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EX-32 - EXHIBIT 32 - Corporate Property Associates 17 - Global INC | c92529exv32.htm |
EX-31.1 - EXHIBIT 31.1 - Corporate Property Associates 17 - Global INC | c92529exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - Corporate Property Associates 17 - Global INC | c92529exv31w2.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: 000-52891
CORPORATE PROPERTY ASSOCIATES 17 GLOBAL INCORPORATED
(Exact name of registrant as specified in its charter)
Maryland | 20-8429087 | |
(State of incorporation) | (I.R.S. Employer Identification No.) | |
50 Rockefeller Plaza | ||
New York, New York | 10020 | |
(Address of principal executive office) | (Zip Code) |
Investor Relations (212) 492-8920
(212) 492-1100
(Registrants telephone numbers, including area code)
(212) 492-1100
(Registrants telephone numbers, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (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 72,067,117 shares of common stock, $.001 par value, outstanding at November 9, 2009.
INDEX
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4 | ||||||||
5 | ||||||||
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7 | ||||||||
20 | ||||||||
28 | ||||||||
29 | ||||||||
30 | ||||||||
31 | ||||||||
32 | ||||||||
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 Form 10-K for the year ended December 31, 2008 filed on March 26, 2009 as revised by
Form 10-K/A filed on April 28, 2009, Form 8-K filed on July 13, 2009, and Form 8-K/A filed on July
20, 2009, (collectively, the 2008 Form 10-K and related Form 8-Ks). 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 the 2008 Form 10-K. There has been no significant
change in our critical accounting estimates.
CPA®:17 Global 9/30/2009 10-Q 1
Table of Contents
PART I
Item 1. Financial Statements
Item 1. Financial Statements
CORPORATE PROPERTY ASSOCIATES 17 GLOBAL 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 |
$ | 187,183 | $ | 168,981 | ||||
Accumulated depreciation |
(4,581 | ) | (1,455 | ) | ||||
Net investments in properties |
182,602 | 167,526 | ||||||
Net investment in direct financing leases |
303,824 | 83,924 | ||||||
Real estate under construction |
44,894 | | ||||||
Equity investments in real estate |
44,231 | 21,864 | ||||||
Net investments in real estate |
575,551 | 273,314 | ||||||
Cash and cash equivalents |
300,003 | 161,569 | ||||||
Commercial mortgage-backed securities |
20,782 | 20,309 | ||||||
Intangible assets, net |
17,860 | 18,291 | ||||||
Deferred offering costs and other assets |
24,578 | 5,589 | ||||||
Total assets |
$ | 938,774 | $ | 479,072 | ||||
Liabilities and Equity |
||||||||
Liabilities: |
||||||||
Debt |
$ | 275,593 | $ | 133,633 | ||||
Accounts payable, accrued expenses and other liabilities |
4,837 | 4,170 | ||||||
Prepaid and deferred rental income |
6,974 | 4,468 | ||||||
Due to affiliates |
8,327 | 4,797 | ||||||
Distributions payable |
9,322 | 4,507 | ||||||
Total liabilities |
305,053 | 151,575 | ||||||
Commitments and contingencies |
||||||||
Equity: |
||||||||
CPA®:17 Global shareholders equity: |
||||||||
Preferred stock, $0.001 par value; 50,000,000 shares authorized; none issued |
| | ||||||
Common stock, $0.001 par value; 400,000,000 shares authorized; 65,414,499
and 34,625,497 shares issued, respectively |
65 | 35 | ||||||
Additional paid-in capital |
586,395 | 310,732 | ||||||
Distributions in excess of accumulated earnings |
(24,449 | ) | (11,056 | ) | ||||
Accumulated other comprehensive loss |
(517 | ) | (2,288 | ) | ||||
561,494 | 297,423 | |||||||
Less, treasury stock at cost, 144,070 shares at September 30, 2009 |
(1,340 | ) | | |||||
Total CPA®:17 Global shareholders equity |
560,154 | 297,423 | ||||||
Noncontrolling interests |
73,567 | 30,074 | ||||||
Total equity |
633,721 | 327,497 | ||||||
Total liabilities and equity |
$ | 938,774 | $ | 479,072 | ||||
See Notes to Consolidated Financial Statements.
CPA®:17 Global 9/30/2009 10-Q 2
Table of Contents
CORPORATE PROPERTY ASSOCIATES 17 GLOBAL INCORPORATED
Consolidated Statements of Income (Unaudited)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenues |
||||||||||||||||
Rental income |
$ | 4,452 | $ | 2,307 | $ | 13,185 | $ | 2,319 | ||||||||
Interest income from direct financing leases |
8,311 | 608 | 20,515 | 608 | ||||||||||||
Interest income from commercial mortgage-backed securities |
690 | 675 | 2,046 | 985 | ||||||||||||
13,453 | 3,590 | 35,746 | 3,912 | |||||||||||||
Expenses |
||||||||||||||||
Depreciation and amortization |
(1,374 | ) | (727 | ) | (3,640 | ) | (733 | ) | ||||||||
Property expenses |
425 | (280 | ) | (2,472 | ) | (341 | ) | |||||||||
General and administrative |
(518 | ) | (585 | ) | (2,581 | ) | (1,495 | ) | ||||||||
(1,467 | ) | (1,592 | ) | (8,693 | ) | (2,569 | ) | |||||||||
Other Income and Expenses |
||||||||||||||||
Other interest income |
43 | 426 | 212 | 1,044 | ||||||||||||
Income from equity investments in real estate |
399 | 142 | 1,122 | 194 | ||||||||||||
Other income and (expenses) |
(782 | ) | (439 | ) | (2,399 | ) | (439 | ) | ||||||||
Interest expense |
(2,974 | ) | (1,322 | ) | (7,107 | ) | (1,331 | ) | ||||||||
(3,314 | ) | (1,193 | ) | (8,172 | ) | (532 | ) | |||||||||
Income before income taxes |
8,672 | 805 | 18,881 | 811 | ||||||||||||
Provision for income taxes |
(257 | ) | (83 | ) | (777 | ) | (83 | ) | ||||||||
Net Income |
8,415 | 722 | 18,104 | 728 | ||||||||||||
Less: Net income attributable to noncontrolling interests |
(3,864 | ) | (115 | ) | (8,811 | ) | (115 | ) | ||||||||
Net Income Attributable to CPA®:17 Global Shareholders |
$ | 4,551 | $ | 607 | $ | 9,293 | $ | 613 | ||||||||
Earnings Per Share |
||||||||||||||||
Net income attributable to CPA®:17 Global shareholders |
$ | 0.08 | $ | 0.03 | $ | 0.19 | $ | 0.05 | ||||||||
Weighted Average Shares Outstanding |
58,804,027 | 22,590,990 | 48,082,751 | 12,545,395 | ||||||||||||
Distributions Declared Per Share |
$ | 0.1587 | $ | 0.1390 | $ | 0.4724 | $ | 0.4140 | ||||||||
See Notes to Consolidated Financial Statements.
CPA®:17 Global 9/30/2009 10-Q 3
Table of Contents
CORPORATE PROPERTY ASSOCIATES 17 GLOBAL INCORPORATED
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(in thousands)
(in thousands)
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net Income |
$ | 8,415 | $ | 722 | $ | 18,104 | $ | 728 | ||||||||
Other Comprehensive Income: |
||||||||||||||||
Foreign currency translation adjustment |
2,305 | (2,485 | ) | 2,599 | (2,481 | ) | ||||||||||
Change in unrealized loss on derivative instrument |
(701 | ) | | (673 | ) | | ||||||||||
1,604 | (2,485 | ) | 1,926 | (2,481 | ) | |||||||||||
Comprehensive income (loss) |
10,019 | (1,763 | ) | 20,030 | (1,753 | ) | ||||||||||
Amounts Attributable to Noncontrolling Interests: |
||||||||||||||||
Net income |
(3,864 | ) | (115 | ) | (8,811 | ) | (115 | ) | ||||||||
Foreign currency translation adjustment |
(512 | ) | 737 | (470 | ) | 737 | ||||||||||
Change in unrealized loss on derivative instruments |
315 | | 315 | | ||||||||||||
Comprehensive (income) loss attributable to
noncontrolling interests |
(4,061 | ) | 622 | (8,966 | ) | 622 | ||||||||||
Comprehensive Income (Loss) Attributable to
CPA®:17
Global Shareholders |
$ | 5,958 | $ | (1,141 | ) | $ | 11,064 | $ | (1,131 | ) | ||||||
See Notes to Consolidated Financial Statements.
CPA®:17
Global 9/30/2009 10-Q 4
Table of Contents
CORPORATE PROPERTY ASSOCIATES 17 GLOBAL INCORPORATED
Consolidated Statements of Equity (Unaudited)
For the nine months ended September 30, 2009 and the year ended December 31, 2008
(in thousands, except share amounts)
For the nine months ended September 30, 2009 and the year ended December 31, 2008
(in thousands, except share amounts)
CPA®:17 Global Shareholders | ||||||||||||||||||||||||||||||||||||
Distributions | Accumulated | Total | ||||||||||||||||||||||||||||||||||
Additional | in Excess of | Other | CPA®:17 | |||||||||||||||||||||||||||||||||
Common | Paid-In | Accumulated | Comprehensive | Treasury | Global | Noncontrolling | ||||||||||||||||||||||||||||||
Shares | Stock | Capital | Earnings | (Loss) Income | Stock | Shareholders | Interests | Total | ||||||||||||||||||||||||||||
Balance at January 1, 2008 |
22,222 | $ | | $ | 200 | $ | (106 | ) | $ | | $ | | $ | 94 | $ | | $ | 94 | ||||||||||||||||||
Shares issued, net of offering costs |
34,544,270 | 35 | 309,942 | | | | 309,977 | | 309,977 | |||||||||||||||||||||||||||
Shares issued to affiliates |
59,005 | | 590 | | | | 590 | 590 | ||||||||||||||||||||||||||||
Contributions |
| | | | | | | 31,527 | 31,527 | |||||||||||||||||||||||||||
Distributions declared |
| | | (9,703 | ) | | | (9,703 | ) | (23 | ) | (9,726 | ) | |||||||||||||||||||||||
Net loss |
| | | (1,247 | ) | | | (1,247 | ) | (403 | ) | (1,650 | ) | |||||||||||||||||||||||
Other comprehensive loss: |
||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment |
| | | | (2,288 | ) | | (2,288 | ) | (1,027 | ) | (3,315 | ) | |||||||||||||||||||||||
Balance at December 31, 2008 |
34,625,497 | 35 | 310,732 | (11,056 | ) | (2,288 | ) | | 297,423 | 30,074 | 327,497 | |||||||||||||||||||||||||
Shares issued, net of offering costs |
30,598,550 | 30 | 273,733 | | | | 273,763 | | 273,763 | |||||||||||||||||||||||||||
Shares issued to affiliates |
190,452 | | 1,930 | | | | 1,930 | | 1,930 | |||||||||||||||||||||||||||
Contributions |
| | | | | | | 103,363 | 103,363 | |||||||||||||||||||||||||||
Distributions declared |
| | | (22,686 | ) | | | (22,686 | ) | (68,836 | ) | (91,522 | ) | |||||||||||||||||||||||
Net income |
| | | 9,293 | | | 9,293 | 8,811 | 18,104 | |||||||||||||||||||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment |
| | | | 2,129 | | 2,129 | 470 | 2,599 | |||||||||||||||||||||||||||
Change in unrealized loss on
derivative instrument |
| | | | (358 | ) | | (358 | ) | (315 | ) | (673 | ) | |||||||||||||||||||||||
Repurchase of shares |
(144,070 | ) | | | | | (1,340 | ) | (1,340 | ) | | (1,340 | ) | |||||||||||||||||||||||
Balance at September 30, 2009 |
65,270,429 | $ | 65 | $ | 586,395 | $ | (24,449 | ) | $ | (517 | ) | $ | (1,340 | ) | $ | 560,154 | $ | 73,567 | $ | 633,721 | ||||||||||||||||
See Notes to Consolidated Financial Statements.
