, processed, summarized and reported within the required time periods
specified in the SECs rules and forms. It should be noted that no system of controls can provide
complete assurance of achieving a companys objectives and that future events may impact the
effectiveness of a system of controls.
Our chief executive officer and acting chief financial officer, after conducting an evaluation,
together with members of our management, of the effectiveness of the design and operation of our
disclosure controls and procedures as of September 30, 2009, have concluded that our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective as of
September 30, 2009 at a reasonable level of assurance.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during our most
recently completed fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
CPA®:14 9/30/2009 10-Q 31
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PART II
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
For the three months ended September 30, 2009, we issued 168,741 restricted shares of our common
stock to the advisor as consideration for performance fees. These shares were issued at $13.00 per
share, which is our most recently published estimated net asset value per share as approved by our
board of directors. Since none of these transactions were considered to have involved a public
offering within the meaning of Section 4(2) of the Securities Act of 1933, the shares issued were
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.
The following table provides information with respect to repurchases of our common stock during the
three months ended September 30, 2009:
Issuer Purchases of Equity Securities
Maximum number (or | ||||||||||||||||
Total number of shares | approximate dollar value) | |||||||||||||||
purchased as part of | of shares that may yet be | |||||||||||||||
Total number of | Average price | publicly announced | purchased under the | |||||||||||||
2009 Period | shares purchased (a) | paid per share | plans or programs (a) | plans or programs (a) | ||||||||||||
July |
| | N/A | N/A | ||||||||||||
August |
| | N/A | N/A | ||||||||||||
September |
1,322,402 | $ | 12.26 | N/A | N/A | |||||||||||
Total |
1,322,402 | |||||||||||||||
(a) | Represents shares of our common stock purchased pursuant to our redemption plan. In November 1997, we announced a redemption plan under which we may elect to redeem shares at the request of our shareholders, subject to certain conditions and limitations. The maximum amount of shares purchasable by us in any period depends on a number of factors and is at the discretion of our board of directors. 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. The suspension will remain in effect until our board of directors, in its discretion, determines to reinstate the redemption plan. We currently expect that our board will re-evaluate the status of the redemption plan in the first quarter of 2010. However, we cannot give any assurances as to the timing of any further actions by the board with regard to the redemption plan. The redemption plan will terminate if and when our shares are listed on a national securities market. |
Item 6. | Exhibits |
Exhibit No. | Description | Method of Filing | ||||
10.1 | Amended and Restated Advisory Agreement dated as of October 1, 2009 between Corporate Property
Associates 14 Incorporated and Carey Asset Management Corp.,
|
Filed herewith | ||||
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
Filed herewith | ||||
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
Filed herewith | ||||
32 | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
Filed herewith |
CPA®:14 9/30/2009 10-Q 32
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
Corporate Property Associates 14 Incorporated |
||||
Date 11/13/2009 | By: | /s/ Mark J. DeCesaris | ||
Mark J. DeCesaris | ||||
Managing Director and Acting Chief Financial Officer (Principal Financial Officer) |
||||
Date 11/13/2009 | By: | /s/ Thomas J. Ridings, Jr. | ||
Thomas J. Ridings, Jr. | ||||
Executive Director and Chief Accounting Officer (Principal Accounting Officer) |
CPA®:14 9/30/2009 10-Q 33