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EXCEL - IDEA: XBRL DOCUMENT - Corporate Property Associates 17 - Global INC | Financial_Report.xls |
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EX-31.2 - EX-31.2 - Corporate Property Associates 17 - Global INC | y93404exv31w2.htm |
EX-31.1 - EX-31.1 - Corporate Property Associates 17 - Global INC | y93404exv31w1.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, 2011
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
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Registrant has 197,314,765 shares of common stock, $0.001 par value, outstanding at November 4,
2011.
INDEX
Forward-Looking Statements
This Quarterly Report on Form 10-Q (the Report), including Managements Discussion and Analysis
of Financial Condition and Results of Operations in Item 2 of Part I of this Report, contains
forward-looking statements within the meaning of the federal securities laws. These forward-looking
statements generally are identified by the words believe, project, expect, anticipate,
estimate, intend, strategy, plan, may, should, will, would, will be, will
continue, will likely result, and similar expressions. It is important to note that our actual
results could be materially different from those projected in such forward-looking statements. You
should exercise caution in relying on forward-looking statements as they involve known and unknown
risks, uncertainties and other factors that may materially affect our future results, performance,
achievements or transactions. Information on factors which could impact actual results and cause
them to differ from what is anticipated in the forward-looking statements contained herein is
included in this Report as well as in our other filings with the Securities and Exchange Commission
(the SEC), including but not limited to those described in Item 1A. Risk Factors in our Annual
Report on Form 10-K for the year ended December 31, 2010 as filed with the SEC on March 18, 2011
(the 2010 Annual Report). We do not undertake to revise or update any forward-looking statements.
Additionally, a description of our critical accounting estimates is included in the Managements
Discussion and Analysis of Financial Condition and Results of Operations section of our 2010 Annual
Report. There has been no significant change in our critical accounting estimates.
CPA®:17 Global 9/30/2011 10-Q 1
Table of Contents
PART I
Item 1. Financial Statements
CORPORATE PROPERTY ASSOCIATES 17 GLOBAL INCORPORATED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
September 30, 2011 | December 31, 2010 | |||||||
Assets |
||||||||
Investments in real estate: |
||||||||
Real estate, at cost |
$ | 1,344,596 | $ | 930,404 | ||||
Operating real estate, at cost |
154,620 | 12,177 | ||||||
Accumulated depreciation |
(34,692 | ) | (16,574 | ) | ||||
Net investments in properties |
1,464,524 | 926,007 | ||||||
Real estate under construction |
64,741 | 53,041 | ||||||
Net investments in direct financing leases |
492,288 | 397,006 | ||||||
Equity investments in real estate |
193,798 | 50,853 | ||||||
Net investments in real estate |
2,215,351 | 1,426,907 | ||||||
Notes receivable |
70,000 | 89,560 | ||||||
Cash and cash equivalents |
146,782 | 162,745 | ||||||
Intangible assets, net |
397,835 | 252,078 | ||||||
Other assets, net |
67,022 | 56,965 | ||||||
Total assets |
$ | 2,896,990 | $ | 1,988,255 | ||||
Liabilities and Equity |
||||||||
Liabilities: |
||||||||
Non-recourse and limited-recourse debt |
$ | 1,113,813 | $ | 667,478 | ||||
Accounts payable, accrued expenses and other liabilities |
38,341 | 14,719 | ||||||
Prepaid and deferred rental income |
44,810 | 27,020 | ||||||
Due to affiliates |
30,538 | 21,009 | ||||||
Distributions payable |
29,918 | 21,520 | ||||||
Total liabilities |
1,257,420 | 751,746 | ||||||
Commitments and contingencies (Note 10) |
||||||||
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; 192,121,020 and 143,231,953 shares issued and outstanding, respectively |
192 | 143 | ||||||
Additional paid-in capital |
1,720,123 | 1,280,453 | ||||||
Distributions in excess of accumulated earnings |
(138,847 | ) | (93,446 | ) | ||||
Accumulated other comprehensive loss |
(289 | ) | (14,943 | ) | ||||
Less, treasury stock at cost, 1,308,490 and 864,991 shares, respectively |
(12,199 | ) | (8,044 | ) | ||||
Total CPA®:17 Global shareholders equity |
1,568,980 | 1,164,163 | ||||||
Noncontrolling interests |
70,590 | 72,346 | ||||||
Total equity |
1,639,570 | 1,236,509 | ||||||
Total liabilities and equity |
$ | 2,896,990 | $ | 1,988,255 | ||||
See Notes to Consolidated Financial Statements.
CPA®:17 Global 9/30/2011 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)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues |
||||||||||||||||
Rental income |
$ | 29,521 | $ | 14,723 | $ | 85,573 | $ | 35,407 | ||||||||
Interest income from direct financing leases |
12,762 | 9,991 | 36,319 | 29,592 | ||||||||||||
Other operating income |
623 | 522 | 2,133 | 939 | ||||||||||||
Interest income on notes receivable and CMBS |
1,217 | 964 | 5,173 | 1,999 | ||||||||||||
Other real estate income |
5,120 | 897 | 7,125 | 1,437 | ||||||||||||
49,243 | 27,097 | 136,323 | 69,374 | |||||||||||||
Operating Expenses |
||||||||||||||||
Depreciation and amortization |
(11,684 | ) | (3,922 | ) | (29,036 | ) | (9,741 | ) | ||||||||
General and administrative |
(4,673 | ) | (1,063 | ) | (10,871 | ) | (3,673 | ) | ||||||||
Property expenses |
(4,829 | ) | (2,122 | ) | (13,236 | ) | (4,770 | ) | ||||||||
Other real estate expenses |
(2,906 | ) | (526 | ) | (4,032 | ) | (833 | ) | ||||||||
(24,092 | ) | (7,633 | ) | (57,175 | ) | (19,017 | ) | |||||||||
Other Income and Expenses |
||||||||||||||||
Income from equity investments in real estate |
1,226 | 794 | 3,921 | 1,312 | ||||||||||||
Other income and (expenses) |
2,337 | 606 | 2,475 | 683 | ||||||||||||
Interest expense |
(12,851 | ) | (7,665 | ) | (35,936 | ) | (19,593 | ) | ||||||||
(9,288 | ) | (6,265 | ) | (29,540 | ) | (17,598 | ) | |||||||||
Income from continuing operations before income taxes |
15,863 | 13,199 | 49,608 | 32,759 | ||||||||||||
(Provision for) benefit from income taxes |
(876 | ) | (59 | ) | (1,120 | ) | 292 | |||||||||
Income from continuing operations |
14,987 | 13,140 | 48,488 | 33,051 | ||||||||||||
Discontinued Operations |
||||||||||||||||
Income from operations of discontinued properties |
| | 363 | | ||||||||||||
Gain on sale of real estate |
| | 787 | | ||||||||||||
Income from discontinued operations |
| | 1,150 | | ||||||||||||
Net Income |
14,987 | 13,140 | 49,638 | 33,051 | ||||||||||||
Less: Net income attributable to noncontrolling interests |
(4,683 | ) | (4,427 | ) | (14,056 | ) | (11,560 | ) | ||||||||
Net Income Attributable to CPA®:17 Global Shareholders |
$ | 10,304 | $ | 8,713 | $ | 35,582 | $ | 21,491 | ||||||||
Earnings Per Share |
||||||||||||||||
Income from continuing operations
attributable to CPA®:17 Global shareholders |
$ | 0.06 | $ | 0.07 | $ | 0.20 | $ | 0.21 | ||||||||
Income from discontinued operations
attributable to CPA®:17 Global shareholders |
| | 0.01 | | ||||||||||||
Net income attributable to CPA®:17 Global shareholders |
$ | 0.06 | $ | 0.07 | $ | 0.21 | $ | 0.21 | ||||||||
Weighted Average Shares Outstanding |
184,111,963 | 117,964,002 | 167,293,746 | 102,875,944 | ||||||||||||
Amounts Attributable to CPA®:17 Global Shareholders |
||||||||||||||||
Income from continuing operations, net of tax |
$ | 10,304 | $ | 8,713 | $ | 34,432 | $ | 21,491 | ||||||||
Income from discontinued operations, net of tax |
| | 1,150 | | ||||||||||||
Net income |
$ | 10,304 | $ | 8,713 | $ | 35,582 | $ | 21,491 | ||||||||
Distributions Declared Per Share |
$ | 0.1625 | $ | 0.1600 | $ | 0.4850 | $ | 0.4800 | ||||||||
See Notes to Consolidated Financial Statements.
CPA®:17 Global 9/30/2011 10-Q 3
Table of Contents
CORPORATE PROPERTY ASSOCIATES 17 GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
(in thousands)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net Income |
$ | 14,987 | $ | 13,140 | $ | 49,638 | $ | 33,051 | ||||||||
Other Comprehensive (Loss) Income: |
||||||||||||||||
Foreign currency translation adjustments |
(29,688 | ) | 27,498 | 16,905 | 22 | |||||||||||
Unrealized gain (loss) on derivative instrument |
3,856 | (1,538 | ) | (2,149 | ) | (5,276 | ) | |||||||||
Change in unrealized appreciation on marketable securities |
| | (15 | ) | | |||||||||||
(25,832 | ) | 25,960 | 14,741 | (5,254 | ) | |||||||||||
Comprehensive (Loss) Income |
(10,845 | ) | 39,100 | 64,379 | 27,797 | |||||||||||
Amounts Attributable to Noncontrolling Interests: |
||||||||||||||||
Net income |
(4,683 | ) | (4,427 | ) | (14,056 | ) | (11,560 | ) | ||||||||
Foreign currency translation adjustments |
586 | (1,051 | ) | (259 | ) | 501 | ||||||||||
Change in unrealized loss on derivative instruments |
58 | 205 | 172 | 1,164 | ||||||||||||
Comprehensive income attributable to noncontrolling interests |
(4,039 | ) | (5,273 | ) | (14,143 | ) | (9,895 | ) | ||||||||
Comprehensive (Loss) Income Attributable to CPA®:17 Global Shareholders |
$ | (14,884 | ) | $ | 33,827 | $ | 50,236 | $ | 17,902 | |||||||
See Notes to Consolidated Financial Statements.
CPA®:17 Global 9/30/2011 10-Q 4
Table of Contents
CORPORATE PROPERTY ASSOCIATES 17 GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
For the nine months ended September 30, 2011 and the year ended December 31, 2010
(in thousands, except share and per share amounts)
CPA®:17 Global Shareholders | ||||||||||||||||||||||||||||||||||||
Distributions | Accumulated | Total | ||||||||||||||||||||||||||||||||||
Total | Additional | in Excess of | Other | CPA®:17 | ||||||||||||||||||||||||||||||||
Outstanding | Common | Paid-In | Accumulated | Comprehensive | Treasury | Global | Noncontrolling | |||||||||||||||||||||||||||||
Shares | Stock | Capital | Earnings | Loss | Stock | Shareholders | Interests | Total | ||||||||||||||||||||||||||||
Balance at January 1, 2010 |
79,886,568 | $ | 82 | $ | 718,057 | $ | (53,118 | ) | $ | (4,902 | ) | $ | (2,314 | ) | $ | 657,805 | $ | 71,332 | $ | 729,137 | ||||||||||||||||
Shares issued, net of offering costs |
62,643,431 | 60 | 557,835 | 557,895 | 557,895 | |||||||||||||||||||||||||||||||
Shares issued to affiliates |
453,121 | 1 | 4,561 | 4,562 | 4,562 | |||||||||||||||||||||||||||||||
Contributions from noncontrolling interests |
412 | 412 | ||||||||||||||||||||||||||||||||||
Distributions declared ($0.6400 per share) |
(70,782 | ) | (70,782 | ) | (70,782 | ) | ||||||||||||||||||||||||||||||
Distributions to noncontrolling interests |
(12,959 | ) | (12,959 | ) | ||||||||||||||||||||||||||||||||
Net income |
30,454 | 30,454 | 15,333 | 45,787 | ||||||||||||||||||||||||||||||||
Other comprehensive loss: |
||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments |
(6,660 | ) | (6,660 | ) | (778 | ) | (7,438 | ) | ||||||||||||||||||||||||||||
Change in unrealized loss on derivative
instruments |
(3,381 | ) | (3,381 | ) | (994 | ) | (4,375 | ) | ||||||||||||||||||||||||||||
Repurchase of shares |
(616,158 | ) | (5,730 | ) | (5,730 | ) | (5,730 | ) | ||||||||||||||||||||||||||||
Balance at December 31, 2010 |
142,366,962 | 143 | 1,280,453 | (93,446 | ) | (14,943 | ) | (8,044 | ) | 1,164,163 | 72,346 | 1,236,509 | ||||||||||||||||||||||||
Shares issued, net of offering costs |
48,140,316 | 47 | 432,129 | 432,176 | 432,176 | |||||||||||||||||||||||||||||||
Shares issued to affiliates |
748,751 | 2 | 7,541 | 7,543 | 7,543 | |||||||||||||||||||||||||||||||
Contributions from noncontrolling interests |
1,198 | 1,198 | ||||||||||||||||||||||||||||||||||
Distributions declared ($0.4850 per share) |
(80,983 | ) | (80,983 | ) | (80,983 | ) | ||||||||||||||||||||||||||||||
Distributions to noncontrolling interests |
(17,097 | ) | (17,097 | ) | ||||||||||||||||||||||||||||||||
Net income |
35,582 | 35,582 | 14,056 | 49,638 | ||||||||||||||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments |
16,646 | 16,646 | 259 | 16,905 | ||||||||||||||||||||||||||||||||
Change in unrealized loss on derivative
instruments |
(1,977 | ) | (1,977 | ) | (172 | ) | (2,149 | ) | ||||||||||||||||||||||||||||
Change in unrealized appreciation on
marketable securities |
(15 | ) | (15 | ) | (15 | ) | ||||||||||||||||||||||||||||||
Repurchase of shares |
(443,499 | ) | (4,155 | ) | (4,155 | ) | (4,155 | ) | ||||||||||||||||||||||||||||
Balance at September 30, 2011 |
190,812,530 | $ | 192 | $ | 1,720,123 | $ | (138,847 | ) | $ | (289 | ) | $ | (12,199 | ) | $ | 1,568,980 | $ | 70,590 | $ | 1,639,570 | ||||||||||||||||
See Notes to Consolidated Financial Statements.