CPA®:17
Global 9/30/2009 10-Q 5
Table of Contents
CORPORATE PROPERTY ASSOCIATES 17 GLOBAL INCORPORATED
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
(in thousands)
Nine months ended September 30, | ||||||||
2009 | 2008 | |||||||
Cash Flows Operating Activities |
||||||||
Net income |
$ | 18,104 | $ | 728 | ||||
Adjustments to net income: |
||||||||
Depreciation and amortization, including intangible assets |
3,467 | 733 | ||||||
Straight-line rent adjustments and amortization of rent-related intangibles |
(2,341 | ) | (66 | ) | ||||
Income from equity investment in real estate in excess of distributions received |
299 | (194 | ) | |||||
Issuance of shares to affiliate in satisfaction of fees due |
1,930 | 216 | ||||||
Amortization of discount on commercial mortgage-backed securities |
(489 | ) | (201 | ) | ||||
Realized loss on foreign currency transactions |
2,502 | 253 | ||||||
Unrealized loss on derivative instrument |
| 186 | ||||||
Increase in accounts receivable and prepaid expenses |
(3,747 | ) | (279 | ) | ||||
Increase in accounts payable and accrued expenses |
983 | 1,549 | ||||||
Increase in prepaid and deferred rental income |
1,260 | 1,990 | ||||||
Increase (decrease) in due to affiliates |
206 | (2,679 | ) | |||||
Change in other operating assets and liabilities, net |
559 | (286 | ) | |||||
Net cash provided by operating activities |
22,733 | 1,950 | ||||||
Cash Flows Investing Activities |
||||||||
Distributions from equity investments in real estate in excess of equity income |
1,936 | | ||||||
Acquisitions of real estate and direct financing lease (a) |
(274,049 | ) | (235,362 | ) | ||||
Contributions to equity investments in real estate (a) |
(22,798 | ) | (22,784 | ) | ||||
Value added taxes recoverable on purchases of real estate |
(2,618 | ) | | |||||
Purchase of marketable securities |
| (19,965 | ) | |||||
Funds for future investments and construction placed in escrow |
(85,022 | ) | | |||||
Funds for future investments released from escrow |
75,934 | | ||||||
Payment of deferred acquisition fees to an affiliate |
(1,446 | ) | (290 | ) | ||||
Net cash used in investing activities |
(308,063 | ) | (278,401 | ) | ||||
Cash Flows Financing Activities |
||||||||
Distributions paid |
(17,871 | ) | (2,055 | ) | ||||
Contributions from noncontrolling interests |
103,363 | 16,204 | ||||||
Distributions to noncontrolling interests |
(68,836 | ) | | |||||
Proceeds from mortgage notes payable |
143,150 | 139,685 | ||||||
Scheduled payments of mortgage principal |
(3,192 | ) | (59 | ) | ||||
Payment of mortgage deposits, net of deposits refunded |
(3,892 | ) | | |||||
Proceeds from issuance of shares, net of offering costs |
273,763 | 248,676 | ||||||
Purchase of treasury stock |
(1,340 | ) | | |||||
Net cash provided by financing activities |
425,145 | 402,451 | ||||||
Change in Cash and Cash Equivalents During the Period |
||||||||
Effect of exchange rate changes on cash |
(1,381 | ) | (358 | ) | ||||
Net increase in cash and cash equivalents |
138,434 | 125,642 | ||||||
Cash and cash equivalents, beginning of period |
161,569 | 183 | ||||||
Cash and cash equivalents, end of period |
$ | 300,003 | $ | 125,825 | ||||
Noncash investing and financing activitites:
(a) | The cost basis of real estate investments acquired during the nine months ended September 30, 2009 and 2008, including equity investments in real estate, also includes deferred acquisition fees payable of $4.7 million and $4.6 million, respectively. |
See Notes to Consolidated Financial Statements.
CPA®:17
Global 9/30/2009 10-Q 6
Table of Contents
CORPORATE PROPERTY ASSOCIATES 17 GLOBAL INCORPORATED
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Organization and Offering
Organization
Corporate Property Associates 17 Global Incorporated (together with its consolidated
subsidiaries, we, us or our) is a publicly owned, non-actively traded real estate investment
trust (REIT) that invests primarily in commercial properties leased to companies domestically and
internationally. As a REIT, we are not subject to United States (U.S.) federal income taxation as
long as we satisfy certain requirements, principally relating to the nature of our income, the
level of our distributions and other factors. We earn revenue principally by leasing the properties
we own to single corporate tenants, 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 23 fully
occupied properties, substantially all of which were triple-net leased to 12 tenants, and totaled
approximately 5 million square feet (on a pro rata basis). We were formed in 2007 and conduct
substantially all of our investment activities and own all of our assets through our operating
partnership, CPA:17 Limited Partnership. We are a general partner and a limited partner and
anticipate that we will own a 99.985% capital interest in the operating partnership. W. P. Carey
Holdings, LLC (Carey Holdings), a subsidiary of W. P. Carey & Co. LLC (WPC), holds a special
general partner interest in the operating partnership. We refer to WPC, together with certain of
its subsidiaries and Carey Holdings, as the advisor.
On February 20, 2007, WPC purchased 22,222 shares of our common stock for $0.2 million and
was admitted as our initial shareholder. WPC purchased its shares at $9.00 per share, net of
commissions and fees, which would have otherwise been payable to Carey Financial, LLC (Carey
Financial), our sales agent and a subsidiary of WPC. In addition, in July 2008, we received a
capital contribution from the advisor of $0.3 million.
Public Offering
In November 2007, our registration statement on Form S-11 (File No. 333-140842), covering an
initial public offering of up to 200,000,000 shares of common stock at $10.00 per share, was
declared effective by the SEC under the Securities Act of 1933, as amended. The registration
statement also covers the offering of up to 50,000,000 shares of common stock at $9.50 pursuant to
our distribution reinvestment and stock purchase plan. Our initial public offering is being offered
on a best efforts basis by Carey Financial and selected other dealers. We commenced our initial
public offering in late December 2007. Since inception through October 31, 2009, we have raised a
total of more than $685.0 million.
We intend to use the net proceeds of the offering to acquire, own and manage a portfolio of
commercial properties leased to a diversified group of companies primarily on a single tenant net
lease basis.
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 Form 10-K
and related Form 8-Ks, 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.
CPA®:17 Global 9/30/2009 10-Q 7
Table of Contents
Notes to Consolidated Financial Statements
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 accounting
guidance, we have determined that we are the primary beneficiary of our operating partnership,
which is deemed to be a variable interest entity (VIE) and which we consolidate.
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 $1.9 million and $6.1 million for the three and nine months ended
September 30, 2009, respectively, and $1.8 million for both the three and nine months ended
September 30, 2008. Our net investments in real estate for these investments totaled $141.8 million
and $98.4 million as of September 30, 2009 and December 31, 2008, respectively.
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 structures and negotiates the purchase and sale of investments and debt placement
transactions for us, for which we pay the advisor structuring and subordinated disposition fees,
and manages our day-to-day operations, for which we pay the advisor asset management fees and certain cash
distributions. In addition, we reimburse the advisor for organization and offering costs incurred
in connection with our offering and for certain administrative duties performed on our behalf. We
also have certain agreements with joint ventures. These transactions are described below.
Transaction Fees
Under the terms of the advisory agreement, we pay the advisor acquisition fees for structuring and
negotiating investments and related mortgage financing on our behalf, a portion of which is payable
upon acquisition of investments with the remainder subordinated to a preferred return. The
preferred return is a non-compounded cumulative distribution return of 5% per annum (based
initially on our invested capital). Acquisition fees payable to the advisor with respect to our
long-term net lease investments may be up to an average of 4.5% of the total cost of those
investments and are comprised of a current portion of 2.5%, typically paid when the property is
purchased, and a deferred portion of 2%, typically paid over three years, once the preferred return
criterion has been met. For certain types of non-long term net lease investments, initial
acquisition fees may range from 0% to 1.75% of the equity invested plus the related acquisition
fees, with no portion of the fee being deferred.
For the three and nine months ended September 30, 2009, we incurred current acquisition fees of
$1.8 million and $5.8 million, respectively, and deferred acquisition fees of $1.4 million and $4.7
million, respectively. For the three and nine months ended September 30, 2008, we incurred current
acquisition fees of $5.0 million and $5.3 million, respectively, and deferred acquisition fees of
$4.0 million and $4.9 million, respectively. Included in deferred acquisition fees incurred for
the nine months ended September 30, 2008 was our assumption of deferred acquisition fees payable
totaling $0.9 million as a result of increasing our interest in an existing venture (Note 6). We
made payments of deferred acquisition fees to the advisor totaling $1.4 million and $0.3 million
during the nine months ended September 30, 2009 and 2008, respectively. Unpaid installments of
deferred acquisition fees totaling $6.8 million and
$3.5 million at September 30, 2009 and December 31, 2008, respectively, are included in Due to
affiliates in the consolidated financial statements.
The advisor may also receive subordinated disposition fees of up to 3% of the contract sales price
of an investment for services provided in connection with the disposition; however, payment of such
fees is subordinated to a preferred return. We have not incurred any subordinated disposition fees
at September 30, 2009 as we have not disposed of any investments.
CPA®:17 Global 9/30/2009 10-Q 8
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Notes to Consolidated Financial Statements
Asset Management Fee and Cash Distributions
We pay the advisor an annual asset management fee ranging from 0.5% of average market value for
long-term net leases and certain other types of real estate investments to 1.75% of average equity
value for certain types of securities. The asset management fee is payable in cash or restricted
stock at the option of the advisor. If the advisor elects to receive all or a portion of its fees
in restricted shares, the number of restricted shares issued is determined by dividing the dollar
amount of fees by our most recently published estimated net asset value per share as approved by
our board of directors. For 2009 and 2008, the advisor elected to receive its asset management fees
in restricted shares of our common stock. We incurred asset management fees of $0.6 million and
$1.7 million for the three and nine months ended September 30, 2009, respectively. Asset management
fees were $0.3 million for both the three and nine months ended September 30, 2008. As of September
30, 2009, the advisor owned 267,238 restricted shares (less than 1%) of our common stock.
The advisor has a special general partner profits
interest in our operating partership, which entitles the advisor to receive up to 10% of distributions of available
cash of the operating partnership,
depending on the type of investments we own. As a result, we made cash distributions of $0.6 million to the advisor
during the nine months ended September 30, 2009. No such distributions were made during the three
months ended September 30, 2009 or the three or nine months ended September 30, 2008.
Organization and Offering Expenses
We are liable for expenses incurred in connection with the offering of our securities. These
expenses are deducted from the gross proceeds of our offering. Total organization and offering
expenses, including underwriting compensation, will not exceed 15% of the gross proceeds of our
offering. Under the terms of a sales agency agreement between Carey Financial and us, Carey
Financial receives a selling commission of up to $0.65 per share sold, a selected dealer fee of up
to $0.20 per share sold and a wholesaling fee of up to $0.15 per share sold. Carey Financial will
re-allow all selling commissions to selected dealers participating in the offering and will
re-allow up to the full selected dealer fee to the selected dealers. Under the terms of a selected
investment advisor agreement among Carey Financial, a selected investment advisor, and us, Carey
Financial also receives a wholesaling fee of up to $0.15 per share sold to clients of selected
investment advisors. Carey Financial will use any retained portion of the selected dealer fee
together with the selected dealer or investment advisor wholesaling fees to cover other
underwriting costs incurred in connection with the offering. Total underwriting compensation paid
in connection with our offering, including selling commissions, the selected dealer fee, the
wholesaling fee and reimbursements made by Carey Financial to selected dealers and investment
advisors, cannot exceed the limitations prescribed by the Financial Industry Regulatory Authority
(FINRA). The limit on underwriting compensation is currently 10% of gross offering proceeds. We
may also reimburse Carey Financial up to an additional 0.5% of offering proceeds for bona fide due
diligence expenses. We reimburse the advisor or one of its affiliates for other organization and
offering expenses (including, but not limited to, filing fees, legal, accounting, printing and
escrow costs). The advisor has agreed to be responsible for the payment of organization and
offering expenses (excluding selling commissions, selected dealer fees and wholesaling fees) that
exceed 4% of the gross offering proceeds.
The total costs paid by the advisor and its affiliates in connection with the organization and
offering of our securities were $7.3 million from inception through September 30, 2009,
substantially all of which has been reimbursed. Unpaid costs are included in Due to affiliates in
the consolidated financial statements. During the offering period, we accrue costs incurred in
connection with the raising of capital as deferred offering costs. Upon receipt of offering
proceeds and reimbursement to the advisor for costs incurred, we charge the deferred costs to
shareholders equity. Such reimbursements will not exceed regulatory cost limitations as described
above.
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. For the three and
nine months ended September 30, 2009, we incurred personnel reimbursements of $0.1 million and $0.2
million, respectively, which are included in General and administrative expenses in the
consolidated financial statements. We did not reimburse any such amounts to the advisor during the
three or nine months ended September 30, 2008.
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 less than
$0.1 million for both the three and nine month periods ended September 30, 2009. No amounts were
allocated to us during the three or nine month periods ended September 30, 2008 because we had
minimal revenues. Based on gross revenues through September 30, 2009, our current share of future
minimum lease payments under this agreement would be $0.1 million annually through 2016; however,
we anticipate that our share of future annual minimum lease payments will increase significantly as
we continue to invest the proceeds of our offering.
CPA®:17 Global 9/30/2009 10-Q 9
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Notes to Consolidated Financial Statements
We own interests in entities ranging from 49% to 70%, with the remaining interests held by
affiliates. We consolidate certain of these entities and account for the remainder under the equity
method of accounting (Note 6).
In July 2008, the advisor made a $0.3 million capital contribution to us, which is included in
Noncontrolling interest in the consolidated financial statements.
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 |
$ | 37,261 | $ | 36,817 | ||||
Buildings |
149,922 | 132,164 | ||||||
Less: Accumulated depreciation |
(4,581 | ) | (1,455 | ) | ||||
$ | 182,602 | $ | 167,526 | |||||
Acquisitions of Real Estate and Real Estate Under Construction
2009 In January and September 2009, we entered into build-to-suit projects located in the United
States and the United Kingdom, respectively, for a total cost of up to $60.4 million, based on
estimated construction costs and the exchange rate of the British Pound Sterling at the date of
acquisition. In connection with these investments, which were deemed to be real estate acquisitions
under current authoritative accounting guidance, we capitalized acquisition-related costs and fees
totaling $3.5 million. Costs incurred and capitalized on these projects through September 30, 2009
were $44.9 million and have been included as Real estate under construction in the consolidated
balance sheet.
2008 During the nine months ended September 30, 2008, we entered into six investments, four in
the United States and two in Germany, at a total cost of $191.9 million, inclusive of amounts
attributable to noncontrolling interests of $21.0 million. In connection with our German
investments, we entered into commitments to purchase two tenant-funded expansion projects for a
total cost of up to $21.5 million, based on estimated construction costs, inclusive of amounts
attributable to noncontrolling interests of up to $6.8 million. These purchase commitments expire
in August 2010 and July 2011; however, one of the tenants filed for bankruptcy in
Germany, which relieved us of our obligation with respect to the funding of the expansion at that
property. As of September 30, 2009, we had not incurred any costs in connection with these
commitments. Amounts are based on the exchange rate of the Euro at
the date of acquisition, as applicable.
Other
In connection with our acquisition of properties, we have recorded net lease intangibles of $16.7
million, which are being amortized over periods ranging from 16 years to 40 years. Amortization of
below-market and above-market rent intangibles is recorded as an adjustment to lease revenues,
while amortization of in-place lease and tenant relationship intangibles is included in
Depreciation and amortization. Below-market rent intangibles are included in Prepaid and deferred
rental income and security deposits in the consolidated financial statements. We acquired our first
consolidated real estate investment in June 2008. Net amortization of intangibles, including the
effect of foreign currency translation, was $0.2 million and $0.6 million for the three and nine
months ended September 30, 2009, respectively, and $0.2 million for both the three months and nine
months ended September 30, 2008.
In May 2009, our tenant Wagon Automotive GmbH terminated its lease with us in bankruptcy
proceedings. As a result, we reclassified the related property from Net investment in direct
financing leases to Net investments in properties. We entered into our investment in this property
in 2008 at a cost of $16.7 million, inclusive of amounts attributable to noncontrolling interests
of $5.6 million.
CPA®:17 Global 9/30/2009 10-Q 10
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Notes to Consolidated Financial Statements
Note 5. Net Investment in Direct Financing Leases
Net investment in direct financing leases is summarized as follows (in thousands):
September 30, 2009 | December 31, 2008 | |||||||
Minimum lease payments receivable |
$ | 599,040 | $ | 148,636 | ||||
Unguaranteed residual value |
302,783 | 83,991 | ||||||
901,823 | 232,627 | |||||||
Less: unearned income |
(597,999 | ) | (148,703 | ) | ||||
$ | 303,824 | $ | 83,924 | |||||
Scheduled future minimum rents, exclusive of renewals and expenses paid by tenants and future
consumer price index (CPI) based increases, under all our non-cancelable direct financing leases
are as follows (in thousands):
2009 (remainder) |
$ | 9,197 | ||
2010 |
31,511 | |||
2011 |
32,170 | |||
2012 |
32,543 | |||
2013 |
32,921 | |||
Thereafter through 2028 |
460,698 |
None of our leases have provisions for rent increases based on percentage rents.
Acquisitions of Net Investments in Direct Financing Leases
2009 In March 2009, an entity in which we, our affiliate Corporate Property Associates 16
Global Incorporated (CPA®:16 Global) and our advisor hold 55%, 27.25% and 17.75%
interests, respectively, completed a net lease financing transaction with respect to a leasehold
condominium interest, encompassing approximately 750,000 rentable square feet, in the office
headquarters of The New York Times Company for approximately $233.7 million, inclusive of amounts
attributable to noncontrolling interest of $104.1 million and acquisition fees payable to the
advisor. The lease has an initial term of 15 years and provides the tenant with one 10-year renewal
option and two additional five-year renewal options. In the 10th year of the initial term of the
lease The New York Times Company has an option to purchase the building for approximately $250.0
million. This purchase option, together with the other terms of the net lease and related
transaction documents, allows the transaction to be accounted for as a financing lease for
financial reporting purposes. In connection with this investment, which was deemed to be a real
estate acquisition under current authoritative accounting guidance, we capitalized
acquisition-related costs and fees totaling $8.7 million, inclusive of amounts attributable to
noncontrolling interests of $2.9 million.
2008 In August 2008, we entered into an investment in two German properties leased to Wagon
Automotive GmbH and Wagon Automotive Nagold GmbH at a total cost of $47.5 million, inclusive of
amounts attributable to noncontrolling interests totaling $15.8 million. In May 2009, a portion of
this investment was reclassified as Net investment in properties as a result of Wagon Automotive
GmbHs termination of its lease with us in bankruptcy proceedings (Note 4).
Note 6. Equity Investments in Real Estate
We own interests in single-tenant net leased properties leased to corporations through
noncontrolling interests in (i) partnerships and limited liability companies in which our ownership
interests are 50% or less but over which we exercise significant influence, and (ii)
tenants-in-common subject to common control. 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). At September 30, 2009, we had two equity investments
in real estate, as described below:
Berry Plastics
We own a 50% noncontrolling interest in a domestic venture that leases properties to Berry Plastics
Corporation, Berry Plastics Holding Corporation and Berry Plastics Acquisition Corporation VII
(collectively, Berry Plastics). In February 2009, this venture repaid its $39.0 million
outstanding balance on a non-recourse mortgage loan at a discount for $32.5 million and recognized
a corresponding gain of $6.5 million. However, our $3.2 million share of the gain was reduced by
$2.9 million due to an impairment charge that we recognized to reduce the carrying value of our
investment to the estimated fair value of the ventures underlying properties. In connection with
this transaction, the venture obtained non-recourse mortgage financing of approximately $29.0
million. The new debt has an annual interest rate of LIBOR plus 5%, with a minimum rate of 6% and a
maximum rate that has been capped at 10% through the use of an interest rate cap. This financing
has a term of three years, with two one-year extensions. Our investment in this venture had a
carrying value of $21.7 million and $21.9 million at September 30, 2009 and December 31, 2008,
respectively, which includes the effect of certain depreciation adjustments related to
other-than-temporary impairment charges.