CPA®:17 Global 9/30/2011 10-Q 5
Table of Contents
CORPORATE PROPERTY ASSOCIATES 17 GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Nine Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
Cash Flows Operating Activities |
||||||||
Net income |
$ | 49,638 | $ | 33,051 | ||||
Adjustments to net income: |
||||||||
Depreciation and amortization, including intangible assets and deferred financing costs |
31,711 | 9,933 | ||||||
Income from equity investments in real estate in excess of distributions received |
657 | 18 | ||||||
Issuance of shares to affiliate in satisfaction of fees due |
7,543 | 3,115 | ||||||
Gain on sale of real estate |
(787 | ) | | |||||
Unrealized (gain) loss on foreign currency transactions and others |
(307 | ) | 81 | |||||
Realized gain on foreign currency transactions and others |
(1,634 | ) | (727 | ) | ||||
Straight-line rent adjustment and amortization of rent-related intangibles |
(7,256 | ) | (3,040 | ) | ||||
Settlement of derivative liability |
(5,131 | ) | | |||||
Increase in accounts receivable and prepaid expenses |
(2,980 | ) | (1,212 | ) | ||||
(Decrease) increase in accounts payable and accrued expenses |
(551 | ) | 2,207 | |||||
Increase in prepaid and deferred rental income |
2,940 | 4,190 | ||||||
(Decrease) increase in due to affiliates |
(987 | ) | 2,327 | |||||
Net changes in other operating assets and liabilities |
(1,619 | ) | (4,316 | ) | ||||
Net cash provided by operating activities |
71,237 | 45,627 | ||||||
Cash Flows Investing Activities |
||||||||
Distributions received from equity investments in real estate in excess of equity income |
89,995 | 2,102 | ||||||
Acquisitions of real estate and direct financing leases and other capital expenditures (a) (b) |
(549,205 | ) | (393,220 | ) | ||||
Capital contributions to equity investments in real estate (a) |
(228,124 | ) | (10,300 | ) | ||||
Funding of notes receivable |
(30,000 | ) | (50,133 | ) | ||||
Value added taxes (VAT) paid in connection with acquisition of real estate |
(3,542 | ) | (33,846 | ) | ||||
VAT refunded in connection with acquisitions of real estate |
29,336 | 33,076 | ||||||
Proceeds from sale of real estate |
19,821 | 1,690 | ||||||
Funds placed in escrow |
(191,119 | ) | (98,100 | ) | ||||
Funds released from escrow |
182,119 | 95,622 | ||||||
Payment of deferred acquisition fees to an affiliate |
(11,080 | ) | (5,363 | ) | ||||
Proceeds from repayment of notes receivable |
49,560 | 7,171 | ||||||
Investment in securities |
(2,394 | ) | | |||||
Net cash used in investing activities |
(644,633 | ) | (451,301 | ) | ||||
Cash Flows Financing Activities |
||||||||
Distributions paid |
(72,585 | ) | (42,089 | ) | ||||
Contributions from noncontrolling interests |
1,198 | | ||||||
Distributions to noncontrolling interests |
(17,097 | ) | (9,402 | ) | ||||
Scheduled payments of mortgage principal |
(10,425 | ) | (4,785 | ) | ||||
Prepayments of mortgage principal |
| (1,888 | ) | |||||
Proceeds from mortgage financing(b) |
213,917 | 200,413 | ||||||
Funds placed in escrow |
17,936 | 3,019 | ||||||
Funds released from escrow |
(6,510 | ) | (1,790 | ) | ||||
Proceeds from loan from an affiliate |
90,000 | | ||||||
Repayment of loan from an affiliate |
(90,000 | ) | | |||||
Payment of financing costs and mortgage deposits, net of deposits refunded |
(4,476 | ) | (2,550 | ) | ||||
Proceeds from issuance of shares, net of issuance costs |
435,022 | 411,855 | ||||||
Purchase of treasury stock |
(4,155 | ) | (4,112 | ) | ||||
Net cash provided by financing activities |
552,825 | 548,671 | ||||||
Change in Cash and Cash Equivalents During the Period |
||||||||
Effect of exchange rate changes on cash |
4,608 | 1,756 | ||||||
Net (decrease) increase in cash and cash equivalents |
(15,963 | ) | 144,753 | |||||
Cash and cash equivalents, beginning of period |
162,745 | 281,554 | ||||||
Cash and cash equivalents, end of period |
$ | 146,782 | $ | 426,307 | ||||
(Continued)
CPA®:17 Global 9/30/2011 10-Q 6
Table of Contents
CORPORATE PROPERTY ASSOCIATES 17 GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Continued)
(Continued)
Supplemental non-cash investing and financing activities:
(a) | The cost basis of real estate investments acquired during the nine months ended September 30, 2011 and 2010, including equity investments in real estate, also included deferred acquisition fees payable of $16.1 million and $9.1 million, respectively (Note 3). | |
(b) | In September 2011, we purchased substantially all of the economic and voting interests in a real estate fund for $164.2 million, based on the exchange rate of the Euro on the date of acquisition (Note 4). This transaction consisted of the acquisition and assumption of certain assets and liabilities, as detailed in the table below (in thousands). |
Assets acquired at fair value: |
||||
Investments in real estate |
$ | 274,840 | ||
Intangible assets, net |
122,735 | |||
Liabilities assumed at fair value: |
||||
Non-recourse debt |
(222,680 | ) | ||
Accounts payable, accrued expenses and other liabilities |
(8,912 | ) | ||
Prepaid and deferred rental income |
(1,791 | ) | ||
Net assets acquired |
$ | 164,192 | ||
See Notes to Consolidated Financial Statements.
CPA®:17 Global 9/30/2011 10-Q 7
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 (CPA®:17 Global and,
together with its consolidated subsidiaries and predecessors, we, us or our) is a publicly
owned, non-listed real estate investment trust (REIT) that invests primarily in commercial
properties leased to companies domestically and internationally. As a REIT, we are not subject to
United States (U.S.) federal income taxation as long as we satisfy certain requirements,
principally relating to the nature of our income, the level of our distributions and other factors.
We earn revenue principally by leasing the properties we own to single corporate tenants, primarily
on a triple-net 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
adjustments, tenant defaults and sales of properties. At September 30, 2011, our portfolio was
comprised of our full or partial ownership interests in 301 fully-occupied properties,
substantially all of which were triple-net leased to 45 tenants, and totaled approximately 25
million square feet (on a pro rata basis). In addition, we own 35 self-storage properties and
retain a fee interest in a hotel property for an aggregate of approximately 3 million square feet
(on a pro rata basis). We were formed in 2007 and are managed by W. P. Carey & Co. LLC (WPC) and
its subsidiaries (collectively, the advisor).
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 Securities Act).
The registration statement also covered 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 shares were initially
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 the termination of our
initial public offering on April 7, 2011, we raised a total of more than $1.5 billion.
In October 2010, we filed a registration statement on Form S-11 (File No. 333-170225) with the SEC
for a continuous public offering of up to $1.0 billion of common stock, which was declared
effective by the SEC on April 7, 2011, terminating our initial public offering. 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. We refer to the continuous public offering
as the follow-on offering. From the beginning of the follow-on offering on May 2, 2011 through
September 30, 2011, we raised $279.3 million. There can be no assurance that we will successfully
sell the full number of shares registered.
We intend to use the net proceeds of these offerings 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 U.S.
(GAAP).
In the opinion of management, the unaudited financial information for the interim periods presented
in this Report reflects all normal and recurring adjustments necessary for a fair statement of
results of operations, financial position and cash flows. Our interim consolidated financial
statements should be read in conjunction with our audited consolidated financial statements and
accompanying notes for the year ended December 31, 2010, which are included in our 2010 Annual
Report, as certain disclosures that would substantially duplicate those contained in the audited
consolidated financial statements have not been included in this Report. Operating results for
interim periods are not necessarily indicative of operating results for an entire fiscal year.
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts
in our consolidated financial statements and the accompanying notes. Actual results could differ
from those estimates. Certain prior year amounts have been reclassified to conform to the current
year presentation.
CPA®:17 Global 9/30/2011 10-Q 8
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Notes to Consolidated Financial Statements
Basis of Consolidation
The consolidated financial statements reflect all of our accounts, including those of our
majority-owned and/or controlled subsidiaries. The portion of equity in a subsidiary that is not
attributable, directly or indirectly, to us is presented as noncontrolling interests. All
significant intercompany accounts and transactions have been eliminated.
Because we conduct our investment activities and own all of our assets through an operating
partnership, substantially all of the assets and liabilities presented in our consolidated balance
sheets are attributable to the operating partnership. The following table presents amounts included
in the consolidated balance sheets that are not attributable to the operating partnership but
rather are attributable to CPA®:17 Global, the primary beneficiary of the operating
partnership (in thousands):
September 30, 2011 | December 31, 2010 | |||||||
Assets: |
||||||||
Cash and cash equivalents not attributable to
consolidated Variable Interest Entity (VIE) |
$ | 16,461 | $ | 2,502 | ||||
Other assets, net not attributable to consolidated VIE |
2,861 | 1,038 | ||||||
Total assets not attributable to VIE |
$ | 19,322 | $ | 3,540 | ||||
Liabilities: |
||||||||
Due to affiliates not attributable to consolidated VIE |
$ | (1,741 | ) | $ | (408 | ) | ||
Distributions payable not attributable to consolidated VIE |
(29,918 | ) | (21,520 | ) | ||||
Total liabilities not attributable to VIE |
$ | (31,659 | ) | $ | (21,928 | ) | ||
Because we generally utilize non-recourse debt, our maximum exposure to the operating
partnership is limited to the equity we have in the operating partnership. We have not provided
financial or other support to the operating partnership, and there were no guarantees or other
commitments from third parties that would affect the value of or risk related to our interest in
this entity.
Out-of-Period Adjustment
During the third quarter of 2011, we identified several calculation and classification errors in
the consolidated financial statements related to 2008 through 2010 and first and second quarters of
2011, which are primarily attributable to the under accrual of interest expense related to a
refinancing and the capitalization of maintenance expenses. As a result of these errors, our net
income was overstated by $0.1 million for each of the years ended December 31, 2008, 2009 and 2010,
and by $0.6 million for the first half of 2011. We concluded that these adjustments were not
material to our results for any of the prior year periods, or the quarterly periods in 2011, and as
such, this cumulative change was recorded in the statement of operations in the third quarter of
2011 as an out-of-period adjustment of $0.9 million.
Information about International Geographic Areas
At September 30, 2011, our international investments were comprised of investments primarily in
Europe. The following tables present information about these investments (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues |
$ | 12,704 | $ | 7,931 | $ | 38,542 | $ | 18,493 |
September 30, 2011 | December 31, 2010 | |||||||
Net investments in real estate |
$ | 633,600 | $ | 515,653 |
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Notes to Consolidated Financial Statements
Future Accounting Requirements
The following Accounting Standards Updates (ASUs) promulgated by the Financial Accounting
Standards Board (FASB) are applicable to us in current or future reports, as indicated:
ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations In
December 2010, the FASB issued an update to Accounting Standards Codification Topic (ASC) 805,
Business Combinations. The amendments in the update clarify that the pro forma disclosures required
under ASC 805 should depict revenue and earnings of the combined entity as though the business
combination(s) that occurred during the current year had occurred as of the beginning of the
comparable prior annual reporting period. Additionally, the amendments expand the supplemental pro
forma disclosures to include a description of the nature and amount of material, nonrecurring pro
forma adjustments directly attributable to the business combination(s) included in the reported pro
forma revenue and earnings. These amendments impact the form of our disclosures only, are
applicable to us prospectively and are effective for our business combinations for which the
acquisition date is on or after December 15, 2010.
ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in
U.S. GAAP and IFRSs In May 2011, the FASB issued an update to ASC 820, Fair Value Measurements.
The amendments in the update explain how to measure fair value and do not require additional fair
value measurements, nor are they intended to establish valuation standards or affect valuation
practices outside of financial reporting. These new amendments will impact the level of information
we provide, particularly for level 3 fair value measurements and the measurements sensitivity to
changes in unobservable inputs, our use of a nonfinancial asset in a way that differs from that
assets highest and best use, and the categorization by level of the fair value hierarchy for items
that are not measured at fair value in the balance sheet but for which the fair value is required
to be disclosed. These amendments are expected to impact the form of our disclosures only, are
applicable to us prospectively and are effective for our interim and annual periods beginning in
2012.
ASU 2011-05, Presentation of Comprehensive Income In June 2011, the FASB issued an update to ASC
220, Comprehensive Income. The amendments in the update change the reporting options applicable to
the presentation of other comprehensive income and its components in the financial statements. This
update eliminates the option to present the components of other comprehensive income as part of the
statement of changes in stockholders equity. Additionally, the update requires the consecutive
presentation of the statement of net income and other comprehensive income. Finally, the update
requires an entity to present reclassification adjustments on the face of the financial statements
from other comprehensive income to net income. These amendments impact the form of our disclosures
only, are applicable to us retrospectively and are effective for our interim and annual periods
beginning in 2012.
CPA®:17 Global 9/30/2011 10-Q 10
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Notes to Consolidated Financial Statements
Note 3. Agreements and Transactions with Related Parties
Transactions with the Advisor
We have an advisory agreement with the advisor whereby the advisor performs certain services for us
for a fee. The agreement, which was scheduled to expire on September 30, 2011, was extended through
December 31, 2011. Under the terms of this agreement, the advisor manages our day-to-day
operations, for which we pay the advisor asset management fees and certain cash distributions, and
structures and negotiates the purchase and sale of investments and debt placement transactions for
us, for which we pay the advisor structuring and subordinated disposition fees. In addition, we
reimburse the advisor for 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. The following tables present a summary of fees we paid and expenses we reimbursed
to the advisor in accordance with the advisory agreement (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Amounts included in operating expenses: |
||||||||||||||||
Asset management fees(a) |
$ | 3,344 | $ | 1,389 | $ | 9,274 | $ | 3,579 | ||||||||
Distribution of available cash |
1,981 | 1,720 | 5,769 | 3,413 | ||||||||||||
Personnel reimbursements(b) |
699 | 257 | 1,515 | 610 | ||||||||||||
Office rent reimbursements(b) |
135 | 42 | 277 | 106 | ||||||||||||
$ | 6,159 | $ | 3,408 | $ | 16,835 | $ | 7,708 | |||||||||
Transaction fees incurred: |
||||||||||||||||
Current acquisition fees(c) |
$ | 11,669 | $ | 313 | $ | 22,245 | $ | 11,332 | ||||||||
Deferred acquisition fees (c) (d) |
8,216 | 250 | 16,085 | 9,065 | ||||||||||||
$ | 19,885 | $ | 563 | $ | 38,330 | $ | 20,397 | |||||||||
September 30, 2011 | December 31, 2010 | |||||||
Unpaid transaction fees: |
||||||||
Deferred acquisition fees |
$ | 24,858 | $ | 19,809 | ||||
Subordinated disposition fees(e) |
202 | | ||||||
$ | 25,060 | $ | 19,809 | |||||
(a) | Asset management fees are included in Property expenses in the consolidated financial statements. For 2011 and 2010, the advisor elected to receive its asset management fees in restricted shares. At September 30, 2011, the advisor owned 1,545,790 shares (less than 1%) of our common stock. | |
(b) | Personnel and office rent reimbursements are included in General and administrative expenses in the consolidated financial statements. Based on current gross revenues, our current share of future annual minimum lease payments under our agreement would be $0.5 million annually through 2016; however, we anticipate that our share of future annual minimum lease payments will increase as we continue to invest the proceeds of our offerings. | |
(c) | Current and deferred acquisition fees for real estate asset acquisitions were capitalized and included in the cost basis of the assets acquired and for business combinations were expensed and included in General and administrative expenses. | |
(d) | We made payments of deferred acquisition fees to the advisor totaling $11.1 million and $5.4 million during the nine months ended September 30, 2011 and 2010, respectively. | |
(e) | These fees, which are subordinated to the performance criterion and certain other provisions included in the advisory agreement, are deferred and are payable to the advisor only in connection with a liquidity event. |
Organization and Offering Expenses
The total costs paid by the advisor and its affiliates in connection with the organization and
offering of our securities were $16.9 million from inception through September 30, 2011, of which
$15.6 million had been reimbursed as of September 30, 2011.
Joint Ventures and Other Transactions with Affiliates
On May 2, 2011, we purchased interests in three ventures, the Hellweg Die Profi-Baumarkte GmbH &
Co. KG (Hellweg 2) venture, the U-Haul Moving Partners, Inc. and Mercury Partners, LP (U-Haul)
venture and the Dicks Sporting Goods, Inc. (Dicks) venture, from one of our affiliates,
Corporate Property Associates 14 Incorporated (CPA®:14), for an aggregate purchase
price of
CPA®:17 Global 9/30/2011 10-Q 11
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Notes to Consolidated Financial Statements
$55.7 million (Note 6). The acquisitions were made pursuant to an agreement entered into between us
and CPA®:14 in December 2010 and were conditioned upon completion of the merger of
CPA®:14 with and into a subsidiary of another one of our affiliates, Corporate Property
Associates 16 Global Incorporated (CPA®:16 Global), which occurred on the same
date (the CPA®:14/16 Merger). The purchase price was based on the appraised values of
the underlying venture properties and the non-recourse mortgage debt on the properties. In
connection with this acquisition, we recorded basis differences totaling $27.4 million, which
represents our share of the excess of the fair value of the underlying venture properties and
related mortgage loans over their respective carrying values, to be amortized into equity earnings
over the remaining lives of the properties and mortgage loans. As part of the acquisition, we also
purchased from CPA®:14 certain warrants, which were granted by Hellweg 2 to
CPA®:14 in connection with the initial lease transaction, for a total cost of $0.8
million, which is based on the fair value of the warrants of $1.6 million less the assumption of a
related liability of $0.8 million on the date of acquisition. These warrants give us participation
rights to any distributions made by Hellweg 2. In addition, we are entitled to a cash distribution
that equates to a certain percentage of the liquidity event price of Hellweg 2, should a liquidity
event occur. Because these warrants are readily convertible to cash and provide for net cash
settlement upon conversion, we account for them as derivative instruments, which are measured at
fair value and record them as assets, with the changes in the fair value recognized in earnings.
We own interests in entities ranging from 12% to 85%, as well as jointly-controlled
tenant-in-common interests in properties, with the remaining interests generally held by
affiliates. We consolidate certain of these investments and account for the remainder under the
equity method of accounting.
In February 2011, we borrowed $90.0 million at an annual interest rate of 1.15% from the advisor to
fund the acquisition of a venture that purchased properties from C1000 B.V. (C1000) (Note 6). We
repaid this loan on April 8, 2011, the maturity date. In connection with this loan, we paid the
advisor interest of $0.2 million during the nine months ended September 30, 2011.
Note 4. Net Investments in Properties and Real Estate Under Construction
Real Estate
Real estate, which consists of land and buildings leased to others, at cost, and which are subject
to operating leases, is summarized as follows (in thousands):
September 30, 2011 | December 31, 2010 | |||||||
Land |
$ | 351,163 | $ | 242,145 | ||||
Buildings |
993,433 | 688,259 | ||||||
Less: Accumulated depreciation |
(33,198 | ) | (16,274 | ) | ||||
$ | 1,311,398 | $ | 914,130 | |||||
Acquisitions of Real Estate
During the nine months ended September 30, 2011, we entered into the following domestic
investments, which were classified as operating leases, at a total cost of $144.4 million,
including net lease intangible assets totaling $17.1 million and acquisition-related costs and
fees:
| an investment for $99.6 million with Terminal Freezers, LLC for three cold storage facilities; |
| an investment for $32.1 million with Harbor Freight Tools USA, Inc. for a distribution facility; |
| a parcel of land for $7.4 million that is leased to a developer for the construction of a restaurant; and |
| two follow-on transactions in existing investments for total costs of $5.3 million, excluding a tenant-funded improvement of $9.0 million. |
In connection with these investments, which we deemed to be real estate asset acquisitions under
current authoritative accounting guidance, we capitalized acquisition-related costs and fees
totaling $6.5 million.
CPA®:17 Global 9/30/2011 10-Q 12
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Notes to Consolidated Financial Statements
Additionally, in September 2011 we entered into an investment in Italy whereby we purchased
substantially all of the economic and voting interests in a real estate fund that owns 20 cash and
carry retail stores located throughout Italy for a total cost of $395.5 million, including net
lease intangible assets of $120.9 million. As this acquisition was deemed to be a real estate asset
acquisition under current authoritative accounting guidance, we capitalized acquisition-related
fees and expenses of $21.4 million. In connection with this investment, we assumed $222.7 million
of indebtedness (Note 9). Amounts are based on the exchange rate of the Euro on the date of
acquisition. The retail stores are leased to Metro Cash & Carry Italia S.p.A (Metro), and Metro
AG, its German parent company, has guaranteed Metros obligations under the leases. The purchase
price was allocated to the assets acquired and liabilities assumed, based upon their preliminary
fair values. The following table summarizes the preliminary estimated fair values of the assets
acquired and liabilities assumed in the acquisition, based on the best estimates of management at
the date of acquisition (in thousands). We are in the process of finalizing our assessment of the
fair value of the assets acquired and liabilities assumed. Accordingly, the fair value of these
assets and liabilities are subject to change.
Assets acquired at fair value: |
||||
Investments in real estate |
$ | 274,840 | ||
Intangible assets, net |
122,735 | |||
Liabilities assumed at fair value: |
||||
Non-recourse debt |
(222,680 | ) | ||
Accounts payable, accrued expenses and other liabilities |
(8,912 | ) | ||
Prepaid and deferred rental income |
(1,791 | ) | ||
Net assets acquired |
$ | 164,192 | ||
During the third quarter of 2011, we finalized the purchase price allocation for our
investment with Harbor Freight Tools USA, Inc. based on the latest information available, which
resulted in a reduction to Real estate of $15.1 million and an increase to Intangible assets, net
of the same amount, and an increase to Depreciation and amortization of $0.7 million.
Operating Real Estate
Operating real estate, which consists primarily of our hotel and self-storage operations, at cost,
is summarized as follows (in thousands):
September 30, 2011 | December 31, 2010 | |||||||
Land |
$ | 38,164 | $ | 1,330 | ||||
Buildings |
114,766 | 10,483 | ||||||
Furniture, fixtures & equipment |
1,690 | 364 | ||||||
Less: Accumulated depreciation |
(1,494 | ) | (300 | ) | ||||
$ | 153,126 | $ | 11,877 | |||||
Acquisitions of Operating Real Estate
During the nine months ended September 30, 2011, we acquired 34 self-storage properties throughout
the U. S. from A-American Self Storage in six separate transactions for a total cost of $139.8
million, including net lease intangible assets of $9.8 million. In addition, we acquired a domestic
self storage property for $3.4 million, including net lease intangible assets of $0.1 million. As
these acquisitions were deemed to be business combinations under current authoritative accounting
guidance, we expensed the acquisition-related fees and expenses totaling $5.2 million, which are
included in General and administrative expenses in the consolidated financial statements.
Real Estate Under Construction
During the nine months ended September 30, 2011, we entered into 11 build-to-suit projects located
in the U.S., which consisted of the following projects:
| one project with ICF International Inc. for the construction of an office facility for a total cost of up to $14.8 million, of which we funded $3.9 million; |
CPA®:17 Global 9/30/2011 10-Q 13
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Notes to Consolidated Financial Statements
| nine projects with Dollar General Corp. as part of an estimated $40.0 million platform build-to-suit program covering up to 40 facilities, for a total cost of up to $9.1 million, of which we funded $6.4 million and placed $4.3 million into service; and |
| one project with Faurecia USA Holdings, Inc. for the construction of a manufacturing facility for a total cost of up to $6.8 million, of which we funded $2.4 million. |
Amounts above are based on the estimated construction costs at the respective dates 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 $3.0 million.
During the nine months ended September 30, 2011, we also had the following activity on projects
entered into during 2010:
| we funded $17.5 million and placed $32.4 million into service on a project with Sun Products Corporation. The unfunded commitment on this project at September 30, 2011 was $9.2 million; |
| we funded $24.8 million on a project with Walgreens. The unfunded commitment on this project at September 30, 2011 was $32.6 million; and |
| we funded a total of $6.8 million and placed a total of $13.1 million into service on several small projects. |
At September 30, 2011, the unfunded commitment on these projects totaled approximately $59.8
million.
Other
In connection with our prior acquisitions of properties, we have recorded net lease intangibles of
$403.0 million, including $147.9 million of net lease intangibles acquired in connection with our
investment activity during the nine months ended September 30, 2011. These intangible assets and
liabilities are being amortized over periods ranging from 10 years to 40 years. In-place lease,
tenant relationship and above-market rent intangibles are included in Intangible assets, net in the
consolidated financial statements. Below-market rent intangibles are included in Prepaid and
deferred rental income. Amortization of below-market and above-market rent intangibles is recorded
as an adjustment to Lease revenues in the consolidated financial statements, while amortization of
in-place lease and tenant relationship intangibles is included in Depreciation and amortization.
Net amortization of intangibles, including the effect of foreign currency translation, was $5.5
million and $1.2 million for the three months ended September 30, 2011 and 2010, respectively, and
$12.4 million and $3.1 million for the nine months ended September 30, 2011 and 2010, respectively.
Note 5. Finance Receivables
Assets representing rights to receive money on demand or at fixed or determinable dates are
referred to as finance receivables. Our finance receivable portfolios consist of our Net
investments in direct financing leases and Notes receivable. Operating leases are not included in
finance receivables as such amounts are not recognized as an asset in the consolidated balance
sheets.
Acquisitions of Net Investments in Direct Financing Leases
During the nine months ended September 30, 2011, we entered into two domestic net lease financing
transactions, one of which was with Flanders Corporation for $50.8 million and the other with Spear
Precision & Packaging, Inc. for $8.0 million, including acquisition-related fees and expenses. In
connection with these investments, which were deemed to be real estate asset acquisitions under
current authoritative accounting guidance, we capitalized acquisition-related fees and expenses of
$2.6 million.
Notes Receivable
In December 2010, we provided financing of $40.0 million to China Alliance Properties Limited, a
subsidiary of Shanghai Forte Land Co., Ltd (Forte). The financing was provided through a
collateralized loan that is guaranteed by Fortes parent company, Fosun International Limited, and
has an interest rate of 11% and matures in December 2015. At September 30, 2011 and December 31,
2010, the balance of the note receivable was $40.0 million.
During the first quarter of 2011, our participation in the limited-recourse mortgage loan related
to our New York Times venture was repaid in full in connection with the refinancing of this loan
(Note 9). At December 31, 2010, the balance of the note receivable was $49.6 million.
CPA®:17 Global 9/30/2011 10-Q 14
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Notes to Consolidated Financial Statements
In June 2011, we provided financing of $30.0 million to a developer, BPS Partners, LLC (BPS), in
connection with the construction of a shopping center, which includes a Walgreens store, in Las
Vegas, Nevada. In connection with the loan, we received an option to purchase the second floor of
the Walgreens store or to exchange the $30.0 million loan for an equity interest in BPS. This loan
is secured by the property and personally guaranteed by each of the principals of BPS, has an
annual interest rate of 0.5% and matures in September 2013. On its maturity date, if we do not
elect to exchange the loan for an equity interest in BPS, we will receive additional interest at an
annual rate of 7.5% from inception through maturity as consideration for making the loan. At
September 30, 2011, the balance of this note receivable was $30.0 million.
Credit Quality of Finance Receivables
We generally seek investments in facilities that we believe are critical to the tenants business
and that we believe have a low risk of tenant defaults. At September 30, 2011 and December 31,
2010, none of the balances of our finance receivables were past due and we had not established any
allowances for credit losses. Additionally, there have been no modifications of finance
receivables. We evaluate the credit quality of our tenant receivables utilizing an internal 5-point
credit rating scale, with 1 representing the highest credit quality and 5 representing the lowest.
The credit quality evaluation of our tenant receivables was last updated in the third quarter of
2011.
A summary of our finance receivables by internal credit quality rating for the periods presented is
as follows (dollars in thousands):
Number of Tenants at | Net Investments in Direct Financing Leases at | |||||||||||
Internal Credit Quality Indicator | September 30, 2011 | December 31, 2010 | September 30, 2011 | December 31, 2010 | ||||||||
1 |
| | $ | | $ | | ||||||
2 |
4 | 5 | 119,851 | 100,255 | ||||||||
3 |
6 | 2 | 372,437 | 271,734 | ||||||||
4 |
| 1 | | 25,017 | ||||||||
5 |
| | | | ||||||||
$ | 492,288 | $ | 397,006 | |||||||||
Number of Obligors at | Notes Receivable at | |||||||||||
Internal Credit Quality Indicator | September 30, 2011 | December 31, 2010 | September 30, 2011 | December 31, 2010 | ||||||||
1 |
1 | | $ | 30,000 | $ | | ||||||
2 |
1 | 1 | 40,000 | 40,000 | ||||||||
3 |
| 1 | | 49,560 | ||||||||
4 |
| | | | ||||||||
5 |
| | | | ||||||||
$ | 70,000 | $ | 89,560 | |||||||||
At September 30, 2011 and December 31, 2010, Other assets, net included $2.3 million and $2.2
million, respectively, of accounts receivable related to amounts billed under these direct
financing leases.
Note 6. Equity Investments in Real Estate
We own interests in single-tenant net leased properties leased to corporations through
noncontrolling interests (i) in partnerships and limited liability companies that we do not control
but over which we exercise significant influence or (ii) as tenants-in-common subject to common
control. Generally, the underlying investments are jointly-owned with affiliates. We account for
these investments under the equity method of accounting (i.e., at cost, increased or decreased by
our share of earnings or losses, less distributions, plus contributions and other adjustments
required by equity method accounting, such as basis differences from other-than-temporary
impairments). Under current authoritative accounting guidance for investments in unconsolidated
ventures, we are required to periodically compare an investments carrying value to its estimated
fair value and recognize an impairment charge to the extent that the carrying value exceeds fair
value.
CPA®:17 Global 9/30/2011 10-Q 15
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Notes to Consolidated Financial Statements
The following table sets forth our ownership interests in our equity investments in real estate and
their respective carrying values. The carrying value of these ventures is affected by the timing
and nature of distributions (dollars in thousands):
Ownership Interest | Carrying Value at | |||||||||||
Lessee | at September 30, 2011 | September 30, 2011 | December 31, 2010 | |||||||||
C1000 B.V. (a) (b) |
85 | % | $ | 91,653 | $ | | ||||||
U-Haul Moving Partners, Inc. and Mercury Partners, LP (c) |
12 | % | 29,174 | | ||||||||
Berry Plastics Corporation |
50 | % | 19,649 | 20,330 | ||||||||
Tesco plc (a) |
49 | % | 19,354 | 19,903 | ||||||||
Hellweg Die Profi-Baumarkte GmbH & Co. KG (a) (c) |
33 | % | 18,861 | | ||||||||
Eroski Sociedad Cooperativa Mallorca (a) (d) |
30 | % | 9,616 | 10,620 | ||||||||
Dicks Sporting Goods, Inc. (c) |
45 | % | 5,491 | | ||||||||
$ | 193,798 | $ | 50,853 | |||||||||
(a) | The carrying value of this investment is affected by the impact of fluctuations in the exchange rate of the Euro. | |
(b) | We acquired our tenancy-in-common interest, under which the venture is under common control by us and our venture partner, in this investment in January 2011 as described below. | |
(c) | We acquired our interest in this venture from CPA®:14 in May 2011 as described below. | |
(d) | The decrease in carrying value was due to cash distributions made to us by the venture. |
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, 2011 | December 31, 2010 | |||||||
Assets |
$ | 1,171,856 | $ | 203,989 | ||||
Liabilities |
(777,519 | ) | (79,786 | ) | ||||
Partners/members equity |
$ | 394,337 | $ | 124,203 | ||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues |
$ | 27,032 | $ | 4,435 | $ | 55,456 | $ | 11,717 | ||||||||
Expenses |
(20,238 | ) | (2,849 | ) | (42,707 | ) | (9,382 | ) | ||||||||
Net income |
$ | 6,794 | $ | 1,586 | $ | 12,749 | $ | 2,335 | ||||||||
We recognized income from equity investments in real estate of $1.2 million and $0.8 million for
the three months ended September 30, 2011 and 2010, respectively, and $3.9 million and $1.3 million
for the nine months ended September 30, 2011 and 2010, respectively. Income from equity investments
in real estate represents our proportionate share of the income or losses of these ventures as well
as certain depreciation and amortization adjustments related to other-than-temporary impairment
charges and basis differentials from acquisitions of certain investments.
Acquisitions of Equity Investments
In January 2011, we and our affiliate, Corporate Property Associates 15 Incorporated
(CPA®:15), acquired a venture as a tenancy-in-common in which we and
CPA®:15 hold interests of 85% and 15%, respectively, and that we account for under the
equity method of accounting. The venture purchased properties from C1000, a Dutch supermarket
chain, for $207.6 million. Our share of the purchase price was $176.5 million, which was funded in
part with a $90.0 million short-term loan from the advisor that has since been repaid (Note 3). In
connection with this transaction, the venture capitalized acquisition-related costs and fees
totaling $12.5 million, of which our share was $10.6 million. In March 2011, the venture obtained
non-recourse financing totaling $98.3 million and distributed the net proceeds to the venture
partners, of which our share was $82.3 million. This mortgage loan bears interest at a variable
rate equal to the three-month Euro inter-bank offered rate (Euribor) plus 2% and matures in March
2013. Amounts above are based upon the exchange rate of the Euro at the dates of acquisition and
financing.
CPA®:17 Global 9/30/2011 10-Q 16
Table of Contents
Notes to Consolidated Financial Statements
In May 2011, we acquired interests of 33%, 12% and 45% in the Hellweg 2, U-Haul and Dicks
ventures, respectively, from CPA®:14 for an aggregate purchase price of a $55.7 million
(Note 3). These ventures are jointly-owned with other affiliates. Because we do not control these
ventures but we exercise significant influence over them, we account for our interests in these
ventures as equity investments. The properties that the ventures own and the mortgages encumbering
the properties had a total fair value of $947.3 million and $581.6 million, respectively, at the
date of acquisition. Amounts provided are the total amounts attributable to the venture properties
and do not represent the proportionate share that we purchased. In connection with this
acquisition, we recorded basis differences totaling $27.4 million, which represents our share of
the excess of the fair value of the underlying venture properties and mortgage loans over their
respective carrying values, to be amortized into equity earnings over the remaining lives of the
properties and mortgage loans. Amounts are based on the exchange rate of the Euro at the date of
acquisition, as applicable.
Note 7. Fair Value Measurements
Under current authoritative accounting guidance for fair value measurements, the fair value of an
asset is defined as the exit price, which is the amount that would either be received when an asset
is sold or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. The guidance establishes a three-tier fair value hierarchy based on the
inputs used in measuring fair value. These tiers are: Level 1, for which quoted market prices for
identical instruments are available in active markets, such as money market funds, equity
securities and U.S. Treasury securities; Level 2, for which there are inputs other than quoted
prices included within Level 1 that are observable for the instrument, such as certain derivative
instruments including interest rate caps and swaps; and Level 3, for which little or no market data
exists, therefore requiring us to develop our own assumptions, such as certain warrants and other
securities.