CPA®:17 Global 9/30/2009 10-Q 11
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Notes to Consolidated Financial Statements
Tesco plc
In July 2009, a venture in which we and an affiliate have 49% and 51% interests, respectively, and
which we account for under the equity method of accounting, entered into an investment in Hungary
leased to a subsidiary of Tesco plc at a total cost of $93.6 million. The venture capitalized
acquisition-related costs and fees totaling $4.6 million in connection with this investment, which
was deemed to be a real estate acquisition under current authoritative accounting guidance.
Concurrent with the investment, the venture obtained non-recourse mortgage financing of $49.5
million that bears interest at a fixed annual interest rate of 5.9% and matures in seven years.
Amounts provided, which are applicable to the entire venture and do not represent our proportionate
share, are based on the exchange rate of the Euro at the date of acquisition. Our investment in
this venture had a carrying value of $22.5 million at September 30, 2009, including the impact of
foreign currency translation adjustment.
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 |
$ | 187,811 | $ | 85,177 | ||||
Liabilities |
(85,400 | ) | (40,073 | ) | ||||
Partners/members equity |
$ | 102,411 | $ | 45,104 | ||||
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenue |
$ | 3,157 | $ | 1,660 | $ | 6,480 | $ | 4,999 | ||||||||
Expenses |
(2,435 | ) | (1,381 | ) | (5,133 | ) | (4,000 | ) | ||||||||
Gain on extinguishment of debt |
| | 6,512 | | ||||||||||||
Net income |
$ | 722 | $ | 279 | $ | 7,859 | $ | 999 | ||||||||
We recognized income from these equity investments in real estate of $0.4 million and $0.1 million
for the three months ended September 30, 2009 and 2008, respectively, and $1.1 million and $0.2
million for the nine months ended September 30, 2009, respectively. These amounts represent our
share of the income of these ventures as well as certain depreciation adjustments related to
other-than-temporary impairment charges.
Note 7. Acquisitions of Real Estate
The FASB has revised its guidance for business combinations. The updated 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 made investments totaling $340.0 million,
inclusive of amounts attributable to noncontrolling interests of $104.1 million, that were deemed
to be real estate asset acquisitions. Costs and fees capitalized in connection with this investment
activity totaled $14.5 million, inclusive of amounts attributable to noncontrolling interests of
$2.9 million. We did not make any investments that were deemed to be business combinations during
the nine months ended September 30, 2009.
CPA®:17 Global 9/30/2009 10-Q 12
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Notes to Consolidated Financial Statements
See Notes 4, 5 and 6 for a discussion of our investments in real estate, net investments in real
estate and equity investments in real estate and Note 11 for a discussion of our financing activity
during the nine months ended September 30, 2009 and 2008, respectively.
Note 8. Securities Held to Maturity
In April 2008 and June 2008, we acquired investments in five investment-grade commercial mortgage
backed securities (CMBS) pools for an aggregate cost of $20.0 million, representing a $13.3
million discount to their face value, which aggregated $33.3 million as of the dates of
acquisition. This discount is accreted into Interest income from commercial mortgage-backed
securities on an effective yield, adjusted for actual prepayment activity over the average life of
the related securities as a yield adjustment. The CMBS investments bear initial pass-through coupon
rates approximating 6.2% and have final expected payout dates ranging from December 2017 to
September 2020. We account for these CMBS investments as held-to-maturity securities because we
have the intent and ability to hold these securities to maturity. The following is a summary of our
securities held-to-maturity, which consist entirely of CMBS, at September 30, 2009 (in thousands):
Description | Face Value | Amortized Cost | Unrealized Loss | Estimated Fair Value | ||||||||||||
CMBS |
$ | 33,284 | $ | 20,782 | $ | (17,088 | ) | $ | 3,694 |
We accreted $0.7 million and $2.1 million into interest income for the three and nine months ended
September 30, 2009, respectively, and accreted $0.2 million into interest income for both the three
and nine months ended September 30, 2008.
The following is a summary of the underlying credit ratings of our CMBS securities at September 30,
2009 (in thousands):
Rating(a) | Amortized Cost | |||
A |
$ | 1,503 | ||
A- |
9,006 | |||
B |
2,855 | |||
B+ |
1,597 | |||
BB- |
3,962 | |||
BBB+ |
1,859 | |||
$ | 20,782 | |||
(a) | Ratings are those of Standard & Poors Ratings Services, a division of The McGraw-Hill Companies, Inc. |
We carry our CMBS investments at cost, net of unamortized premiums and discounts, which are
recognized in interest income using an effective yield or interest method. Decreases in estimated
fair value deemed to be other-than-temporary would be reported as a loss in the consolidated
financial statements. We evaluate these investments on a quarterly basis to determine if there has
been an other-than-temporary impairment. As of September 30, 2009, our CMBS investments were in an
unrealized loss position, as our carrying value exceeded the investments estimated fair value.
However, based on our assessment of expected cash flows, which is supplemented by third-party
research reports, internal review of the underlying assets securing the investments, and the rating
of the security, as well as our intent and ability to hold our CMBS investments to maturity, we
expect to fully recover the carrying value of these investments and have concluded that these
investments are not other-than-temporarily impaired as of September 30, 2009.
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 9. Fair Value Measurements
In September 2007, the FASB issued authoritative guidance for using fair value to measure assets
and liabilities, which we adopted as required on January 1, 2008, with the exception of
nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value
on a recurring basis, which we adopted as required on January 1, 2009. In April 2009, the FASB
provided additional guidance for estimating fair value when the volume and level of activity for
the asset or liability have significantly decreased, which we adopted as required in the second
quarter of 2009. Fair value is defined as the exit price, or the amount that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants
as of the measurement date. The
CPA®:17 Global 9/30/2009 10-Q 13
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Notes to Consolidated Financial Statements
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.
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 (in thousands). Assets and liabilities presented below
exclude assets and liabilities owned by unconsolidated ventures.
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 |
$ | 277,064 | $ | 277,064 | $ | | $ | | ||||||||
Derivative assets |
2,744 | | 2,744 | | ||||||||||||
$ | 279,808 | $ | 277,064 | $ | 2,744 | $ | | |||||||||
Liabilities: |
||||||||||||||||
Derivative liabilities |
$ | | $ | | $ | | $ | | ||||||||
At December 31, 2008, our assets and liabilities that were accounted for at fair value on a
recurring basis consisted of cash and cash equivalents held in money market accounts totaling
$157.0 million (Level 1) and an embedded credit derivative that had no fair value (Level 3). There
were no changes to the fair value of this embedded credit derivative during the nine months ended
September 30, 2009.
Fair Value Measurements Using Significant Unobservable Inputs | ||||||||
(Level 3 only) | ||||||||
Derivative Assets | ||||||||
Three months ended | Nine months ended | |||||||
September 30, 2008 | September 30, 2008 | |||||||
Beginning balance |
$ | | $ | | ||||
Total gains or losses (realized and unrealized): |
||||||||
Included in earnings |
(186 | ) | (186 | ) | ||||
Included in other comprehensive income |
| | ||||||
Amortization and accretion |
| | ||||||
Purchases, issuances, and settlements |
1,363 | 1,363 | ||||||
Ending balance |
$ | 1,177 | $ | 1,177 | ||||
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 |
$ | (186 | ) | $ | (186 | ) | ||
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 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 an other-than-temporary impairment
charge of $2.9 million related to an unconsolidated joint venture (Note 6), calculated based on
market conditions and assumptions at September 30, 2009. Actual results may differ materially if
market conditions or the underlying assumptions change.
CPA®:17 Global 9/30/2009 10-Q
14
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Notes to Consolidated Financial Statements
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 | |||||||||||||
Debt |
$ | 275,593 | $ | 262,495 | $ | 133,633 | $ | 133,436 | ||||||||
CMBS (a) |
20,782 | 3,694 | 20,309 | 4,562 |
(a) | Carrying value represents historical cost for CMBS. |
The estimated fair value of 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 10. Risk Management and Use of Derivative Financial Instruments
Risk Management
In the normal course of our on-going business operations, we encounter economic risk. There are
three main components of economic risk: interest rate risk, credit risk and market risk. We are
subject to interest rate risk on our interest-bearing liabilities and our CMBS investments. 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 CMBS investments 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.
Commercial Mortgage-Backed Securities
We own CMBS that are fully collateralized by a portfolio of commercial real estate mortgages or
commercial mortgage-related securities to the extent consistent with the requirements for
qualification as a REIT. CMBS are instruments that directly or indirectly represent a participation
in, or are secured by and payable from, one or more mortgage loans secured by commercial real
estate. In most cases, CMBS distribute principal and interest payments on the mortgages to
investors. Interest rates on these instruments can be fixed or variable. Some classes of CMBS may
be entitled to receive mortgage prepayments before other classes do. Therefore, the prepayment risk
for a particular instrument may be different than for other CMBS. The value of our CMBS investments
is also subject to fluctuation based on changes in interest rates, economic conditions and the
creditworthiness of lessees at the mortgaged properties. At September 30, 2009, our CMBS
investments did not comprise a significant proportion of our real-estate related assets.
Foreign Currency Exchange
We are exposed to foreign currency exchange rate movements in the Euro and British Pound Sterling.
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
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Notes to Consolidated Financial Statements
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.
At September 30, 2009, excluding derivative instruments owned by unconsolidated ventures, we had
one derivative instrument designated as a hedging instrument. In August 2009, we entered into an
interest rate cap instrument with a value of $2.7 million at September 30, 2009, inclusive of
amounts attributable to noncontrolling interests of $1.2 million. This instrument is included in
Other assets, net in the consolidated financial statements. We also had an embedded credit
derivative not designated as a hedging instrument that had no fair value at either September 30, 2009 or
December 31, 2008, which is described below.