Items Measured at Fair Value on a Recurring Basis
The following methods and assumptions were used to estimate the fair value of each class of
financial instrument:
Money Market Funds Our money market funds consisted of government securities and U.S. Treasury
bills. These funds were classified as Level 1 as we used quoted prices from active markets to
determine their fair values.
Derivative Assets and Liabilities Our derivative assets and liabilities are comprised of
interest rate swaps, interest rate caps, and foreign currency exchange contracts. Interest rate
swaps and caps and foreign currency exchange contracts were measured at fair value using readily
observable market inputs, such as quotations on interest rates and foreign currency exchange rates.
These derivative instruments were classified as Level 2 because these instruments are custom,
over-the-counter contracts with various bank counterparties that are not traded in an active
market.
Other Derivative Assets Our other derivative assets are comprised of stock warrants that were
granted to us by lessees in connection with structuring initial lease transactions. The stock
warrants that we own are not traded in an active market. We estimated the fair value of stock
warrants using internal valuation models that incorporate market inputs and our own assumptions
about future cash flows. We classified stock warrants as Level 3.
CPA®:17 Global 9/30/2011 10-Q 17
Table of Contents
Notes to Consolidated Financial Statements
The following tables set forth our assets and liabilities that were accounted for at fair value on
a recurring basis. Assets and liabilities presented below exclude assets and liabilities owned by
unconsolidated ventures (in thousands):
Fair Value Measurements at September 30, 2011 Using: | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||||||
Identical Assets | Observable Inputs | Inputs | ||||||||||||||
Description | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Assets: |
||||||||||||||||
Money market funds |
$ | 6,000 | $ | 6,000 | $ | | $ | | ||||||||
Derivative assets |
7,813 | | 7,813 | | ||||||||||||
Other derivative assets |
1,419 | | | 1,419 | ||||||||||||
Total |
$ | 15,232 | $ | 6,000 | $ | 7,813 | $ | 1,419 | ||||||||
Liabilities: |
||||||||||||||||
Derivative liabilities |
$ | (5,379 | ) | $ | | $ | (5,379 | ) | $ | | ||||||
Total |
$ | (5,379 | ) | $ | | $ | (5,379 | ) | $ | | ||||||
Fair Value Measurements at December 31, 2010 Using: | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||||||
Identical Assets | Observable Inputs | Inputs | ||||||||||||||
Description | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Assets: |
||||||||||||||||
Money market funds |
$ | 102,084 | $ | 102,084 | $ | | $ | | ||||||||
Derivative assets |
751 | | 751 | | ||||||||||||
Total |
$ | 102,835 | $ | 102,084 | $ | 751 | $ | | ||||||||
Liabilities: |
||||||||||||||||
Derivative liabilities |
$ | (2,215 | ) | $ | | $ | (2,215 | ) | $ | | ||||||
Total |
$ | (2,215 | ) | $ | | $ | (2,215 | ) | $ | | ||||||
Fair Value Measurements Using Significant | ||||||||
Unobservable Inputs (Level 3 Only) | ||||||||
Three Months Ended | Nine Months Ended | |||||||
September 30, 2011 | September 30, 2011 | |||||||
Other Derivative Assets | ||||||||
Beginning balance |
$ | 1,683 | $ | | ||||
Total gains or losses (realized and unrealized): |
||||||||
Included in earnings |
(264 | ) | (198 | ) | ||||
Purchases |
| 1,617 | ||||||
Ending balance |
$ | 1,419 | $ | 1,419 | ||||
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 |
$ | (264 | ) | $ | (198 | ) | ||
We did not have any transfers into or out of Level 1, Level 2 and Level 3 measurements during the
three and nine months ended September 30, 2011 and 2010, except for those assets and liabilities
acquired in connection with the Metro investment (Note 4). Gains and losses (realized and
unrealized) included in earnings are reported in Other income and (expenses) in the consolidated
financial statements.
CPA®:17 Global 9/30/2011 10-Q 18
Table of Contents
Notes to Consolidated Financial Statements
Our other financial instruments had the following carrying values and fair values as of the dates
shown (in thousands):
September 30, 2011 | December 31, 2010 | |||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
Debt |
$ | 1,113,813 | $ | 1,111,295 | $ | 667,478 | $ | 674,225 | ||||||||
CMBS (a) |
3,782 | 6,777 | 3,797 | 4,677 |
(a) | The carrying value of our commercial mortgage-backed securities (CMBS) represents historical cost, as we have deemed these securities to be held-to-maturity, and is inclusive of impairment charges recognized during 2009. There were no purchases or sales during the nine months ended September 30, 2011. |
We determined the estimated fair value of our debt instruments using a discounted cash flow model
with rates that take into account the credit of the tenants and interest rate risk. We estimated
that our other financial assets and liabilities (excluding net investments in direct financing
leases) had fair values that approximated their carrying values at both September 30, 2011 and
December 31, 2010.
Items Measured at Fair Value on a Non-Recurring Basis
We perform an assessment, when required, of the value of certain of our real estate investments in
accordance with current authoritative accounting guidance. As part of that assessment, we determine
the valuation of these assets using widely accepted valuation techniques, including expected
discounted cash flows or an income capitalization approach, which considers prevailing market
capitalization rates. We review 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. As a result of our assessment, we did not recognize any impairment
charges during the three and nine months ended September 30, 2011 and 2010. The valuation of real
estate is subject to significant judgment and actual results may differ materially if market
conditions or the underlying assumptions change.
None of our other assets or liabilities were measured on a fair value basis for the three and nine
months ended September 30, 2011 and 2010.
Note 8. Risk Management and Use of Derivative Financial Instruments
Risk Management
In the normal course of our ongoing business operations, we encounter economic risk. There are
three main components of economic risk: interest rate risk, credit risk and market risk. We are
primarily subject to interest rate risk on our interest-bearing assets and liabilities. Credit risk
is the risk of default on our operations and tenants inability or unwillingness to make
contractually required payments. Market risk includes changes in the value of our properties and
related loans as well as changes in the value of our investments due to changes in interest rates
or other market factors. In addition, we own investments in Europe and are subject to the risks
associated with changing foreign currency exchange rates.
Use of Derivative Financial Instruments
When we use derivative instruments, it is generally to reduce our exposure to fluctuations in
interest rates and foreign currency exchange rate movements. We have not entered, and do not plan
to enter into financial instruments for trading or speculative purposes. In addition to derivative
instruments that we entered into on our own behalf, we may also be a party to derivative
instruments that are embedded in other contracts, and we may own common stock warrants, granted to
us by lessees when structuring lease transactions, that are considered to be derivative
instruments. The primary risks related to our use of derivative instruments are that a counterparty
to a hedging arrangement could default on its obligation or that the credit quality of the
counterparty may be downgraded to such an extent that it impairs our ability to sell or assign our
side of the hedging transaction. While we seek to mitigate these risks by entering into hedging
arrangements with counterparties that are large financial institutions that we deem to be
creditworthy, it is possible that our hedging transactions, which are intended to limit losses,
could adversely affect our earnings. Furthermore, if we terminate a hedging arrangement, we may be
obligated to pay certain costs, such as transaction or breakage fees. We have established policies
and procedures for risk assessment and the approval, reporting and monitoring of derivative
financial instrument activities.
CPA®:17 Global 9/30/2011 10-Q 19
Table of Contents
Notes to Consolidated Financial Statements
We measure derivative instruments at fair value and record them as assets or liabilities, depending
on our rights or obligations under the applicable derivative contract. Derivatives that are not
designated as hedges must be adjusted to fair value through earnings. For a derivative designated
and that qualified as a fair value hedge, the change in the fair value of the derivative is offset
against the change in fair value of the hedged asset, liability, or firm commitment through
earnings. For a derivative designated and that qualified as a cash flow hedge, the effective
portion of the change in fair value of the derivative is recognized in Other comprehensive income
(OCI) until the hedged item is recognized in earnings. The ineffective portion of a derivatives
change in fair value is immediately recognized in earnings.
The following table sets forth certain information regarding our derivative instruments for the
periods presented (in thousands):
Balance Sheet | Asset Derivatives Fair Value at | Liability Derivatives Fair Value at | ||||||||||||||||
Location | September 30, 2011 | December 31, 2010 | September 30, 2011 | December 31, 2010 | ||||||||||||||
Derivatives Designated
as Hedging Instruments |
||||||||||||||||||
Interest rate cap |
Other assets, net | $ | 85 | $ | 733 | $ | | $ | | |||||||||
Interest rate swap |
Other assets, net | | 18 | | | |||||||||||||
Foreign currency contracts |
Other assets, net | 6,246 | | | | |||||||||||||
Interest rate swaps |
Accounts payable, | | | (4,958 | ) | (1,134 | ) | |||||||||||
accrued expenses and | ||||||||||||||||||
other liabilities | ||||||||||||||||||
Foreign currency contracts |
Accounts payable, | | | | (1,081 | ) | ||||||||||||
accrued expenses and | ||||||||||||||||||
other liabilities | ||||||||||||||||||
Derivatives Not Designated
as Hedging Instruments(a) |
||||||||||||||||||
Foreign currency contracts |
Other assets, net | 1,482 | | | | |||||||||||||
Foreign currency contracts |
Accounts payable, | | | (421 | ) | | ||||||||||||
accrued expenses and | ||||||||||||||||||
other liabilities | ||||||||||||||||||
Stock warrants |
Other assets, net | 1,419 | | | | |||||||||||||
Total derivatives |
$ | 9,232 | $ | 751 | $ | (5,379 | ) | $ | (2,215 | ) | ||||||||
(a) | At September 30, 2011 and December 31, 2010, we also had an embedded credit derivative that was not designated as a hedging instrument. This instrument had a fair value of zero at both September 30, 2011 and December 31, 2010. |
CPA®:17 Global 9/30/2011 10-Q 20
Table of Contents
Notes to Consolidated Financial Statements
The following tables present the impact of derivative instruments on the consolidated financial
statements (in thousands):
Amount of Gain (Loss) Recognized | Amount of Gain (Loss) Recognized | |||||||||||||||
in OCI on Derivatives (Effective Portion) | in OCI on Derivatives (Effective Portion) | |||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
Derivatives in Cash Flow Hedging Relationships | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Interest rate cap (a) |
$ | (129 | ) | $ | (456 | ) | $ | (382 | ) | $ | (2,600 | ) | ||||
Interest rate swaps |
(3,589 | ) | (1,082 | ) | (3,862 | ) | (2,676 | ) | ||||||||
Foreign currency contracts |
7,574 | | 2,095 | | ||||||||||||
Total |
$ | 3,856 | $ | (1,538 | ) | $ | (2,149 | ) | $ | (5,276 | ) | |||||
Amount of Gain (Loss) Reclassified | Amount of Gain (Loss) Reclassified | |||||||||||||||
from OCI into Income (Effective Portion) | from OCI into Income (Effective Portion) | |||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
Derivatives in Cash Flow Hedging Relationships | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Foreign currency put options(b) |
$ | (56 | ) | $ | | $ | (56 | ) | $ | | ||||||
Total |
$ | (56 | ) | $ | | $ | (56 | ) | $ | | ||||||
(a) | Includes losses attributable to noncontrolling interests totaling less than $0.1 million and $0.2 million for the three months ended September 30, 2011 and 2010, respectively, and $0.2 million and $1.2 for the nine months ended September 30, 2011 and 2010, respectively. | |
(b) | Gains (losses) reclassified from OCI into income for contracts that have matured are included in Interest expenses. |
During the three and nine months ended September 30, 2011 and 2010, no gains or losses were
reclassified from OCI into income related to ineffective portions of hedging relationships or to
amounts excluded from effectiveness testing.
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, 2011 | September 30, 2011 | |||
Foreign currency contracts |
Other income and (expenses) | $878 | $878 | |||
Stock warrants |
Other income and (expenses) | (264) | (198) | |||
Total |
$614 | $680 | ||||
See below for information on our purposes for entering into derivative instruments, including those
not designated as hedging instruments, and for information on derivative instruments owned by
unconsolidated ventures, which are excluded from the tables above.
Interest Rate Swaps and Caps
We are exposed to the impact of interest rate changes primarily through our borrowing activities.
To limit this exposure, we attempt to obtain mortgage financing on a long-term, fixed-rate basis.
However, from time to time, we or our venture partners may obtain variable-rate non-recourse
mortgage loans and, as a result, may enter into interest rate swap agreements or interest rate cap
agreements with counterparties. Interest rate swaps, which effectively convert the variable-rate
debt service obligations of the loan to a fixed rate, are agreements in which one party exchanges a
stream of interest payments for a counterpartys stream of cash flow over a specific period. The
notional, or face, amount on which the swaps are based is not exchanged. Interest rate caps limit
the effective borrowing rate of variable-rate debt obligations while allowing participants to share
in downward shifts in interest rates. Our objective in using these derivatives is to limit our
exposure to interest rate movements.
CPA®:17 Global 9/30/2011 10-Q 21
Table of Contents
Notes to Consolidated Financial Statements
The derivative instruments that we had outstanding on our consolidated ventures at September 30,
2011 were designated as cash flow hedges and are summarized as follows (dollars in thousands):
Notional | Effective | Effective | Expiration | Fair Value at | ||||||||||||||||||
Type | Amount | Interest Rate | Date | Date | September 30, 2011 | |||||||||||||||||
6-Month Euribor (a) |
"Pay-fixed" swap | $ | 223,347 | 4.2 | % | 9/2011 | 9/2016 | $ | (1,122 | ) | ||||||||||||
3-Month London Inter-bank offered
rate (LIBOR) (b) |
Interest rate cap | 123,554 | 2.8 | % | 3/2011 | 8/2014 | 85 | |||||||||||||||
3-Month LIBOR |
"Pay-fixed" swap | 27,120 | 6.6 | % | 1/2010 | 12/2019 | (3,149 | ) | ||||||||||||||
3-Month Euribor (a) |
"Pay-fixed" swap | 8,156 | 5.8 | % | 7/2010 | 11/2017 | (262 | ) | ||||||||||||||
1-Month LIBOR |
"Pay-fixed" swap | 4,200 | 6.0 | % | 1/2011 | 1/2021 | (425 | ) | ||||||||||||||
$ | (4,873 | ) | ||||||||||||||||||||
(a) | Amounts are based upon the applicable exchange rate of the Euro at September 30, 2011. | |
(b) | The applicable interest rate of the related debt was 2.8%, which was below the effective interest rate of the cap at September 30, 2011. Inclusive of noncontrolling interests are the notional amount and fair value of the swap of $55.6 million and less than $0.1 million, respectively. |
Foreign Currency Contracts
We are exposed to foreign currency exchange rate movements in the Euro and, to a lesser extent, the
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. This reduces our overall exposure to the actual equity that we have invested and the
equity portion of our cash flow. However, 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 may 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.
In order to hedge certain of our foreign currency cash flow exposures, we enter into foreign
currency forward contracts, collars, and put options. A foreign currency forward contract is a
commitment to deliver a certain amount of currency at a certain price on a specific date in the
future. By entering into forward contracts, we are locked into a future currency exchange rate for
the term of the contract. A foreign currency collar consists of a purchased call option to buy and
a written put option to sell the foreign currency. These instruments guarantee that the exchange
rate will not fluctuate beyond the range of the options strike prices. A foreign currency put
option is the right to sell the currency at a predetermined price, which limits our exposure to the
movement in foreign currency exchange rates below a strike price.
CPA®:17 Global 9/30/2011 10-Q 22
Table of Contents
Notes to Consolidated Financial Statements
The following table presents the foreign currency derivative contracts we had outstanding and their
designations at September 30, 2011 (dollars in thousands, except strike price):
Notional | Strike | Effective | Expiration | Fair Value at | ||||||||||||||||
Type | Amount(a) | Price | Date | Date | September 30, 2011 | |||||||||||||||
Designated as Cash Flow Hedging Instruments |
||||||||||||||||||||
Collars |
$ | 63,190 | $ | 1.40 - 1.44 | 9/2011 | 12/2011 - 9/2014 | $ | 3,397 | ||||||||||||
Forward contracts |
61,191 | 1.39 | 7/2011 | 7/2013 | 2,314 | |||||||||||||||
Forward contracts |
53,535 | 1.34 - 1.35 | 9/2011 | 3/2012 - 3/2015 | 534 | |||||||||||||||
Not Designated as Cash Flow Hedging Instruments |
||||||||||||||||||||
Collars(b) |
20,590 | 1.40 - 1.42 | 9/2011 | 9/2012 - 3/2013 | 1,055 | |||||||||||||||
Put options(c) |
15,339 | 1.30 | 5/2011, 9/2011 | 12/2011 - 3/2012 | 7 | |||||||||||||||
$ | 213,845 | $ | 7,307 | |||||||||||||||||
(a) | Amounts are based upon the exchange rate of the Euro at September 30, 2011. | |
(b) | At September 30, 2011, these collars were not designated as hedging instruments because their fair values were in a net liability position at the onset of the trade. In October 2011, we designated these collars as hedging instruments because their fair values increased into a net asset position due to the depreciation of the Euro relative to the U.S. Dollar. | |
(c) | During the third quarter, we entered into new protective put options to cancel the effect of the remaining protective put options we own. These new instruments did not qualify for hedge accounting. |
Stock Warrants
As part of the purchase of an interest in Hellweg 2 from CPA®:14 in May 2011 (Note 3),
we acquired warrants from CPA®:14, which were granted by Hellweg 2 to CPA®:14
in connection with structuring the initial lease transaction, for a total cost of $0.8 million,
which is based on the fair value of the warrants of $1.6 million less the assumption of a related
liability of $0.8 million on the date of acquisition. These warrants give us participation rights
to any distributions made by Hellweg 2. In addition, we are entitled to a cash distribution that
equals to a certain percentage of the liquidity event price of Hellweg 2, should a liquidity event
occur. Because these warrants are readily convertible to cash and provide for net cash settlement
upon conversion, we account for them as derivative instruments.
Embedded Credit Derivative
In connection with a venture in Germany in which we and an affiliate have 67% and 33% interests,
respectively, and which we consolidate, 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. The derivative had an
estimated fair value of zero at both September 30, 2011 and December 31, 2010. This derivative did
not generate gains or losses during the three and nine months ended September 30, 2011 and 2010. In
addition, an unconsolidated venture in which we acquired an interest from CPA®:14 in May
2011 (Note 6) has an embedded credit derivative similar to the one described above. Based on the
valuation obtained at September 30, 2011 and including the effect of foreign currency translation,
this embedded credit derivative had a fair value of less than $0.1 million and generated an
unrealized gain of less than $0.1 million for the three months ended September 30, 2011 and an
unrealized loss of less than $0.1 million for the nine months ended September 30, 2011. Amounts
provided are the total amounts attributable to the venture and do not represent our proportionate
share. Changes in the fair value of the embedded credit derivative are recognized in this ventures
earnings.
Other
Amounts reported in OCI related to derivatives will be reclassified to interest expense as interest
payments are made on our variable-rate debt. At September 30, 2011, we estimate that an additional
$1.5 million, inclusive of amounts attributable to noncontrolling interests of $0.4 million, will
be reclassified as interest expense during the next twelve months.
CPA®:17 Global 9/30/2011 10-Q 23
Table of Contents
Notes to Consolidated Financial Statements
Some of the agreements we have with our derivative counterparties contain certain credit contingent
provisions that could result in a declaration of default against us regarding our derivative
obligations if we either default or are capable of being declared in default on certain of our
indebtedness. At September 30, 2011, we had not been declared in default on any of our derivative
obligations. The estimated fair value of our derivatives that were in a net liability position was
$5.5 million and $2.2 million at September 30, 2011 and December 31, 2010, respectively, which
included accrued interest but excluded any adjustment for nonperformance risk. If we had breached
any of these provisions at either September 30, 2011 or December 31, 2010, we could have been
required to settle our obligations under these agreements at their aggregate termination value of
$6.2 million or $2.5 million, respectively.
Portfolio Concentration Risk
Concentrations of credit risk arise when a group of tenants is engaged in similar business
activities or is subject to similar economic risks or conditions that could cause them to default
on their lease obligations to us. We regularly monitor our portfolio to assess potential
concentrations of credit risk. While we believe our portfolio is reasonably well diversified, it
does contain concentrations in excess of 10%, based on the percentage of our annualized contractual
minimum base rent for the third quarter of 2011, in certain areas, as shown in the table below. The
percentages in the table below represent our directly-owned real estate properties and do not
include our pro rata share of equity investments.
At September 30, | ||||
Region: | 2011 | |||
New York |
13 | % | ||
California |
11 | % | ||
Other U.S. |
37 | % | ||
Total U.S. |
61 | % | ||
Italy |
14 | % | ||
Spain |
10 | % | ||
Other Europe |
15 | % | ||
Total Europe |
39 | % | ||
Total |
100 | % | ||
Asset Type: |
||||
Warehouse/Distribution |
27 | % | ||
Office |
26 | % | ||
Retail |
25 | % | ||
Industrial |
12 | % | ||
Other |
10 | % | ||
Total |
100 | % | ||
Tenant Industry: |
||||
Retail |
25 | % | ||
Media Printing & Publishing |
17 | % | ||
Grocery |
13 | % | ||
Other |
45 | % | ||
Total |
100 | % | ||
Guarantor/Tenant: |
||||
Metro AG (Europe) |
14 | % | ||
New York Times Company (U.S.) |
13 | % |
CPA®:17 Global 9/30/2011 10-Q 24
Table of Contents
Notes to Consolidated Financial Statements
Note 9. Non-Recourse and Limited Recourse Debt
During the nine months ended September 30, 2011, we obtained non-recourse and limited-recourse
mortgage financing totaling $213.9 million at a weighted-average annual interest rate and term of
5.6% and 10.0 years, respectively. Of the total:
| $110.5 million of non-recourse financing was related to five domestic investments acquired during 2011; |
| $32.6 million of non-recourse financing was related to three domestic investments acquired during 2010; |
| $13.7 million of non-recourse financing was related to a United Kingdom investment acquired in 2009, based on the exchange rate of the British Pound Sterling on the date of financing; |
| $48.1 million of non-recourse financing was related to the self-storage properties that we purchased during 2011; and |
| $9.0 million incremental borrowing related to the March 2009 New York Times transaction, inclusive of amounts attributable to noncontrolling interests of $4.1 million. In March 2011, we refinanced the limited-recourse mortgage loan obtained in August 2009, which had an outstanding balance of $116.0 million at the date of refinancing, with new limited-recourse financing of $125.0 million that matures in April 2018 and has option to extend the maturity to April 2019. The new financing bears interest at an annual interest rate equal to the LIBOR plus 2.5% that has been capped at 6.25% through the use of an interest rate cap designated as a cash flow hedge, which matures in March 2014 (Note 8). |
Additionally, in connection with the Metro investment, we assumed $222.7 million of indebtedness
with an annual interest rate equal to Euribor plus 2.15%, that has been fixed at 4.18% through an
interest rate swap, and a term of five years. Amounts are based on the exchange rate of the Euro on
the date of acquisition. In connection with the self-storage investment, we also assumed a
non-recourse mortgage totaling $14.8 million.
Non-recourse and limited-recourse debt consists of mortgage notes payable, which are collateralized
by an assignment of real property and direct financing leases, with an aggregate carrying value of
approximately $1.7 billion and $1.1 billion at September 30, 2011 and December 31, 2010,
respectively. At September 30, 2011, our mortgage notes payable bore interest at fixed annual rates
ranging from 3.6% to 6.6% and variable annual rates ranging from 2.8% to 6.6%, with maturity dates
ranging from 2012 to 2031.
Scheduled debt principal payments during each of the next five calendar years following September
30, 2011 and thereafter are as follows (in thousands):
Total | ||||
2011 (remainder) |
$ | 3,654 | ||
2012 |
21,152 | |||
2013 |
18,543 | |||
2014 |
22,529 | |||
2015 |
64,421 | |||
Thereafter through 2031 |
984,423 | |||
1,114,722 | ||||
Fair market value
adjustments(a) |
(909 | ) | ||
Total |
$ | 1,113,813 | ||
(a) | Represents the unamortized discount on two notes. |
Certain amounts in the table above are based on the applicable foreign currency exchange rate at
September 30, 2011.
CPA®:17 Global 9/30/2011 10-Q 25
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Notes to Consolidated Financial Statements
Note 10. Commitments and Contingencies
Various claims and lawsuits arising in the normal course of business are pending against us. The
results of these proceedings are not expected to have a material adverse effect on our consolidated
financial position or results of operations.
Note 11. Income Taxes
We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code.
We believe we have operated, and we intend to continue to operate, in a manner that allows us to
continue to qualify as a REIT. Under the REIT operating structure, we are permitted to deduct
distributions paid to our shareholders and generally will not be required to pay U.S. federal
income taxes. Accordingly, no provision has been made for U.S. federal income taxes in the
consolidated financial statements.
We conduct business in the various states and municipalities within the U.S. and in Europe, and as
a result, we file income tax returns in the U.S. federal jurisdiction and various state and certain
foreign jurisdictions.
We account for uncertain tax positions in accordance with current authoritative accounting
guidance. At September 30, 2011 and December 31, 2010, we had unrecognized tax benefits of $0.5
million and $0.2 million, respectively, that, if recognized, would have a favorable impact on our
effective income tax rate in future periods. We recognize interest and penalties related to
uncertain tax positions in income tax expense. At both September 30, 2011 and December 31, 2010, we
had less than $0.1 million of accrued interest related to uncertain tax positions.
Our tax returns are subject to audit by taxing authorities. Such audits can often take years to
complete and settle. The tax years 2008 through 2011 remain open to examination by the major taxing
jurisdictions to which we are subject.
During 2010, we elected to treat our corporate subsidiary that engages in hotel operations as a
taxable REIT subsidiary (TRS). This subsidiary owns a hotel that is managed on our behalf by a
third-party hotel management company. A TRS is subject to corporate federal income taxes, and we
provide for income taxes in accordance with current authoritative accounting guidance. This
subsidiary has recognized de minimus profit since inception.
Note 12. Discontinued Operations
From time to time, tenants may vacate space due to lease buy-outs, elections not to renew their
leases, insolvency or lease rejection in the bankruptcy process. In these cases, we assess whether
we can obtain the highest value from the property by re-leasing or selling it. In addition, in
certain cases, we may try to sell a property that is occupied. When it is appropriate to do so
under current accounting guidance for the disposal of long-lived assets, we classify the property
as an asset held for sale on our consolidated balance sheet and the current and prior period
results of operations of the property are reclassified as discontinued operations.
The results of operations for properties that are held for sale or have been sold are reflected in
the consolidated financial statements as discontinued operations for all periods presented and are
summarized as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues |
$ | | $ | | $ | 629 | $ | | ||||||||
Expenses |
| | (266 | ) | | |||||||||||
Gain on sale of real estate |
| | 787 | | ||||||||||||
Income from discontinued operations |
$ | | $ | | $ | 1,150 | $ | | ||||||||
In June 2011, we sold two Canadian properties previously leased to CARQUEST for $19.8 million, net
of selling costs, and recognized a net gain on the sale of $0.8 million. Amounts are based on the
exchange rate of the Canadian dollar on the date of the sale.
CPA®:17 Global 9/30/2011 10-Q 26
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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 2010 Annual Report.
Business Overview
We are a publicly owned, non-listed REIT that invests in commercial properties leased to companies
domestically and internationally. As a REIT, we are not subject to U.S. federal income taxation as
long as we satisfy certain requirements, principally relating to the nature of our income, the
level of our distributions and other factors. We earn revenue principally by leasing the properties
we own to single corporate tenants, primarily on a triple-net lease basis, which requires the
tenant to pay substantially all of the costs associated with operating and maintaining the
property. Revenue is subject to fluctuation because of the timing of new lease transactions, lease
terminations, lease expirations, contractual rent adjustments, tenant defaults and sales of
properties. We were formed in 2007 and are managed by the advisor. We hold substantially all of our
assets and conduct substantially all of our business through our operating partnership.
Financial Highlights
(In thousands)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Total revenues |
$ | 49,243 | $ | 27,097 | $ | 136,323 | $ | 69,374 | ||||||||
Net income attributable to
CPA®:17 Global shareholders |
10,304 | 8,713 | 35,582 | 21,491 | ||||||||||||
Cash flow from operating activities |
71,237 | 45,627 | ||||||||||||||
Distributions paid |
26,832 | 16,469 | 72,585 | 42,089 | ||||||||||||
Supplemental financial measures: |
||||||||||||||||
Modified funds from operations (MFFO) |
23,474 | 11,995 | 69,061 | 31,049 | ||||||||||||
Adjusted cash flow from operating activities |
72,137 | 34,679 |
We consider the performance metrics listed above, including certain supplemental metrics that are
not defined by GAAP (non-GAAP), such as Modified funds from operations, or MFFO, and Adjusted
cash flow from operating activities, to be important measures in the evaluation of our results of
operations, liquidity and capital resources. We evaluate our results of operations with a primary
focus on the ability to generate cash flow necessary to meet our objectives of funding
distributions to shareholders. See Supplemental Financial Measures below for our definition of
these non-GAAP measures and reconciliations to their most directly comparable GAAP measure.
Total revenues, Net income attributable to CPA®:17 Global shareholders and Cash flow
from operating activities all increased during the current year periods as compared to the same
periods in 2010, primarily reflecting our investment activity during 2010 and 2011.
Our daily cash distribution for the third quarter of 2011 was $0.0017663 per share and was paid on
October 14, 2011 to shareholders of record on each day during the third quarter, or $0.65 per share
on an annualized basis. Our board of directors has declared that our daily cash distribution for
the fourth quarter of 2011 will be $0.0017663 per share, or $0.65 per share on an annualized basis,
which was unchanged from the annualized rate per share for the second quarter of 2011. The daily
distributions for the fourth quarter of 2011 will be paid in aggregate on or about January 13, 2012
to shareholders of record on each day during the fourth quarter.
For the three and nine months ended September 30, 2011 as compared to the same periods in 2010, our
MFFO supplemental measure increased, primarily as a result of our investment activity during 2010
and 2011.
For the nine months ended September 30, 2011 as compared to the same period in 2010, our adjusted
cash flow from operating activities supplemental measure increased, primarily as a result of our
investment activity during 2010 and 2011.
CPA®:17 Global 9/30/2011 10-Q 27
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Current Trends
General Economic Environment
We are impacted by macro-economic environmental factors, the capital markets, and general
conditions in the commercial real estate market, both in the U.S. and globally. During the first
half of 2011 as compared to the prior year period, we saw slow improvement in the global economy
following the significant distress experienced in 2008 and 2009 and, as a result, we experienced
increased investment volume, as well as an improved financing and fundraising environment. During
the second half of 2011, however, there has been an increase in economic uncertainty as a result of
the sovereign debt crisis in Europe and the U.S. sovereign credit downgrade. As of the date of this
report, the economic environment remains volatile, rendering any discussion of the future impact of
these trends uncertain. Nevertheless, our views of the effects of the current financial and
economic trends on our business, as well as our response to those trends, are presented below.
Foreign Exchange Rates
We have foreign investments and, as a result, are subject to risk from the effects of exchange rate
movements. Our results of foreign operations benefit from a weaker U.S. dollar and are adversely
affected by a stronger U.S. dollar relative to foreign currencies. Investments denominated in the
Euro accounted for approximately 36% of our annualized contractual minimum base rent at September
30, 2011. During the nine months ended September 30, 2011, the U.S. dollar weakened in relation to
the Euro as evidenced by the change in the end-of-period conversion rate of the Euro, which
increased by 3% to $1.3598 at September 30, 2011 from $1.3253 at December 31, 2010. This weakening
had a favorable impact on our balance sheet at September 30, 2011 as compared to our balance sheet
at December 31, 2010. During the nine months ended September 30, 2011, the average conversion rate
for the U.S. dollar in relation to the Euro increased by 7% in comparison to the same period in
2010. This increase had a favorable impact on 2011 year-to-date results of operations compared to
the prior year period. While we actively manage our foreign exchange risk, a significant unhedged
decline in the value of the Euro could have a material negative impact on our net asset values,
future results, financial position and cash flows.
Investor Capital Inflows
Despite sustained competition for investment dollars, capital inflows for non-listed real estate
investments trusts overall reflected an increase in average monthly volume during the six months
ended June 30, 2011 as compared to the prior year period. However, during the three months ended
September 30, 2011, capital inflows for non-listed real estate investment trusts declined
reflecting the recent economic uncertainty. For our current offering, we have made a concerted
effort to diversify our distribution channels and are seeing a greater portion of our fundraising
come from an expanded network of broker-dealers as a result of these efforts.