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 | Nine months ended | |||||||
Derivatives in Cash Flow Hedging Relationships | September 30, 2009 | September 30, 2009 | ||||||
Interest rate cap (a) |
$ | (700 | ) | $ | (700 | ) | ||
Total |
$ | (700 | ) | $ | (700 | ) | ||
Amount of Gain (Loss) Recognized in Income on Derivatives | ||||||||||||
Derivatives not in Cash Flow | Location of Gain (Loss) | Three months ended | Nine months ended | |||||||||
Hedging Relationships | Recognized in Income | September 30, 2008 | September 30, 2008 | |||||||||
Embedded credit derivative (b) |
Other income and (expenses) |
$ | (186 | ) | $ | (186 | ) | |||||
Total |
$ | (186 | ) | $ | (186 | ) | ||||||
(a) | For both the three and nine months ended September 30, 2009, losses of $0.3 million were attributable to noncontrolling interests. | |
(b) | For both the three and nine months ended September 30, 2008, losses of $0.1 million were attributable to noncontrolling interests. No gains or losses were recognized in income related to this embedded credit derivative during 2009. |
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 Caps
We are exposed to the impact of interest rate changes primarily through our borrowing activities.
To limit this exposure, we attempt to obtain mortgage financing on a long-term, fixed-rate basis.
However, from time to time, we or our venture partners may obtain variable rate non-recourse
mortgage loans and may, as a result, enter into interest rate cap agreements with counterparties.
Interest rate caps limit the effective borrowing rate of variable rate debt obligations while
allowing participants to share in downward shifts in interest rates. Our objective in using these
derivatives is to limit our exposure to interest rate movements.
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Notes to Consolidated Financial Statements
In August 2009, a venture in which we and two of our affiliates hold 55% and 45% interests,
respectively, and which we consolidate, obtained non-recourse mortgage financing with a total
carrying value of $119.8 million at September 30, 2009, inclusive of amounts
attributable to noncontrolling interests of $53.4 million. The financing bears interest at an
annual interest rate of LIBOR plus 4.8%, with a minimum rate of 4.8% and a maximum rate that has
been capped at 8.8% through the use of an interest rate cap designated as a cash flow hedge. The
applicable interest rate of the related debt was 5.1%, which was below the interest rate cap at
September 30, 2009. The interest rate cap expires in August 2014 and had an estimated total fair
value of $2.7 million at September 30, 2009, inclusive of amounts attributable to noncontrolling
interests of $1.2 million.
In addition, an unconsolidated venture in which we hold a 50% ownership interest had a non-recourse
mortgage loan with a total carrying value of $29.0 million as of September 30, 2009. The financing
bears interest at an annual interest rate of LIBOR plus 5%, with a minimum rate of 6% and a maximum
rate that has been capped at 10% through the use of an interest rate cap designated as a cash flow
hedge. The applicable interest rate of the related debt of 6.6% was below the interest rate cap at
September 30, 2009. The interest rate cap expires in March 2015 and had an estimated total fair
value of less than $0.1 million at September 30, 2009. Amounts provided represent the entire amount
attributable to the venture, not our proportionate share.
Embedded Credit Derivative
In August 2008, a venture in which we and an affiliate have 67% and 33% interests, respectively,
and which we consolidate, acquired an investment in Germany. In connection with the investment, the
venture obtained non-recourse mortgage financing for which the interest rate has both fixed and
variable components. In connection with providing the financing, the lender entered into an
interest rate swap agreement on its own behalf through which the fixed interest rate component on
the financing was converted into a variable interest rate instrument. Through the venture, we have
the right, at our sole discretion, to prepay this debt at any time and to participate in any
realized gain or loss on the interest rate swap at that time. This participation right is deemed to
be an embedded credit derivative. In connection with the tenants bankruptcy filing in December
2008, this derivative was written down to $0 at December 31, 2008 and had an estimated fair value
of $0 at both September 30, 2009 and December 31, 2008. This derivative did not generate any gains
or losses during the three or nine months ended September 30, 2009.
Other
Amounts reported in OCI related to derivatives will be reclassified to interest expense as interest
payments are made on our variable-rate debt. As of September 30, 2009, we estimate that less than
$0.1 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. We had no derivatives that were in a net liability position as of September
30, 2009.
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. Our portfolio contains concentrations in excess of 10% of current
annualized lease revenues in certain areas, as described below, because we have a limited number of
investments. 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, based on current annualized lease revenues, our directly owned real estate
properties were located in the U.S. (86%) and Germany (14%) with the following tenants representing
more than 10% of our total current annualized lease revenues: The New York Times Company (52%),
Life Time Fitness, Inc. (12%) and Frontier Spinning Mills, Inc. (10%). At September 30, 2009, our
directly owned real estate properties contained concentrations in the following asset types: office
(58%), industrial (20%) and retail (12%); and in the following tenant industries: media printing
and publishing (52%), electronics (15%), leisure, amusement and entertainment (12%) and textiles,
leather and apparel (10%).
Many companies in automotive related industries (manufacturing, parts, services, etc.) have been
experiencing increasing difficulties in recent years. In August 2008, we entered into lease
agreements with Wagon Automotive GmbH and Wagon Automotive Nagold GmbH (collectively, Wagon),
which operate in the automotive industry. These tenants each contributed $0.2 million and $0.6
million, respectively, of our lease revenue for the three months ended September 30, 2009; $1.2
million and $1.7 million in each case of our lease revenue for the nine months ended September 30,
2009; and $0.4 million in both cases of our lease revenue for the three and nine months ended
September 30, 2008, all of which are inclusive of amounts attributable to the holder of a 33%
noncontrolling interest in the properties. In December 2008, Wagon PLC, the parent of Wagon and a
guarantor of both tenants obligations under the leases, filed for bankruptcy protection in the
United Kingdom for itself and certain of its subsidiaries based in the United Kingdom,
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Notes to Consolidated Financial Statements
and Wagon Automotive GmbH filed for bankruptcy in Germany. Wagon Automotive GmbH terminated its
lease with us in bankruptcy proceedings effective May 2009 but as of the date of this Report was
paying rent to us, albeit at a significantly reduced rate. Wagon Automotive Nagold GmbH has not
filed for bankruptcy, and while it briefly ceased making rent payments during the second quarter of
2009, it subsequently resumed paying rent to us substantially in accordance with the terms stated
in its lease. In October 2009 we terminated the existing lease and signed a new lease with Wagon
Automotive Nagold GmbH on substantially the same terms. Total arrearages of these tenants were $0.6
million and were fully reserved at September 30, 2009. In connection with the bankruptcy filings by
Wagon PLC and Wagon Automotive GmbH, the lender of the mortgage financing has sent us a notice in
order to preserve its right to retain any rent payments that may be made under the leases, as well
as to take further actions, including accelerating the debt and foreclosure. The lender has not
exercised any of these rights as of the date of this Report.
Note 11. Debt
Non-recourse and limited-recourse debt consists of mortgage notes payable with a carrying value of
$486.4 million as of September 30, 2009 that are collateralized by an assignment of real property
and direct financing leases. At that date, our mortgage notes payable bore interest at fixed annual
rates ranging from 6.2% to 8.0% or bore interest at a variable rate of 5.1%. The maximum interest
rate on our variable rate debt has been capped at 8.8% through the use of an interest rate cap
instrument. Maturity dates on our debt ranged from 2014 to 2028 as of September 30, 2009.
Scheduled debt principal payments are as follows (in thousands):
Total | ||||
2009 (remainder) |
$ | 1,302 | ||
2010 |
5,385 | |||
2011 |
5,717 | |||
2012 |
6,064 | |||
2013 |
6,428 | |||
Thereafter through 2028 |
250,697 | |||
Total |
$ | 275,593 | ||
Financing Activity
2009 During the nine months ended September 30, 2009, we obtained mortgage financing totaling
$143.2 million, as follows. In August 2009, we obtained mortgage financing on the New York Times
property of $119.8 million, inclusive of amounts attributable to noncontrolling interests of $53.9
million. The financing bears interest at an annual interest rate of LIBOR plus 4.8%, with a minimum
rate of 4.8% and a maximum rate that has been capped at 8.8% through the use of an interest rate
cap designated as a cash flow hedge (Note 10). In addition, in July 2009, a domestic venture in
which we and an affiliate own 60% and 40% interests, respectively, and which we consolidate,
obtained mortgage financing on an existing property of $23.4 million, inclusive of $9.4 million
attributable to the holder of the noncontrolling interest. We and our affiliate have provided an
unconditional guarantee of the debt to the lender. The financing bears interest at a fixed annual
interest rate of 8.0% and matures in seven years.
2008 During the nine months ended September 30, 2008, we obtained non-recourse mortgage financing totaling
$139.7 million, inclusive of amounts attributable to noncontrolling interests of $20.6 million, at
a weighted average fixed annual interest rate and term of 6.9% and 11 years, respectively. In
addition, in connection with purchase commitments related to two German investments (Note 4), we
obtained commitments from lenders for non-recourse mortgage financing totaling $13.0 million,
inclusive of amounts attributable to noncontrolling interests of $4.4 million, at a fixed annual
interest rate to be determined at the date of funding and having a weighted average term of seven
years. These purchase commitments expire in August 2010 and July 2011; however, one of the tenants,
Wagon Automotive GmbH, filed for bankruptcy in Germany, which relieved us and the mortgage lender
of our respective obligations with respect to the funding of the expansion at that property. Amounts are based on the exchange rate of the Euro at the date of financing, as applicable.
Note 12. 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.
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Notes to Consolidated Financial Statements
We conduct business in the 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.
Note 13. Pro Forma Financial Information
The following consolidated pro forma financial information has been presented as if our
acquisitions made and new financing obtained since January 1, 2008 had occurred on January 1, 2009
and 2008 for the three and nine months ended September 30, 2009 and 2008, respectively. The pro
forma financial information is not necessarily indicative of what the actual results would have
been, nor does it purport to represent the results of operations for future periods.
Pro forma financial information is summarized as follows (dollars in thousands, except per share
amounts):
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||
2009 | 2008 | 2009 | 2008 | ||||||||||||||
Pro forma total revenues |
$ | 13,368 | $ | 14,397 | $ | 40,358 | $ | 40,960 | |||||||||
Pro forma net income |
$ | 7,278 | $ | 7,674 | $ | 19,166 | $ | 21,689 | |||||||||
Less: Net income attributable to noncontrolling
interests |
(3,238 | ) | (3,501 | ) | (8,259 | ) | (10,159 | ) | |||||||||
Pro forma net income attributable to CPA®:17
Global shareholders |
$ | 4,040 | $ | 4,173 | $ | 10,907 | $ | 11,530 | |||||||||
Pro forma earnings per share: |
|||||||||||||||||
Net income attributable to CPA®:17 Global
shareholders |
$ | 0.06 | $ | 0.06 | $ | 0.17 | $ | 0.18 |
The pro forma weighted average shares outstanding for the three and nine months ended September 30,
2009 and 2008 totaled 65,270,429 shares and were determined as if all shares issued since our
inception through September 30, 2009 were issued on January 1, 2008.