In October 2010, we filed a registration statement with the SEC for the follow-on offering of up to
an additional $1.0 billion of common stock, which was declared effective by the SEC on April 7,
2011 and, as a result, our initial public offering terminated. There can be no assurance that we
will sell the full number of shares registered. Through the termination of our initial public
offering, we raised $163.8 million during 2011 and raised more than $1.5 billion since beginning
fundraising in December 2007. From the beginning of the
follow-on offering on April 7, 2011 through
September 30, 2011, we raised $279.3 million.
Capital Markets
During the first half of the year, capital markets conditions exhibited some signs of post-crisis
improvement, including new issuances of CMBS debt and capital inflows to both commercial real
estate debt and equity markets, which helped increase the availability of mortgage financing and
maintained transaction volume. However, during the third quarter of 2011, there was increased
volatility in the CMBS market and a credit downgrade of U.S. Treasury debt obligations. In
response, the Federal Reserve has kept interest rates low. These events have impacted commercial
real estate capitalization rates, which have begun to vary greatly depending on a variety of
factors including asset quality, tenant credit quality, geography and lease term.
Investment Opportunities
Our ability to complete investments fluctuates based on the pricing and availability of
transactions and the pricing and availability of financing, among other factors.
We continue to see investment opportunities that we believe will allow us to enter into
transactions on favorable terms. Although capitalization rates have begun to vary widely, we
believe that the investment environment remains attractive. We believe that the
CPA®:17 Global 9/30/2011 10-Q 28
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significant amount of corporate debt that remains outstanding in the marketplace, which will need
to be refinanced over the next several years, will provide attractive investment opportunities for
net lease investors such as ourselves. To the extent that these trends continue and we are able to
achieve sufficient levels of fundraising, we believe that our investment volume will benefit.
However, we continue to experience increased competition for investments, both domestically and in
Europe, and further capital inflows into the marketplace could put additional pressure on the
returns that we can generate from our investments and our willingness and ability to execute
transactions. In addition, we expect to continue to expand our ability to source deals in other
markets.
We entered into investments totaling approximately $979.3 million during the nine months ended
September 30, 2011, representing an increase of $526.4 million over the prior year period, and
based on current conditions we expect that we will be able to continue to take advantage of the
investment opportunities we are seeing in both the U.S. and Europe through the near term.
Investment volume reflects international investments of 58% (on a pro rata basis) during the nine
months of 2011. While this international activity fluctuates from quarter to quarter, we currently
expect that such transactions will continue to form a significant portion of our investments,
although the relative portion of international investments in any given period will vary.
We calculate net operating income for each investment we make as the rent that we receive from a
tenant, less debt service for any financing obtained for our investment in such property. The
capitalization rate for an investment is a function of the purchase price that we are willing to
pay for an investment and the risk we are willing to assume. In our target markets, we have
recently seen capitalization rates in the U.S. ranging from 6.5% to 13.5% and in Europe ranging
from 7.0% to 10.5%. The variability is due largely to the quality of the underlying assets, tenant
credit quality, and the terms of the leases. During the nine months ended September 30, 2011, we
entered into the Metro transaction for a total cost of $395.5 million, which had a capitalization
rate of approximately 8.0%.
Financing Conditions
During the first half of 2011, we saw some improvement in both the credit and real estate financing
markets. However, the sovereign debt issues in Europe that began in the second quarter of 2011 had
the impact of increasing the cost of debt in certain international markets and made it more
challenging to obtain debt for certain international deals. Additionally, during the third quarter
of 2011, the U.S. sovereign credit downgrade impacted the cost and availability of domestic
non-recourse mortgage financing. During the nine months ended September 30, 2011, we obtained
non-recourse mortgage financing totaling $357.3 million (on a pro rata basis).
Real Estate Sector
As noted above, the commercial real estate market is impacted by a variety of macro-economic
factors, including but not limited to growth in gross domestic product, unemployment, interest
rates, inflation, and domestic and foreign demographics. Despite modest improvements in
expectations during the first half of the year, these macro-economic factors have persisted since
the beginning of the credit crisis, negatively impacting commercial real estate market
fundamentals, which has resulted in higher vacancies, lower rental rates, and lower demand for
vacant space. We are chiefly affected by changes in the appraised values of our properties, tenant
defaults, inflation, lease expirations, and occupancy rates.
Credit Quality of Tenants
As a net lease investor, we are exposed to credit risk within our tenant portfolio, which can
reduce our results of operations and cash flow from operations if our tenants are unable to pay
their rent. Tenants experiencing financial difficulties may become delinquent on their rent and/or
default on their leases and, if they file for bankruptcy protection, may reject our lease in
bankruptcy court, resulting in reduced cash flow, which may negatively impact net asset values and
require us to incur impairment charges. Even where a default has not occurred and a tenant is
continuing to make the required lease payments, we may restructure or renew leases on less
favorable terms, or the tenants credit profile may deteriorate, which could affect the value of
the leased asset and could in turn require us to incur impairment charges.
Despite signs of improvement in general business conditions during the first half of 2011, which
had a favorable impact on the overall credit quality of our tenants, we believe that there still
remain significant risks to the overall economic recovery. As of the date of this Report, we have
no exposure to tenants operating under bankruptcy protection. It is possible, however, that tenants
may file for bankruptcy or default on their leases in the future and that economic conditions may
again deteriorate.
To mitigate credit risk, we have historically looked to invest in assets that we believe are
critically important to our tenants operations and have attempted to diversify our portfolio by
tenant, tenant industry and geography. We also monitor tenant performance through review of rent
delinquencies as a precursor to a potential default, meetings with tenant management and review of
tenants financial statements and compliance with any financial covenants. When necessary, our
asset management process includes restructuring
CPA®:17 Global 9/30/2011 10-Q 29
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transactions to meet the evolving needs of tenants, re-leasing properties, refinancing debt and
selling properties, as well as protecting our rights when tenants default or enter into bankruptcy.
Inflation
Our leases generally have rent adjustments that are either fixed or based on formulas indexed to
changes in the consumer price index (CPI) or other similar indices for the jurisdiction in which
the property is located. Because these rent adjustments may be calculated based on changes in the
CPI over a multi-year period, changes in inflation rates can have a delayed impact on our results
of operations. While we have seen a return of moderate inflation during 2011, the historically low
inflation rates in the U.S. and the Euro zone during 2009 and 2010 will limit rent increases in
coming years.
Lease Expirations and Occupancy
Our leases are in their early stages, with no significant leases scheduled to expire or renew in
the near term. The advisor actively manages our real estate portfolio and begins discussing options
with tenants in advance of scheduled lease expirations. In certain cases, we obtain lease renewals
from our tenants; however, tenants may elect to move out at the end of their term or may elect to
exercise purchase options, if any, in their leases. In cases where tenants elect not to renew, we
may seek replacement tenants or try to sell the property. Our investments were fully occupied at
both September 30, 2011 and December 31, 2010, reflecting a portfolio of primarily new tenants.
Proposed Accounting Changes
The following proposed accounting changes may potentially impact us if the outcome has a
significant influence on sale-leaseback demand in the marketplace:
The International Accounting Standards Board (IASB) and FASB have issued an Exposure Draft on a
joint proposal that would dramatically transform lease accounting from the existing model. These
changes would impact most companies but are particularly applicable to those that are significant
users of real estate. The proposal outlines a completely new model for accounting by lessees,
whereby their rights and obligations under all leases, existing and new, would be capitalized and
recorded on the balance sheet. For some companies, the new accounting guidance may influence
whether or not, or the extent to which, they may enter into the type of sale-leaseback transactions
in which we specialize. The FASB and IASB met during July 2011 and voted to re-expose the proposed
standard. A revised exposure draft for public comment is expected in the first quarter of 2012,
with a final standard during 2012. The boards also reached decisions, which are tentative and
subject to change, on a single lessor accounting model and the accounting for variable lease
payments, along with several presentation and disclosure issues. As of the date of this Report, the
proposed guidance has not yet been finalized, and as such we are unable to determine whether this
proposal will have a material impact on our business.
The following proposed accounting change would potentially affect the way we account for a
significant portion of our real estate portfolio and could create volatility in our future earnings
to the extent real estate values fluctuate:
In October 2011, the FASB issued an exposure draft which proposes a new accounting standard for
investment property entities. Currently, an entity that invests in real estate properties but is
not an investment company under the definition set forth by GAAP is required to measure its real
estate properties at cost. The proposed amendments would require all entities that meet the
criteria to be investment property entities to follow the proposed guidance, under which investment
properties acquired by an investment property entity would initially be measured at transaction
price, including transaction costs, and subsequently measured at fair value with all changes in
fair value recognized in net income. A detailed analysis is required to determine whether an entity
is within the scope of the amendments in this proposed update. An entity in which substantially all
of its business activities are investing in a real estate property or properties for total return,
including an objective to realize capital appreciation (including certain real estate investment
trusts and real estate funds) would be affected by the proposed amendments. The proposed amendments
also would introduce additional presentation and disclosure requirements for an investment property
entity. As of the date of this Report, the proposed guidance has not yet been finalized, and as
such we are unable to determine whether we meet the definition of an investment property entity and
if the proposal will have a material impact on our business.
Additionally, the FASB has issued an exposure draft that could impact us to the extent we
deconsolidate real estate subsidiaries subject to non-recourse debt:
In July 2011, the FASB issued an exposure draft stating that an investor that consolidates a
single-purpose entity that is capitalized, in whole or in part, with nonrecourse debt used to
purchase real estate should apply the guidance in ASC 360-20, which provides accounting guidance
for the sale of real estate other than retail land, to determine whether to derecognize real estate
owned by the in-
CPA®:17 Global 9/30/2011 10-Q 30
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substance real estate entity. This new guidance would impact the timing of our recognition of gains
in the event a property is placed into receivership. Until this guidance is implemented, it is
permissible to deconsolidate the entity and recognize a gain related to the excess of the carrying
value of the debt over the related property based on losing control over the entity.
Results of Operations
The results of operations presented below for the nine months ended 2011 are not expected to be
representative of future results because we anticipate that our asset base will increase as we
continue to invest capital. 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 our follow-on offering to conduct our proposed
activities. The capital required to make investments will be obtained from the follow-on offering
and from any mortgage indebtedness that we may incur in connection with our investment activity.
The following table presents the components of our lease revenues (in thousands):
Nine Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
Rental income |
$ | 85,573 | $ | 35,407 | ||||
Interest income from direct financing leases |
36,319 | 29,592 | ||||||
$ | 121,892 | $ | 64,999 | |||||
CPA®:17 Global 9/30/2011 10-Q 31
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The following table sets forth the net lease revenues (i.e., rental income and interest income
from direct financing leases) that we earned from lease obligations through our direct ownership of
real estate (in thousands):
Nine Months Ended September 30, | ||||||||
Lessee (Date Acquired or Placed in Service) | 2011 | 2010 | ||||||
The New York Times Company (3/2009) (a) |
$ | 20,869 | $ | 19,985 | ||||
General Parts Inc., Golden State Supply LLC, Straus-Frank Enterprises LLC, General
Parts Distribution LLC and Worldpac Inc., collectively CARQUEST (12/2010) |
14,428 | | ||||||
Agrokor d.d. (12/2010, 4/2010) (b) |
11,924 | 3,921 | ||||||
Eroski Sociedad Cooperativa (6/2010, 2/2010, 12/2009) (b) |
8,223 | 5,705 | ||||||
Terminal Freezers, LLC (1/2011) |
7,899 | | ||||||
DTS Distribuidora de Television Digital SA (12/2010) (b) |
6,966 | | ||||||
LifeTime Fitness, Inc. (9/2008) |
5,134 | 5,134 | ||||||
Flint River Services, LLC (11/2010) |
3,805 | | ||||||
Angelica Corporation (3/2010) |
3,745 | 2,589 | ||||||
Frontier Spinning Mills, Inc. (12/2008) (a) |
3,375 | 3,350 | ||||||
Actebis Peacock GmbH (7/2008) (a) (b) |
3,190 | 2,945 | ||||||
McKesson Corporation (formerly US Oncology, Inc.) (12/2009) |
3,142 | 3,142 | ||||||
JP Morgan Chase Bank, National Association and AT&T Wireless Services (5/2010) |
2,950 | 1,456 | ||||||
Kronos Products, Inc. (1/2010) |
2,867 | 2,841 | ||||||
Flanders Corporation (4/2011) |
2,744 | | ||||||
Laureate Education, Inc. (7/2008) |
2,179 | 2,171 | ||||||
Sabre Communications Corporation and Cellxion, LLC (6/2010, 8/2008) |
2,123 | 1,999 | ||||||
Mori Seiki USA, Inc. (12/2009) |
2,108 | 2,108 | ||||||
TDG Limited (5/2010, 4/2010) (b) |
2,105 | 1,339 | ||||||
Harbor Freight Tools, USA, Inc. (3/2011) |
1,908 | | ||||||
Berry Plastics Corporation (3/2010, 4/2011) (c) |
1,849 | 1,035 | ||||||
National Express Limited (12/2009) (b) |
1,565 | 1,428 | ||||||
Wagon Automotive Nagold GmbH (8/2008) (a) (b) |
1,527 | 1,545 | ||||||
Other (b) |
5,267 | 2,306 | ||||||
$ | 121,892 | $ | 64,999 | |||||
(a) | These revenues are generated in consolidated ventures, generally with our affiliates, and on a combined basis, include revenues applicable to noncontrolling interests totaling $12.4 million and $11.9 million for the nine months ended September 30, 2011 and 2010, respectively. | |
(b) | Amounts are subject to fluctuations in foreign currency exchange rates. The average rate for the U.S. dollar in relation to the Euro during the nine months ended September 30, 2011 increased by approximately 7% in comparison to the same period in 2010, resulting in a positive impact on lease revenues for our Euro-denominated investments in the current year period. | |
(c) | We also own an interest in a venture with one of our affiliates that leases another property to this lessee, which we account for as an equity investment in real estate. |
CPA®:17 Global 9/30/2011 10-Q 32
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We recognize income from equity investments in real estate, of which lease revenues are a
significant component. The following table sets forth the net lease revenues earned by these
ventures. Amounts provided are the total amounts attributable to the ventures and do not represent
our proportionate share (dollars in thousands):
Ownership Interest | Nine Months Ended September 30, | |||||||||||
Lessee (Date Acquired) | at September 30, 2011 | 2011 | 2010 | |||||||||
Hellweg Die Profi-Baumarkte GmbH & Co. KG (5/2011) (a) (b) |
33 | % | $ | 15,648 | $ | | ||||||
U-Haul Moving Partners, Inc. and Mercury Partners, LP (5/2011)
(b) |
12 | % | 13,484 | | ||||||||
C1000 BV (1/2011) (a) |
85 | % | 10,946 | | ||||||||
Tesco plc (7/2009) (a) |
49 | % | 5,802 | 5,443 | ||||||||
Berry Plastics Corporation (12/2007) (c) |
50 | % | 4,968 | 5,128 | ||||||||
Eroski Sociedad Cooperativa Mallorca (6/2010) (a) |
30 | % | 2,452 | 931 | ||||||||
Dicks Sporting Goods, Inc. (5/2011) (b) |
45 | % | 1,309 | | ||||||||
$ | 54,609 | $ | 11,502 | |||||||||
(a) | Amounts are subject to fluctuations in foreign currency exchange rates. The average rate for the U.S. dollar in relation to the Euro during the nine months ended September 30, 2011 increased by approximately 7% in comparison to the same period in 2010, resulting in a positive impact on lease revenues for our Euro-denominated investments in the current year period. | |
(b) | We acquired our interest in this venture in May 2011 from CPA®:14 (Note 3). | |
(c) | We also consolidate a venture with one of our affiliates that leases another property to this lessee. |
Lease Revenues
As of September 30, 2011, 54% of our net leases, based on annualized contractual minimum base rent,
provide for adjustments based on formulas indexed to changes in the CPI, or other similar indices
for the jurisdiction in which the property is located, some of which have caps and/or floors. In
addition, 37% of our net leases on that same basis have fixed rent adjustments. We own
international investments and, therefore, lease revenues from these investments are subject to
fluctuations in exchange rate movements in foreign currencies. During the quarter ended September
30, 2011, we entered into five new leases with a total contractual annual minimum base rent of
$28.7 million and a weighted-average term of 15.3 years. We had no renewals or modifications during
the three months ended September 30, 2011.
For the three and nine months ended September 30, 2011 as compared to the same periods in 2010,
lease revenues increased by $17.6 million and $56.9 million, respectively, primarily due to our
investment activity during 2010 and 2011, which contributed revenues of $14.0 million and $48.3
million, respectively. In addition, rent increases at several properties contributed $2.0 million
and $6.3 million, respectively.
Interest Income on Notes Receivable and CMBS
For the three and nine months ended September 30, 2011 as compared to the same periods in 2010,
interest income on notes receivable and CMBS investments increased by $0.3 million and $3.2
million, respectively, as a result of interest income recognized during 2011 related to notes
receivable acquired during the second half of 2010.
Other Real Estate Operations
Other real estate operations represent the results of operations (revenues and operating expenses)
of our domestic hotel venture and 35 self-storage properties, which we acquired during the second
and third quarters of 2011. Operating profit from these operations increased from $0.4 million to
$2.2 million for the comparable quarter periods and from $0.6 million to $3.1 million for the
comparable year-to-date periods. These increases were primarily due to the acquisition of the 35
self-storage properties during 2011.
Depreciation and Amortization
For the three and nine months ended September 30, 2011 as compared to the same periods in 2010,
depreciation and amortization increased by $7.8 million and $19.3 million, respectively, as a
result of investments we entered into during 2010 and 2011.
CPA®:17 Global 9/30/2011 10-Q 33
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General and Administrative
For the three and nine months ended September 30, 2011 as compared to the same periods in 2010,
general and administrative expense increased by $3.6 million and $7.2 million respectively,
primarily due to increases in acquisition-related fees and expenses of $1.8 million and $4.1
million, respectively; increases in professional fees of $0.7 million and $1.3 million,
respectively; and increases in management expenses of $0.4 million and $0.9 million, respectively.
Acquisition-related fees and expenses incurred in the current year periods were primarily related
to the acquisition of 35 self storage properties. Professional fees include legal, accounting and
investor-related expenses incurred in the normal course of business. Management expenses include
our reimbursements to the advisor for the allocated costs of personnel and overhead in providing
management of our day-to-day operations.
Property Expenses
For the three and nine months ended September 30, 2011 as compared to the same periods in 2010,
property expenses increased by $2.7 million and $8.5 million, respectively, primarily due to
increases in asset management fees of $2.0 million and $5.7 million, respectively, and professional
fees of $0.3 million and $1.2 million, respectively. Property expenses also increased during the
nine months ended September 30, 2011 as a result of increases in reimbursable tenant costs of $1.2
million. Asset management fees increased as a result of 2010 and 2011 investment volume.
Professional fees include legal and accounting expenses incurred for certain properties.
Reimbursable tenant costs are recorded as both revenue and expenses and therefore have no impact on
our results of operations.
Income from Equity Investments in Real Estate
Income from equity investments in real estate represents our proportionate share of net income or
net loss (revenue less expenses) from investments entered into with affiliates in which we have a
noncontrolling interest but over which we exercise significant influence.
For the three and nine months ended September 30, 2011 as compared to the same periods in 2010,
income from equity investments in real estate increased by $0.4 million and $2.6 million,
respectively, primarily due to our investments in the C1000 venture in January 2011 and the Eroski
Socieded Cooperativa Mallorca venture in June 2010, which contributed an aggregate increase to
income of $0.7 million and $3.0 million, respectively. These increases in income were partially
offset by net losses of $0.1 million and $0.5 million recognized during the three and nine months
ended September 30, 2011, respectively, on the ventures that we purchased from
CPA®:14 due to the amortization of basis differences (Note 6).
Other Income and (Expenses)
Other income and (expenses) primarily 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 OCI. We also recognize gains or losses on foreign currency transactions when we repatriate cash
from our foreign investments. In addition, we have certain derivative instruments, including common
stock warrants and foreign currency contracts that are not designated as hedging, for which
realized and unrealized gains and losses are included in earnings. The timing and amount of such
gains and losses cannot always be estimated and are subject to fluctuation.
For the three and nine months ended September 30, 2011 as compared to the same periods in 2010,
other income increased by $1.7 million and $1.8 million, respectively, primarily due to increases
in net realized and unrealized gains on foreign currency transactions of $1.0 million during each
of the current year periods as a result of changes in the exchange rate of the foreign currencies
and an unrealized gain of $0.9 million recognized during each of the current year periods on
foreign currency derivative contracts.
Interest Expense
For the three and nine months ended September 30, 2011 as compared to the same periods in 2010,
interest expense increased by $5.2 million and $16.3 million, respectively, primarily as a result
of mortgage financing obtained and assumed in connection with our investment activity during 2011
and 2010.
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Provision for Income Taxes
For the three and nine months ended September 30, 2011 as compared to the same periods in 2010,
provision for income taxes increased by $0.8 million and $1.4 million, respectively, primarily due
to increases in foreign taxes incurred on new international investments.
Net Income Attributable to CPA®:17 Global Shareholders
For the three and nine months ended September 30, 2011 as compared to the same periods in 2010, the
resulting net income attributable to CPA®:17 Global shareholders increased by $1.6
and $14.1 million, respectively.
Modified Funds from Operations (MFFO)
MFFO is a non-GAAP measure that we use to evaluate our business. For a definition of MFFO and
reconciliation to net income attributable to CPA®:17 Global shareholders, see
Supplemental Financial Measures below. For the three and nine months ended September 30, 2011 as
compared to the same periods in 2010, MFFO increased by $11.5 million and $38.0 million,
respectively, primarily as a result of our recent investment activity.
Financial Condition
Sources and Uses of Cash During the Period
Our initial public offering terminated on April 7, 2011, the date which the registration statement
for our follow-on offering was declared effective by the SEC. We expect to continue to invest the
proceeds of our offerings in a diversified portfolio of income-producing commercial properties and
other real estate related assets. We use the cash flow generated from our investments to meet our
operating expenses, fund distributions to shareholders and service debt. Our cash flows fluctuate
period to period due to a number of factors, which may include, among other things, the timing of
purchases and sales of real estate, the timing of the receipt of the proceeds from and the
repayment of 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, changes in foreign
currency exchange rates and the timing and characterization of distributions received 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, until we have fully invested the proceeds of our offerings, we have used, and expect in
the future to use a portion of the offering proceeds to fund our operating activities and
distributions to shareholders (see Financing Activities below). We assess our ability to access
capital on an ongoing basis. Our sources and uses of cash during the period are described below.
Operating Activities
During the nine months ended September 30, 2011, we used cash flows provided by operating
activities of $71.2 million to fund cash distributions to shareholders of $37.0 million, excluding
$35.6 million in dividends that were reinvested by shareholders through our distribution
reinvestment and share purchase plan, and to pay distributions of $17.1 million to affiliates that
hold noncontrolling interests in various entities with us. We also used cash distributions received
from equity investments in real estate in excess of equity income of $90.0 million to fund these
payments. For 2011, the advisor elected to continue to receive its asset management fees in
restricted shares of our common stock, and as a result, we paid asset management fees of $7.5
million through the issuance of restricted stock rather than in cash.
Investing Activities
Our investing activities are generally comprised of real estate-related transactions (purchases and
sales), payment of deferred acquisition fees to the advisor and capitalized property-related costs.
During the nine months ended September 30, 2011, we used $549.2 million to acquire ten consolidated
investments, including $164.2 million for the Metro transaction and $128.4 million for the
acquisition of the 35 self-storage properties, and to fund construction costs on several build-to
suit projects. In addition, we made contributions of $228.1 million to unconsolidated ventures,
including $172.4 million related to our equity investment in properties leased to C1000 and $55.7
million to acquire interests in three ventures from CPA®:14. We also used $30.0 million
to provide financing for a property developer. We received $49.6 million in proceeds from the full
repayment of our participation in the limited-recourse mortgage loan related to our New York Times
venture in connection with the refinancing of the loan, $90.0 million in distributions from our
equity investments in real estate in excess of cumulative equity income and proceeds of $19.8
million from the sale of two Canadian properties previously leased to CARQUEST. We placed $166.7
million in escrow for future investments, of
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which the full amount was released in the same period for the Metro transaction. Funds totaling
$24.4 million and $15.4 million, respectively, were invested in and released from lender-held
investment accounts. We paid foreign value added taxes, or VAT, totaling $3.5 million during the
nine months ended September 30, 2011 in connection with several international investments and
recovered $29.3 million of foreign VAT during the period, including amounts paid in prior years.
Payments of deferred acquisition fees to the advisor totaled $11.1 million.
Financing Activities
As noted above, during the nine months ended September 30, 2011, we paid distributions to
shareholders and to affiliates that hold noncontrolling interests in various entities with us. We
also made scheduled mortgage principal installments of $10.4 million. We received $435.0 million in
net proceeds from our initial and follow-on public offerings and $213.9 million in proceeds from
mortgage financings related to 2011 and 2010 investment activity. In connection with our financing
activities, we paid mortgage financing costs of $4.5 million. In February 2011, we borrowed $90.0
million from the advisor to fund the C1000 venture acquisition and repaid this amount in full in
April 2011. Funds totaling $6.5 million and $17.9 million, respectively, were released from and
placed into lender-held escrow accounts for mortgage-related payments.
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. During the nine months ended September 30, 2011, we have declared
distributions to shareholders totaling $81.0 million, which were comprised of cash distributions of
$41.5 million and $39.5 million of distributions reinvested by shareholders. We have funded $72.1
million, or 89%, of these distributions from adjusted cash flow from operating activities with the
remainder being funded from proceeds of our public offerings. 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.
We maintain a quarterly redemption plan pursuant to which we may, at the discretion of our board of
directors, redeem shares of our common stock from shareholders seeking liquidity. For the nine
months ended September 30, 2011, we received requests to redeem 666,514 shares of our common stock
pursuant to our redemption plan, of which 443,499 shares were redeemed during the nine months ended
September 30, 2011, with the remainder redeemed in the fourth quarter of 2011. We used $4.2 million
to fulfill the shares redeemed during the nine months ended September 30, 2011 at a price per share
of $9.30. We funded share redemptions during the nine months ended September 30, 2011 from the
proceeds of the sale of shares of our common stock pursuant to our distribution reinvestment and
stock purchase plan.
Liquidity is affected adversely by unanticipated costs, lower-than-anticipated fundraising 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 from financings or refinancings of
additional properties.
Adjusted Cash Flow from Operating Activities
Adjusted cash flow from operating activities is a non-GAAP measure that we use to evaluate our
business. For a definition of adjusted cash flow from operating activities and reconciliation to
cash flow from operating activities, see Supplemental Financial Measures below.
Our adjusted cash flow from operating activities for the nine months ended September 30, 2011 and
2010 was $72.1 million and $34.7 million, respectively. This increase was primarily due to
increases in property-level cash flow generated from our investment activity during 2010 and 2011.
CPA®:17 Global 9/30/2011 10-Q 36
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Summary of Financing
The table below summarizes our non-recourse and limited recourse debt (dollars in thousands):
September 30, 2011 | December 31, 2010 | |||||||
Balance |
||||||||
Fixed rate |
$ | 721,330 | $ | 516,103 | ||||
Variable rate (a) |
392,483 | 151,375 | ||||||
Total |
$ | 1,113,813 | $ | 667,478 | ||||
Percent of total debt |
||||||||
Fixed rate |
65 | % | 77 | % | ||||
Variable rate (a) |
35 | % | 23 | % | ||||
100 | % | 100 | % | |||||
Weighted-average interest rate at end of period |
||||||||
Fixed rate |
6.1 | % | 6.2 | % | ||||
Variable rate (a) |
4.0 | % | 5.4 | % |
(a) | Variable-rate debt at September 30, 2011 consisted of (i) $262.0 million that was effectively converted to fixed-rate debt through interest rate swap derivative instruments, (ii) $123.6 million that was subject to an interest rate cap, but for which the applicable interest rate was below the effective interest rate of the cap at September 30, 2011, and (iii) $6.9 million in mortgage loan obligations that bore interest at fixed rates but have interest rate reset features that may change the interest rates to then-prevailing market fixed rates at certain points during their term. |
Cash Resources
At September 30, 2011, our cash resources consisted of cash and cash equivalents totaling $146.8
million. Of this amount, $38.5 million, at then-current exchange rates, was held in foreign
subsidiaries, but we could be subject to restrictions or significant costs should we decide to
repatriate these amounts. We also had unleveraged properties that had an aggregate carrying value
of $308.8 million at September 30, 2011, although there can be no assurance that we would be able
to obtain financing for these properties. In April 2011, the SEC declared our registration
statement effective for a continuous public offering of up to $1.0 billion of common stock. Our
cash resources may be used for future investments, working capital needs and other commitments.
Cash Requirements
During the next 12 months, we expect that cash payments will include paying distributions to our
shareholders and to our affiliates who hold noncontrolling interests in entities we control, making
scheduled mortgage loan principal payments (neither we nor our venture partners have any balloon
payments on our mortgage loan obligations until the fourth quarter of 2012), reimbursing the
advisor for costs incurred on our behalf and paying normal recurring operating expenses. We expect
to continue to use funds raised from our initial public offering and follow-on offering to invest
in new properties.
CPA®:17 Global 9/30/2011 10-Q 37
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Off-Balance Sheet Arrangements and Contractual Obligations
The table below summarizes our debt, off-balance sheet arrangements and other contractual
obligations at September 30, 2011 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 (a) |
$ | 1,114,722 | $ | 16,298 | $ | 42,202 | $ | 349,254 | $ | 706,968 | ||||||||||
Deferred acquisition fees |
24,858 | 10,857 | 14,001 | | | |||||||||||||||
Interest on borrowings and deferred
acquisition fees |
412,522 | 57,769 | 115,815 | 109,537 | 129,401 | |||||||||||||||
Subordinated disposition fees (b) |
202 | | | | 202 | |||||||||||||||
Build-to-suit commitment and other
capital commitments (c) |
27,222 | 27,222 | | | | |||||||||||||||
Lending commitment (d) |
32,581 | | 32,581 | | | |||||||||||||||
Operating and other lease commitments (e) |
2,989 | 568 | 1,133 | 1,111 | 177 | |||||||||||||||
$ | 1,615,096 | $ | 112,714 | $ | 205,732 | $ | 459,902 | $ | 836,748 | |||||||||||
(a) | Excludes $0.9 million of unamortized discount on two notes, which is included in Non-recourse and limited recourse debt at September 30, 2011. | |
(b) | Payable to the advisor, subject to meeting contingencies, in connection with any liquidity event. There can be no assurance that any liquidity event will be achieved in this time frame. | |
(c) | Represents remaining build-to-suit commitments on eight projects. As of September 30, 2011, total estimated construction costs for these projects were projected to be $66.2 million in the aggregate, of which $39.0 million had been funded at that date. | |
(d) | Represents unfunded amount on a commitment to provide a loan to a developer of a domestic build-to-suit project. As of September 30, 2011, the total commitment for the loan was for up to $85.6 million, of which $53.0 million had been funded at that date. | |
(e) | 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 as well as future minimum rents payable under a lease executed in June 2010 (denominated in British Pound Sterling) in conjunction with an investment in the United Kingdom. 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 as we continue to invest the proceeds of our public offerings. |
Amounts in the table above related to our foreign operations are based on the exchange rate of the
local currencies at September 30, 2011, which consisted primarily of the Euro. At September 30,
2011, we had no material capital lease obligations for which we were the lessee, either
individually or in the aggregate.
CPA®:17 Global 9/30/2011 10-Q 38
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Equity Method Investments
We have investments in unconsolidated ventures that own single-tenant properties net leased to
corporations. Generally, the underlying investments are jointly-owned with our affiliates.
Summarized financial information for these ventures and our ownership interest in the ventures at
September 30, 2011 is presented below. Summarized financial information provided represents the
total amounts attributable to the ventures and does not represent our proportionate share (dollars
in thousands):
Ownership Interest | Total Third- | |||||||||||||||
Lessee | at September 30, 2011 | Total Assets | Party Debt | Maturity Date | ||||||||||||
C1000 BV (a) |
85 | % | $ | 207,126 | $ | 95,866 | 3/2013 | |||||||||
U-Haul Moving Partners, Inc. and
Mercury Partners, LP (b) |
12 | % | 282,132 | 156,914 | 5/2014 | |||||||||||
Tesco plc (a) |
49 | % | 89,466 | 46,097 | 6/2016 | |||||||||||
Hellweg Die Profi-Baumarkte
GmbH & Co. KG (a) (b) |
33 | % | 457,684 | 376,526 | 4/2017 | |||||||||||
Berry Plastics Corporation |
50 | % | 77,174 | 28,178 | 6/2020 | |||||||||||
Dicks Sporting Goods, Inc. (b) |
45 | % | 26,664 | 21,605 | 1/2022 | |||||||||||
Eroski Sociedad Cooperativa Mallorca (a) |
30 | % | 31,610 | | N/A | |||||||||||
$ | 1,171,856 | $ | 725,186 | |||||||||||||
(a) | Dollar amounts shown are based on the exchange rate of the Euro at September 30, 2011. | |
(b) | We acquired our interest in this venture from CPA®:14 in May 2011 (Note 3). |
Environmental Obligations
In connection with the purchase of many of our properties, we required the sellers to perform
environmental reviews. We believe, based on the results of these reviews, that our properties were
in substantial compliance with Federal, state, and foreign environmental statutes at the time the
properties were acquired. However, portions of certain properties have been subject to some degree
of contamination, principally in connection with leakage from underground storage tanks, surface
spills or other on-site activities. In most instances where contamination has been identified,
tenants are actively engaged in the remediation process and addressing identified conditions.