Note 14. Subsequent Event
In May 2009, the FASB issued authoritative guidance for subsequent events, which we adopted as
required in the second quarter of 2009. The guidance establishes general standards of accounting
for and disclosures of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. We evaluated subsequent events through
November 13, 2009, the date on which we filed this Report with the SEC.
In October 2009, we entered into an investment in Poland at a total cost of approximately $15.0
million, based on the exchange rate of the Euro at the date of acquisition.
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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 Form 10-K and related Form 8-Ks.
Business Overview
We are a publicly owned, non-actively traded REIT that invests primarily in commercial properties
leased to companies domestically and internationally. As a REIT, we are not subject to U.S. federal
income taxation as long as we satisfy certain requirements, principally relating to the nature of
our income, the level of our distributions and other factors. We earn revenue principally by
leasing the properties we own to single corporate tenants, 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 23 fully occupied properties, substantially all of which were leased
to 12 tenants, and totaled approximately 5 million square feet (on a pro rata basis). We were
formed in 2007 and are managed by WPC and its subsidiaries.
Financial Highlights
(In thousands)
(In thousands)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Total revenues |
$ | 13,453 | $ | 3,590 | $ | 35,746 | $ | 3,912 | ||||||||
Net income attributable to CPA®:17 Global
shareholders (a) |
4,551 | 607 | 9,293 | 613 | ||||||||||||
Cash flow provided by operating activities (a) |
22,733 | 1,950 |
(a) | For the three and nine months ended September 30, 2009, net income attributable to CPA®: 17 Global shareholders and cash flow provided by operating activities reflect the results of our investment activity during 2009 and 2008. |
Our daily cash distribution for the third quarter was $0.0017255 per share and was paid on October
15, 2009 to shareholders of record as of the close of business on each day during the quarter, or
$0.635 per share on an annualized basis, while our daily cash distribution for the second quarter
of 2009 was $0.001731 per share, or $0.630 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, 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 one tenant filing
for bankruptcy protection 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 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.
Investment Opportunities
Because of the lack of liquidity in the credit and real estate financing markets, we believe
sale-leaseback transactions can often be a particularly attractive alternative for a corporation
seeking to raise capital. As a result, there may be increased and more attractive
investment opportunities for us in the current environment. In addition, due to the continued
deterioration in these markets, we believe there has been a decrease in the level of competition
for the investments we make, both domestically and internationally.
CPA®:17 Global 9/30/2009 10-Q 20
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We are seeing increasingly attractive pricing on sale-leaseback investment opportunities, although
we have not yet seen significant volume in completed transactions, which we believe is a result of
slow acceptance of pricing changes by many sellers and the difficult financing markets. In this
environment, however, we have been able to achieve financing on substantially all of our
investments either at the time of the investment or afterwards, and when financing has not
initially been available, we have completed transactions without financing where we determined that
the risk adjusted returns were attractive. During the nine months ended September 30, 2009, we
completed two domestic and two international investments totaling $340.0 million, the largest of
which was a $233.7 million transaction with The New York Times Company. We own a 55% interest in
the New York Times investment, which we consolidate. We currently expect international transactions
to comprise a significant portion of our investments, although the percentage of international
investments in any given period may vary.
Financing Conditions
Current real estate financing markets remain weak as of the date of this Report, and obtaining
financing for investments, 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 mortgage financing on
transactions completed during 2008 and 2009 totaling $143.2 million, inclusive of amounts
attributable to noncontrolling interests totaling $63.2 million. The new financing has a weighted
average interest rate and term of up to 8.6% and 5.3 years, respectively. In addition, ventures in
which we have interests ranging from 49% to 50% obtained mortgage financing of $78.5 million,
including financing for new transactions and refinancing of existing debt, with a weighted average
interest rate and term of up to 7.4% and 5.5 years, respectively.
Neither we nor the ventures in which we own investments have any balloon payments until 2012. 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 generally 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. As of September 30, 2009, we have not incurred any
impairment charges. Based on tenant activity during the nine months ended September 30, 2009, we
currently expect that our lease revenue will decrease by approximately 5% on an annualized basis as
a result of a lease termination in bankruptcy court (see below). 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.
We have experienced increased levels of corporate defaults recently. Wagon Automotive GmbH filed
for bankruptcy in Germany in December 2008, terminating its lease in the bankruptcy proceedings
effective May 2009, but as of the date of this Report was paying rent to us, albeit at a
significantly reduced rate. Wagon Automotive Nagold GmbH has not filed for bankruptcy, and while it
briefly ceased making rent payments during the second quarter of 2009, it subsequently resumed
paying rent to us substantially in accordance with the terms stated in its lease. In October 2009
we terminated the existing lease and signed a new lease with Wagon Automotive Nagold GmbH on
substantially the same terms. Wagon Automotive GmbH and Wagon Automotive Nagold GmbH collectively
contributed $0.8 million and $2.9 million of our lease revenue for the three and nine months ended
September 30, 2009, respectively, both of which are inclusive of amounts attributable to the holder
of a 33% noncontrolling interest in the properties.
To mitigate these risks, we have invested in assets that we believe are critically important to a
tenants operations and attempt 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.
CPA®:17 Global 9/30/2009 10-Q 21
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Fundraising
We began fundraising in December 2007. Fundraising trends are very difficult to predict,
particularly in the current economic environment. However, although industry fundraising has for
the most part been trending downward in the first half of 2009, we have experienced increases in
our fundraising results so far in 2009. We raised more than $124.0 million in the third quarter of
2009. This represents a $24.3 million increase over the second quarter of 2009 and a $53.1 million
increase over the first quarter of 2009. Since beginning fundraising, we have raised more than
$685.0 million through October 31, 2009, with October 2009 being our largest fundraising month to
date. We have made a concerted effort to broaden our distribution channels and are beginning to see
a greater portion of our fundraising come from these new distribution channels as a result of these efforts. We
expect these trends to continue for the remainder of 2009.
Commercial Mortgage-Backed Securities
We acquired several CMBS investments in the second quarter of 2008 for an aggregate cost of $20.0
million, representing a $13.3 million discount to their face value at the time of acquisition.
These investments have final expected payout dates ranging from 2017 to 2020. We have designated
these investments as held to maturity securities and carry them at amortized cost as we have both
the intent and ability to hold these securities to maturity. The current credit crisis and
heightened turmoil in the financial markets have resulted in a severe lack of liquidity for these
types of investments. The estimated fair value of our CMBS investments was $3.7 million as of
September 30, 2009. Until these markets recover, we expect that values for CMBS investments will
remain subject to continued volatility.
We actively monitor the performance of the underlying properties and loans in our CMBS investments
and update our pricing model to reflect changes in projected cash flows. Although the estimated
fair value of our CMBS investments has decreased significantly, we have not recorded an impairment
charge on these investments as of September 30, 2009 because we have not experienced any
significant changes in the predicted cash flows for these investments in either the timing or
amount of payments to be made under such investments. If we were to experience significant
deterioration in the predicted cash flows for these investments, we may be required to write down
the carrying value of these investments to their estimated fair value.
Other Factors
Our leases generally have rent adjustments based on formulas indexed to changes in the CPI or other
similar indices for the jurisdiction in which the property is located. Because these rent
adjustments may be calculated based on changes in the CPI over a multi-year period, changes in
inflation rates can have a delayed impact on our results of operations. Current inflation rates in
the U.S. and the Euro zone, which are historically low, will impact rent increases in our portfolio
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% during the three and nine months ended September
30, 2009, respectively, 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 14% and 46% of our annualized lease
revenues for each of the nine month periods ended September 30, 2009 and 2008, respectively.
Results of Operations
We are a recently formed company and have a very limited operating history. The results of
operations presented below for the three and nine months ended September 30, 2009 are not expected
to be representative of future results because we anticipate that our asset base will increase
substantially as we continue to raise capital and invest the proceeds of our initial public
offering. We entered into our first consolidated investment in June 2008 and recorded minimal
property-related revenues and expenses during the three and nine months ended September 30, 2008.
As our asset base increases, we expect that property-related revenues and expenses, as well as
general and administrative expenses and other revenues and expenses, will increase.
We are dependent upon proceeds received from the offering to conduct our proposed activities. The
capital required to make investments will be obtained from the offering and from any mortgage
indebtedness that we may incur in connection with our investment activity.
CPA®:17 Global 9/30/2009 10-Q 22
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Managements evaluation of the sources of lease revenues is as follows (in thousands):
Nine months ended September 30, | ||||||||
2009 | 2008 | |||||||
Rental income |
$ | 13,185 | $ | 2,319 | ||||
Interest income from direct financing leases |
20,515 | 608 | ||||||
$ | 33,700 | $ | 2,927 | |||||
During the nine months ended September 30, 2009, 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 (Date Acquired) | 2009 | 2008 | ||||||
The New York Times Company (3/2009) (a) |
$ | 15,034 | $ | | ||||
LifeTime Fitness, Inc. (9/2008) |
5,134 | 77 | ||||||
Frontier Spinning Mills, Inc. (12/2008) (a) |
3,350 | | ||||||
Actebis Peacock GmbH (7/2008) (a) (b) |
3,044 | 1,088 | ||||||
Wagon Automotive GmbH and Wagon Automotive Nagold GmbH (8/2008) (a) (b) (c) |
2,857 | 723 | ||||||
Laureate Education, Inc. (7/2008) |
2,171 | 540 | ||||||
Sabre Communications Corporation and Cellxion, LLC (8/2008) |
1,934 | 428 | ||||||
Flexmag Industries, Inc. (2/2008) |
176 | 71 | ||||||
$ | 33,700 | $ | 2,927 | |||||
(a) | These revenues are generated in consolidated ventures with our affiliates and include lease revenues applicable to noncontrolling interests totaling $10.0 million and $0.6 million for the nine months ended September 30, 2009 and 2008, respectively. | |
(b) | Amounts are subject to fluctuations in foreign currency exchange rates. | |
(c) | Wagon Automotive GmbH filed for bankruptcy in Germany in December 2008 and terminated its lease in bankruptcy proceedings effective May 2009, but as of the date of this Report was paying rent to us, albeit at a significantly reduced rate. Wagon Automotive Nagold GmbH has not filed for bankruptcy, and while it briefly ceased making rent payments during the second quarter of 2009, it subsequently resumed paying rent to us substantially in accordance with the terms stated in its lease. In October 2009, we terminated the existing lease and signed a new lease with Wagon Automotive Nagold GmbH on substantially the same terms (Note 10). |
Lease Revenues
Our net leases generally have rent adjustments based on formulas indexed to changes in the CPI or
other similar indices for the jurisdiction in which the property is located, sales overrides or
other periodic increases, which are designed to increase lease revenues in the future. We own
international investments and, therefore, lease revenues from these investments are subject to
fluctuations in exchange rate movements in foreign currencies. In certain cases, although we
recognize lease revenue in connection with our tenants obligation to pay rent, we may also
increase our uncollected rent expense if tenants are experiencing financial distress and have not
paid the rent to us that they owe, as described in Property expenses below.
For the three and nine months ended September 30, 2009 as compared to the same periods in 2008,
lease revenues increased by $9.8 million and $30.8 million, respectively, as a result of our
investment activity during 2008 and 2009, including lease revenues earned from The New York Times
of $6.6 million and $15.0 million for the current year periods, respectively.
Interest Income from Commercial Mortgage-Backed Securities
For the three months ended September 30, 2009 as compared to the same period in 2008, interest
income from CMBS did not fluctuate significantly.
For the nine months ended September 30, 2009 as compared to the same period in 2008, interest
income from CMBS investments increased by $1.1 million, reflecting the full year impact of these
investments, which we entered into during the second quarter of 2008.
CPA®:17 Global 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 expense increased by $0.6 million and $2.9 million, respectively,
related to investments we entered into during 2008 and 2009.
Property Expenses
For the three months ended September 30, 2009 as compared to the same period in 2008, property
expenses decreased by $0.7 million, primarily due to a decrease in uncollected rent expense of $1.1
million. During the first half of 2009, we recognized uncollected rent expense of $1.7 million in
connection with two German tenants, Wagon Automotive GmbH and Wagon Automotive Nagold GmbH (see
Note (e) to lease revenue table above). As a result of developments in the third quarter of 2009,
including the use of a letter of credit provided by the tenants to pay a portion of their accrued
rents receivable and both tenants renewed payment of rent, we reduced our uncollected rent expense
related to these tenants by $1.1 million. This reduction was partially offset by an increase of
$0.4 million in asset management fees payable to the advisor in connection with our investment
activity.
For the nine months ended September 30, 2009 as compared to the same period in 2008, property
expenses increased by $2.1 million, primarily due to an increase of $1.4 million in asset
management fees payable to the advisor and an increase of $0.6 million in uncollected rent expense
related to Wagon Automotive GmbH and Wagon Automotive Nagold GmbH. This uncollected rent expense
represents the total amount currently owed by these tenants to us.
General and Administrative Expense
For the three months ended September 30, 2009 as compared to the same period in 2008, general and
administrative expense did not fluctuate significantly.
For the nine months ended September 30, 2009 as compared to the same period in 2008, general and
administrative expense increased by $1.1 million, primarily due to increases in business
development expenses of $0.4 million and professional fees of $0.3 million. Business development
costs reflect costs incurred in connection with potential investments that ultimately were not
consummated. We expect that we may continue to incur significant costs in connection with
unconsummated investments, particularly in the current uncertain economic environment. Professional
fees include legal, accounting and investor-related expenses incurred in the normal course of
business.
Other Interest Income
For the three and nine months ended September 30, 2009 as compared to the same periods in 2008,
other interest income decreased by $0.4 million and $0.8 million, primarily due to lower rates of
return earned on our cash balances, reflecting current market conditions.
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 two investments entered into with affiliates 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 our equity investments in real estate increased by $0.3 million and $0.9 million,
respectively, primarily due to entering into a new equity investment in real estate in Hungary in
July 2009. In addition, we increased our ownership interest in a domestic equity investment from
0.01% to 50% in May 2008, which contributed to the increase for the current year nine months as
compared to the same period in the prior year. During the nine months ended September 30, 2009,
the domestic venture recognized a gain on extinguishment of debt of $6.5 million in connection with
the repayment of its existing $39.0 million non-recourse mortgage loan at a discount for $32.5
million. Our share of the gain on extinguishment of debt was $3.2 million; however, our share of
the gain was reduced by $2.9 million due to an other-than-temporary impairment charge that we
recognized to reduce the carrying value of our investment to the estimated fair value of the
ventures underlying properties.
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 embedded
credit derivatives for which realized and unrealized gains and losses are included in earnings. The
timing and amount of such gains and losses cannot always be estimated and are subject to
fluctuation.
CPA®:17 Global 9/30/2009 10-Q 24
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For the three and nine months ended September 30, 2009, we recognized net other expenses of $0.8
million and $2.4 million, as compared with net other expenses of $0.4 million for both the three
and nine months ended September 2008. The increase in net other expenses was primarily due to
increases in realized losses on foreign currency transactions as a result of changes in foreign
currency exchange rates on deposits that had been held for new investments but that were released
to us because the transactions were not consummated.
Interest Expense
For the three and nine months ended September 30, 2009 as compared to the same periods in 2008,
interest expense increased by $1.7 million and $5.8 million, respectively, in connection with
non-recourse mortgage financing obtained during 2009 and 2008 related to our investment activity.
Provision for Income Taxes
For the three and nine months ended September 30, 2009 as compared to the same periods in 2008,
provision for income taxes increased by $0.2 million and $0.7 million, respectively, substantially
all of which is related to our investments in Germany.
Net Income Attributable to Noncontrolling Interests
We consolidate investments in which we are deemed to have a controlling interest. Noncontrolling
interest in income represents the proportionate share of net income (revenue less expenses) from
such investments that is attributable to the noncontrolling interests.
For the three and nine months ended September 30, 2009 as compared to the same periods in 2008, net
income attributable to noncontrolling interests increased by $3.7 million and $8.7 million,
respectively, as a result of our involvement in four investments with affiliates where we have
controlling interests, including The New York Times Company transaction.
Net Income Attributable to CPA®:17 Global Shareholders
For the three and nine months ended September 30, 2009 as compared to the same periods in 2008, the resulting net income attributable to CPA®:17 Global shareholders increased by $3.9 million and $8.7 million, respectively.
For the three and nine months ended September 30, 2009 as compared to the same periods in 2008, the resulting net income attributable to CPA®:17 Global shareholders increased by $3.9 million and $8.7 million, respectively.
Financial Condition
We expect to continue to raise capital from the sale of our common stock in our initial public
offering and to invest such proceeds in a diversified portfolio of income-producing commercial
properties and other real estate related assets. After investing capital raised through our public
offering, we expect our primary source of operating cash flow to be generated from cash flow from
our net leases and other real estate related assets. We expect that these cash flows will 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, and the timing and characterization of distributions from equity investments in real
estate. Despite this fluctuation, we believe our net leases and other real estate related assets
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. However, as we continue
to raise capital, it may be necessary to use cash raised in our initial public offering to fund our
operating activities (see Financing Activities below). Our sources and uses of cash during the
period are described below.
Operating Activities
We generated cash flow from operations of $22.0 million for the nine months ended September 30,
2009, primarily due to our investment activity beginning in the second quarter of 2008. For 2009,
the advisor elected to receive its asset management fees in restricted shares of our common stock,
and as a result, we paid asset management fees of $1.9 million during the nine months ended
September 30, 2009 through the issuance of restricted stock rather than in cash.
Investing Activities
Our investing activities are generally comprised of real estate related transactions (purchases and
sales), payment of deferred acquisition fees to the advisor and capitalized property-related costs.
During the nine months ended September 30, 2009, we entered into a $233.7 million investment in the
office headquarters of The New York Times Company and funded construction costs totaling $39.6
million at two separate build-to-suit projects that we entered into in 2009. We financed the New
York Times transaction in part with mortgage financing of $119.8 million and net contributions
received from noncontrolling interests of $52.2 million (see Financing Activities below). In July
2009, we also contributed $22.8 million to an equity investment in real estate in connection with
its investment in properties in Hungary. We placed $75.9 million into escrow to fund potential
investments, which was released when these investments were not consummated, and placed an
additional $9.1 million into escrow to fund future construction costs at one of the build-to-suit
projects. Payments of deferred acquisition fees to the advisor totaled $1.4 million for the current
year period.
CPA®:17 Global 9/30/2009 10-Q 25
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Financing Activities
Our financing activities for the nine months ended September 30, 2009 primarily consisted of net
proceeds from our initial public offering totaling $273.8 million; the receipt of mortgage proceeds
totaling $143.2 million related to investments completed in 2008
and 2009; and the receipt of
contributions totaling $103.4 million from noncontrolling interests in connection with The New York
Times Company transaction. We made distributions to noncontrolling interests of $68.8 million,
which includes the distribution of mortgage proceeds of $51.2 million attributable to our
affiliates noncontrolling interests in The New York Times Company transaction. We also placed
mortgage financing deposits of $3.9 million with lenders in connection with seeking mortgage
financing for the investments we completed during 2008 and 2009. Distributions to shareholders
totaled $17.9 million.
Our objectives are to generate sufficient cash flow over time to provide shareholders with
increasing distributions and to seek investments with potential for capital appreciation throughout
varying economic cycles. We have funded a portion of our cash distributions to date using net
proceeds from our initial public offering and we may do so in the future, particularly during the
early stages of our offering and until we substantially invest the net offering proceeds. In
determining our distribution policy during the periods we are raising funds and investing capital,
we place primary emphasis on projections of cash flow from operations, together with equity
distributions in excess of equity income in real estate, from our investments, rather than on
historical results of operations (though these and other factors may be a part of our
consideration). In setting a distribution rate, we thus focus primarily on expected returns from
those investments we have already made, as well as our anticipated rate of future investment, to
assess the sustainability of a particular distribution rate over time. During the nine months ended
September 30, 2009, our cash flow from operations (which does not reflect, among other things, cash
distributions paid by us to noncontrolling interests) was $22.7 million and cash distributions were
$17.9 million.
Liquidity would be affected adversely by unanticipated costs and greater-than-anticipated operating
expenses. To the extent that our cash reserves are insufficient to satisfy our cash requirements,
additional funds may be provided from cash generated from operations or through short-term
borrowings. In addition, we may incur indebtedness in connection with the acquisition of any
property, refinancing the debt thereon, arranging for the leveraging of any previously unfinanced
property, or reinvesting the proceeds of financings or refinancings in additional properties.
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 |
$ | 155,843 | $ | 133,633 | ||||
Variable rate (a) |
119,750 | | ||||||
Total |
$ | 275,593 | $ | 133,633 | ||||
Percent of total debt |
||||||||
Fixed rate |
57 | % | 100 | % | ||||
Variable rate (a) |
43 | % | 0 | % | ||||
100 | % | 100 | % | |||||
Weighted average interest rate at end of period |
||||||||
Fixed rate |
7.1 | % | 6.9 | % | ||||
Variable rate (a) |
5.1 | % | N/A |
(a) | Variable rate debt at September 30, 2009 consisted entirely of debt that is subject to an interest rate cap, but the applicable interest rate for such debt was below the interest rate cap at September 30, 2009. |
Cash Resources
As of September 30, 2009, our cash resources consisted of cash and cash equivalents of $300.0
million. Of this amount, $19.5 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 had unleveraged properties that had an aggregate carrying value of
$44.9 million, although given the current economic environment, there can be no assurance that we
would be able to obtain financing for these properties. As described above, as of October 31, 2009,
we have raised more than $685.0 million from our public offering.
CPA®:17 Global 9/30/2009 10-Q 26
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Wagon Automotive GmbH, which filed for bankruptcy in Germany in December 2008, terminated its lease
in bankruptcy proceedings effective May 2009 but as of the date of this Report was paying rent to
us, albeit at a significantly reduced rate. Wagon Automotive Nagold GmbH has not filed for
bankruptcy, and while it briefly ceased making rent payments during the second quarter of 2009, it
subsequently resumed paying rent to us substantially in accordance with the terms stated in its
lease. In October 2009 we terminated the existing lease and signed a new lease with Wagon
Automotive Nagold GmbH on substantially the same terms (Note 10). Wagon Automotive GmbH and Wagon
Automotive Nagold GmbH accounted for approximately 3% and 5% of our lease revenue for the nine
months ended September 30, 2009, respectively. If additional tenants encounter financial
difficulties as a result of the current economic environment, our cash flows could be negatively
impacted.
Cash Requirements
During the next twelve months, we expect that cash payments will include making scheduled mortgage
principal payments (neither we nor our venture partners have any balloon payments on our mortgage
obligations until 2012), paying distributions to shareholders and to our affiliates who hold
noncontrolling interests in entities we control, reimbursing the advisor for costs incurred on our
behalf and paying normal recurring operating expenses, such as fees to the advisor for services
performed and rent. We expect to continue to use funds raised from our public offering to invest in
new properties.
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 and limited-recourse debt principal |
$ | 275,593 | $ | 5,304 | $ | 11,609 | $ | 119,539 | $ | 139,141 | ||||||||||
Deferred acquisition fees |
6,769 | 3,252 | 3,517 | | | |||||||||||||||
Interest on borrowings and deferred acquisition fees |
119,662 | 17,313 | 33,197 | 31,578 | 37,574 | |||||||||||||||
Build-to-suit commitments (b) |
4,717 | 4,717 | | | | |||||||||||||||
Operating and other lease commitments (c) |
636 | 86 | 178 | 184 | 188 | |||||||||||||||
$ | 407,377 | $ | 30,672 | $ | 48,501 | $ | 151,301 | $ | 176,903 | |||||||||||
(a) | Represents organization and offering costs payable to the advisor and its subsidiaries in connection with the offering of our securities. | |
(b) | Represents remaining build-to-suit commitment for a project in Glendale Heights, IN. Estimated total construction costs for the project are currently projected to be $31.0 million, of which $26.3 million was funded as of September 30, 2009. | |
(c) | Operating and other lease commitments consist of 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. We anticipate that our share of future minimum lease payments will increase significantly as we continue to invest the proceeds of our offering. |
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 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 ventures 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 | ||||||||||||
Berry Plastics |
50 | % | $ | 86,735 | $ | 29,000 | 3/2012 | |||||||||
Tesco plc (a) |
49 | % | 101,076 | 51,007 | 6/2016 | |||||||||||
$ | 187,811 | $ | 80,007 | |||||||||||||
(a) | Dollar amounts shown are based on the exchange rate of the Euro as of September 30, 2009. We acquired this investment in July 2009. |
Subsequent Event
In October 2009, we entered into an investment in Poland at a total cost of approximately
$15.0 million, based on the exchange rate of the Euro at the
date of acquisition.
CPA®:17 Global 9/30/2009 10-Q 27
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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, as we have a limited number of investments. We intend
to regularly monitor our portfolio to assess potential concentrations of market risk as we make
additional investments. As we invest the proceeds of our initial public offering, we will seek to
ensure that our portfolio is reasonably well diversified and does not contain any unusual
concentration of market risks.
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, related fixed rate debt obligations and CMBS investments 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.
We own CMBS that are fully collateralized by a portfolio of commercial mortgages or commercial
mortgage-related securities to the extent consistent with the requirements for qualification as a
REIT. CMBS are instruments that directly or indirectly represent a participation in, or are secured
by and payable from, one or more mortgage loans secured by commercial real estate. In most cases,
CMBS distribute principal and interest payments on the mortgages to investors. Interest rates on
these instruments can be fixed or variable. Some classes of CMBS may be entitled to receive
mortgage prepayments before other classes do. Therefore, the prepayment risk for a particular
instrument may be different than for other CMBS. The value of our CMBS investments is also 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 the aggregate fair
value of our CMBS investments was $3.7 million.
Although we have not experienced any credit losses on our CMBS investments, in the event of a
significant rising interest rate environment and given the current economic crisis, loan defaults
could occur and result in our recognition of credit losses, which could adversely affect our
liquidity and operating results. Further, such defaults could have an adverse effect on the spreads
between interest earning assets and interest bearing liabilities.
We are exposed to the impact of interest rate changes primarily through our borrowing activities.
To limit this exposure, we attempt to obtain mortgage financing on a long-term, fixed-rate basis.
However, from time to time, we or our venture partners may obtain variable rate 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 cap, which is included in Other assets, net in the consolidated financial statements,
was $2.7 million, inclusive of amounts attributable to noncontrolling interests of $1.2 million
(Note 10).
In connection with a German investment in August 2008, a venture in which we and an affiliate have
67% and 33% interests, respectively, and which we consolidate, obtained a participation right in an
interest rate swap obtained by the lender of the non-recourse mortgage financing on the
transaction. This participation right is deemed to be an embedded credit derivative. This
derivative instrument had no fair value as of September 30, 2009.
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.
At September 30, 2009, our non-recourse and limited-recourse debt bore
interest at fixed rates that ranged from 6.2% to 8.0% or bore interest at a variable rate of 5.1%.
The maximum interest rate on our variable rate debt has been capped at 8.8% through the use of an
interest rate cap instrument The estimated fair value of these instruments is affected by changes
in market interest rates. The following table presents principal cash flows based upon expected
maturity dates of our debt obligations outstanding at September 30, 2009 (in thousands):
CPA®:17 Global 9/30/2009 10-Q 28
Table of Contents
2009 | 2010 | 2011 | 2012 | 2013 | Thereafter | Total | Fair value | |||||||||||||||||||||||||
Fixed rate debt |
$ | 706 | $ | 2,924 | $ | 3,127 | $ | 3,339 | $ | 3,560 | $ | 142,187 | $ | 155,843 | $ | 142,745 | ||||||||||||||||
Variable rate debt |
$ | 596 | $ | 2,461 | $ | 2,590 | $ | 2,725 | $ | 2,868 | $ | 108,510 | $ | 119,750 | $ | 119,750 |
The estimated fair value of our fixed rate debt 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 by
an aggregate increase of $8.3 million or an aggregate decrease of $7.6 million, respectively. At
September 30, 2009, the interest rate cap on our variable rate debt was not being utilized, and
therefore our annual interest expense on this debt would increase or decrease by $1.2 million for
each respective 1% change in annual interest rates.
Foreign Currency Exchange Rate Risk
We own international investments in the European Union, and as a result we are exposed to foreign
currency exchange rate movements in the Euro and the British Pound Sterling, which may affect
future costs and cash flows. Although all of our foreign investments to date were conducted in
these currencies, we are likely to conduct business in other currencies as we seek to invest funds
from our offering internationally. 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. We are generally a net receiver of these currencies (we receive more cash than we pay
out), and therefore our foreign operations benefit from a weaker U.S. dollar, and are adversely
affected by a stronger U.S. dollar, relative to the foreign currency. We recognized realized
foreign currency transaction losses of $2.5 million during the nine months ended September 30,
2009. These losses are included in Other income and expenses in the consolidated financial
statements and were primarily due to changes in the value of foreign currency on deposits held for
new investments.
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.
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®:17 Global 9/30/2009 10-Q 29
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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 84,996 restricted shares of our common
stock to the advisor as consideration for asset management fees. These shares were issued at $10.00
per share, which represents our initial offering price. 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.
We intend to use the net proceeds of our offering to invest in a diversified portfolio of
income-producing commercial properties and other real estate related assets. The following table
sets forth the use of proceeds from our offering of common stock, which commenced in December 2007
pursuant to a registration statement (No. 333-140842) that was declared effective in November 2007,
at September 30, 2009 (in thousands, except share amounts):
Shares registered |
200,000,000 | |||
Aggregate price of offering amount registered |
$ | 2,000,000 | ||
Shares sold (a) |
63,935,125 | |||
Aggregated offering price of amount sold |
$ | 638,835 | ||
Direct or indirect payments to directors, officers, general partners of the issuer or their
associates;
to persons owning ten percent or more of any class of equity securities of the issuer; and to
affiliates of the issuer |
(63,791 | ) | ||
Direct or indirect payments to others |
(7,267 | ) | ||
Net offering proceeds to the issuer after deducting expenses |
567,777 | |||
Purchases of real estate related assets |
(205,044 | ) | ||
Temporary investments in cash and cash equivalents |
$ | 362,733 | ||
(a) | Excludes shares issued to affiliates, including our advisor, and excludes shares issued pursuant to our distribution reinvestment and stock purchase plan. |
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 |
82,563 | $ | 9.30 | N/A | N/A | |||||||||||
Total |
82,563 | |||||||||||||||
(a) | Represents shares of our common stock purchased under our redemption plan, pursuant to which we may elect to redeem shares at the request of our shareholders who have held their shares for at least one year from the date of their issuance, subject to certain conditions and limitations. The maximum amount of shares purchasable by us in any period depends on a number of factors and is at the discretion of our board of directors. The redemption plan will terminate if and when our shares are listed on a national securities market. |
CPA®:17 Global 9/30/2009 10-Q 30
Table of Contents
Item 6. Exhibits
Exhibit No. | Description | Method of Filing | ||
10.1
|
Amended and Restated Advisory Agreement dated as of October 1, 2009 among Corporate Property Associates 17Global Incorporated, CPA:17 Limited Partnership and Carey Asset Management Corp. | Incorporated by reference to Registration Statement on Form S-11 (File No. 333-140842) filed November 4, 2009 | ||
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®:17 Global 9/30/2009 10-Q 31
Table of Contents
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 17 Global 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®:17 Global 9/30/2009 10-Q 32