Tenants are generally subject to environmental statutes and regulations regarding the discharge of
hazardous materials and any related remediation obligations. In addition, our leases generally
require tenants to indemnify us from all liabilities and losses related to the leased properties
and the provisions of such indemnifications specifically address environmental matters. The leases
generally include provisions that allow for periodic environmental assessments, paid for by the
tenant, and allow us to extend leases until such time as a tenant has satisfied its environmental
obligations. Certain of our leases allow us to require financial assurances from tenants, such as
performance bonds or letters of credit, if the costs of remediating environmental conditions are,
in our estimation, in excess of specified amounts. Accordingly, we believe that the ultimate
resolution of environmental matters should not have a material adverse effect on our financial
condition, liquidity or results of operations.
Supplemental Financial Measures
In the real estate industry, analysts and investors employ certain non-GAAP supplemental financial
measures in order to facilitate meaningful comparisons between periods and among peer companies.
Additionally, in the formulation of our goals and in the evaluation of the effectiveness of our
strategies, we employ the use of supplemental non-GAAP measures, which are uniquely defined by our
management. We believe these measures are useful to investors to consider because they may assist
them to better understand and measure the performance of our business over time and against similar
companies. A description of these non-GAAP financial measures and reconciliations to the most
directly comparable GAAP measures are provided below.
Funds from Operations (FFO) and Modified Funds from Operations (MFFO)
Due to certain unique operating characteristics of real estate companies, as discussed below, the
National Association of Real Estate Investment Trusts, Inc., or NAREIT, an industry trade group,
has promulgated a measure known as funds from operations, or FFO, which we believe to be an
appropriate supplemental measure to reflect the operating performance of a real estate investment
trust, or REIT. The use of FFO is recommended by the REIT industry as a supplemental performance
measure. FFO is not equivalent to nor a substitute for net income or loss as determined under GAAP.
CPA®:17 Global 9/30/2011 10-Q 39
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We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on
FFO approved by the Board of Governors of NAREIT, as revised in February 2004, or the White Paper.
The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains
or losses from sales of property but including asset impairment writedowns, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments
for unconsolidated partnerships and joint ventures are calculated to reflect FFO. Our FFO
calculation complies with NAREITs policy described above.
The historical accounting convention used for real estate assets requires straight-line
depreciation of buildings and improvements, which implies that the value of real estate assets
diminishes predictably over time, especially if such assets are not adequately maintained or
repaired and renovated as required by relevant circumstances and/or is requested or required by
lessees for operational purposes in order to maintain the value disclosed. We believe that, since
real estate values historically rise and fall with market conditions, including inflation, interest
rates, the business cycle, unemployment and consumer spending, presentations of operating results
for a REIT using historical accounting for depreciation may be less informative. Historical
accounting for real estate involves the use of GAAP. Any other method of accounting for real estate
such as the fair value method cannot be construed to be any more accurate or relevant than the
comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the
use of FFO, which excludes the impact of real estate related depreciation and amortization,
provides a more complete understanding of our performance to investors and to management, and when
compared year over year, reflects the impact on our operations from trends in occupancy rates,
rental rates, operating costs, general and administrative expenses, and interest costs, which may
not be immediately apparent from net income. However, FFO and MFFO, as described below, should not
be construed to be more relevant or accurate than the current GAAP methodology in calculating net
income or in its applicability in evaluating the operating performance of the company. The method
utilized to evaluate the value and performance of real estate under GAAP should be construed as a
more relevant measure of operational performance and considered more prominently than the non-GAAP
FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.
Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses
from a capitalization/depreciation model to an expensed-as-incurred model) were put into effect in
2009. These other changes to GAAP accounting for real estate subsequent to the establishment of
NAREITs definition of FFO have prompted an increase in cash-settled expenses, specifically
acquisition fees and expenses for all industries as items that are expensed under GAAP, that are
typically accounted for as operating expenses. Management believes these fees and expenses do not
affect our overall long-term operating performance. Publicly registered, non-listed REITs typically
have a significant amount of acquisition activity and are substantially more dynamic during their
initial years of investment and operation. While other start-up entities may also experience
significant acquisition activity during their initial years, we believe that non-listed REITs are
unique in that they have a limited life with targeted exit strategies within a relatively limited
time frame after acquisition activity ceases. As disclosed in the prospectus for our follow-on
offering dated April 7, 2011 (the Prospectus), we intend to begin the process of achieving a
liquidity event (i.e., listing of our common stock on a national exchange, a merger or sale of our
assets or another similar transaction) within eight to 12 years following the investment of
substantially all of the net proceeds from our initial public offering, which was terminated in
April 2011. Thus, we do not intend to continuously purchase assets and intend to have a limited
life. Due to the above factors and other unique features of publicly registered, non-listed REITs,
the Investment Program Association (IPA), an industry trade group, has standardized a measure
known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered
non-listed REITs and which we believe to be another appropriate supplemental measure to reflect the
operating performance of a non-listed REIT having the characteristics described above. MFFO is not
equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure
of the impact of long-term operating performance on value if we do not continue to operate with a
limited life and targeted exit strategy, as currently intended. We believe that, because MFFO
excludes costs that we consider more reflective of investing activities and other non-operating
items included in FFO and also excludes acquisition fees and expenses that affect our operations
only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an
indication of the sustainability (that is, the capacity to continue to be maintained) of our
operating performance after the period in which we are acquiring properties and once our portfolio
is in place. By providing MFFO, we believe we are presenting useful information that assists
investors and analysts to better assess the sustainability of our operating performance after our
offering has been completed and once all of our properties have been acquired. We also believe that
MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry.
Further, we believe MFFO is useful in comparing the sustainability of our operating performance
after our offering and most of our acquisitions are completed with the sustainability of the
operating performance of other real estate companies that are not as involved in acquisition
activities. Investors are cautioned that MFFO should only be used to assess the sustainability of a
companys operating performance after a companys offering has been completed and properties have
been acquired, as it excludes acquisition costs that have a negative effect on a companys
operating performance during the periods in which properties are acquired.
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We define MFFO, a non-GAAP measure, consistent with the IPAs Guideline 2010-01, Supplemental
Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations, or
the Practice Guideline, issued by the IPA in November 2010. The Practice Guideline defines MFFO as
FFO further adjusted for the following items, as applicable, included in the determination of GAAP
net income: acquisition fees and expenses; amounts relating to deferred rent receivables and
amortization of above and below market leases and liabilities (which are adjusted in order to
reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease
payments); accretion of discounts and amortization of premiums on debt investments; nonrecurring
impairments of real estate-related investments (i.e., infrequent or unusual, not reasonably likely
to recur in the ordinary course of business); mark-to-market adjustments included in net income;
nonrecurring gains or losses included in net income from the extinguishment or sale of debt,
hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not
a fundamental attribute of the business plan, unrealized gains or losses resulting from
consolidation from, or deconsolidation to, equity accounting, and after adjustments for
consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated
to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt
investments, nonrecurring unrealized gains and losses on hedges, foreign exchange, derivatives or
securities holdings, unrealized gains and losses resulting from consolidations, as well as other
listed cash flow adjustments are adjustments made to net income in calculating the cash flows
provided by operating activities and, in some cases, reflect gains or losses which are unrealized
and may not ultimately be realized. While we are responsible for managing interest rate, hedge and
foreign exchange risk, we retain an outside consultant to review all our hedging agreements.
Inasmuch as interest rate hedges are not a fundamental part of our operations, we believe it is
appropriate to exclude such infrequent gains and losses in calculating MFFO, as such gains and
losses are not reflective of on-going operations.
Our MFFO calculation complies with the IPAs Practice Guideline described above. In calculating
MFFO, we exclude acquisition-related expenses, amortization of above- and below-market leases, fair
value adjustments of derivative financial instruments, deferred rent receivables and the
adjustments of such items related to noncontrolling interests. Under GAAP, acquisition fees and
expenses are characterized as operating expenses in determining operating net income. These
expenses are paid in cash by a company. All paid and accrued acquisition fees and expenses will
have negative effects on returns to investors, the potential for future distributions, and cash
flows generated by the company, unless earnings from operations or net sales proceeds from the
disposition of other properties are generated to cover the purchase price of the property, these
fees and expenses and other costs related to such property. Further, under GAAP, certain
contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash
adjustments to net income in determining cash flow from operating activities. In addition, we view
fair value adjustments of derivatives, impairment charges and gains and losses from dispositions of
assets as infrequent items or items which are unrealized and may not ultimately be realized, and
which are not reflective of on-going operations and are therefore typically adjusted for assessing
operating performance. In particular, we believe it is appropriate to disregard impairment charges,
as this is a fair value adjustment that is largely based on market fluctuations and assessments
regarding general market conditions which can change over time. An asset will only be evaluated for
impairment if certain impairment indications exist and if the carrying, or book value, exceeds the
total estimated undiscounted future cash flows (including net rental and lease revenues, net
proceeds on the sale of the property, and any other ancillary cash flows at a property or group
level under GAAP) from such asset. Investors should note, however, that determinations of whether
impairment charges have been incurred are based partly on anticipated operating performance,
because estimated undiscounted future cash flows from a property, including estimated future net
rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary
cash flows, are taken into account in determining whether an impairment charge has been incurred.
While impairment charges are excluded from the calculation of MFFO as described above, investors
are cautioned that, due to the fact that impairments are based on estimated future undiscounted
cash flows and the relatively limited term of our operations, it could be difficult to recover any
impairment charges.
Our management uses MFFO and the adjustments used to calculate it in order to evaluate our
performance against other non-listed REITs which have limited lives with short and defined
acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not
be a useful measure of the impact of long-term operating performance on value if we do not continue
to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate it
allow us to present our performance in a manner that reflects certain characteristics that are
unique to non-listed REITs, such as their limited life, limited and defined acquisition period and
targeted exit strategy, and hence that the use of such measures is useful to investors. For
example, acquisition costs are generally funded from the proceeds of our offering and other
financing sources and not from operations. By excluding expensed acquisition costs, the use of MFFO
provides information consistent with managements analysis of the operating performance of the
properties. Additionally, fair value adjustments, which are based on the impact of current market
fluctuations and underlying assessments of general market conditions, but can also result from
operational factors such as rental and occupancy rates, may not be directly related or attributable
to our current operating performance. By excluding such changes that may reflect anticipated and
unrealized gains or losses, we believe MFFO provides useful supplemental information.
Presentation of this information is intended to provide useful information to investors as they
compare the operating performance of different REITs, although it should be noted that not all
REITs calculate FFO and MFFO the same way, so comparisons with other
CPA®:17 Global 9/30/2011 10-Q 41
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REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow
available to fund cash needs and should not be considered as an alternative to net income (loss) or
income (loss) from continuing operations as an indication of our performance, as an alternative to
cash flows from operations as an indication of our liquidity, or indicative of funds available to
fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO
should be reviewed in conjunction with other GAAP measurements as an indication of our performance.
MFFO has limitations as a performance measure in an offering such as ours, where the price of a
share of common stock is a stated value and there is no net asset value determination during the
offering stage and for a period thereafter. MFFO is useful in assisting management and investors in
assessing the sustainability of operating performance in future operating periods, and in
particular, after the offering and acquisition stages are complete and net asset value is
disclosed. MFFO is not a useful measure in evaluating net asset value because impairments are taken
into account in determining net asset value but not in determining MFFO.
Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of
the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another
regulatory body may decide to standardize the allowable adjustments across the non-listed REIT
industry and we would have to adjust our calculation and characterization of FFO or MFFO
accordingly.
FFO and MFFO for all periods presented are as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income attributable to CPA®:17 Global shareholders |
$ | 10,304 | $ | 8,713 | $ | 35,582 | $ | 21,491 | ||||||||
Adjustments: |
||||||||||||||||
Depreciation and amortization of real property |
11,367 | 3,721 | 28,197 | 9,309 | ||||||||||||
Gain on sale of real estate, net |
| (109 | ) | (787 | ) | (109 | ) | |||||||||
Proportionate share of adjustments to equity in net income
of partially-owned entities to arrive at FFO: |
||||||||||||||||
Depreciation and amortization of real property |
4,476 | 783 | 9,740 | 2,330 | ||||||||||||
Loss on sale of real estate, net |
3 | | | 38 | ||||||||||||
Proportionate share of adjustments for noncontrolling
interests to arrive at FFO |
(164 | ) | (113 | ) | (490 | ) | (422 | ) | ||||||||
Total adjustments |
15,682 | 4,282 | 36,660 | 11,146 | ||||||||||||
FFO as defined by NAREIT (a) |
25,986 | 12,995 | 72,242 | 32,637 | ||||||||||||
Adjustments: |
||||||||||||||||
Other depreciation, amortization and non-cash charges |
(1,069 | ) | 14 | (624 | ) | 98 | ||||||||||
Straight-line and other rent adjustments (b) |
(3,410 | ) | (1,271 | ) | (9,537 | ) | (3,895 | ) | ||||||||
Acquisition expenses (c) |
2,346 | 379 | 6,374 | 1,570 | ||||||||||||
Above (below)-market rent intangible lease amortization, net (d) |
461 | 241 | 1,408 | 849 | ||||||||||||
Amortization of premiums on debt investments, net |
37 | 37 | 111 | 93 | ||||||||||||
Realized gains on foreign currency, derivatives and other |
(1,032 | ) | (497 | ) | (1,620 | ) | (751 | ) | ||||||||
Proportionate share of adjustments to equity in net income
of partially-owned entities to arrive at MFFO: |
||||||||||||||||
Other depreciation, amortization and non-cash charges |
| (21 | ) | 1 | (21 | ) | ||||||||||
Straight-line and other rent adjustments (b) |
(55 | ) | (117 | ) | (239 | ) | (249 | ) | ||||||||
Acquisition expenses (c) |
64 | 1 | 170 | 1 | ||||||||||||
Above (below)-market rent intangible lease amortization, net
(d) |
(4 | ) | (2 | ) | 8 | (21 | ) | |||||||||
Realized losses (gains) on foreign currency, derivatives
and other |
1 | 1 | (4 | ) | 1 | |||||||||||
Proportionate share of adjustments for noncontrolling
interests to arrive at MFFO |
149 | 235 | 771 | 737 | ||||||||||||
Total adjustments |
(2,512 | ) | (1,000 | ) | (3,181 | ) | (1,588 | ) | ||||||||
MFFO |
$ | 23,474 | $ | 11,995 | $ | 69,061 | $ | 31,049 | ||||||||
Distributions declared for the applicable period (e) |
$ | 29,918 | $ | 18,847 | $ | 81,050 | $ | 49,263 | ||||||||
CPA®:17 Global 9/30/2011 10-Q 42
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(a) | The SEC Staff has recently stated that they take no position on the inclusion or exclusion of impairment write-downs in arriving at FFO. Since 2003, NAREIT has taken the position that the exclusion of impairment charges is consistent with its definition of FFO. Accordingly, in future presentations we will revise our computation of FFO to exclude impairment charges, if any, in arriving at FFO. | |
(b) | Under GAAP, rental receipts are allocated to periods using various methodologies. This may result in income recognition that is significantly different than underlying contract terms. By adjusting for these items (to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), management believes that MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments, provides insight on the contractual cash flows of such lease terms and debt investments, and aligns results with managements analysis of operating performance. | |
(c) | In evaluating investments in real estate, management differentiates the costs to acquire the investment from the operations derived from the investment. Such information would be comparable only for non-listed REITs that have completed their acquisition activity and have other similar operating characteristics. By excluding expensed acquisition costs, management believes MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with managements analysis of the investing and operating performance of our properties. Acquisition fees and expenses include payments to our advisor or third parties. Acquisition fees and expenses under GAAP are considered operating expenses and as expenses included in the determination of net income and income from continuing operations, both of which are performance measures under GAAP. All paid and accrued acquisition fees and expenses will have negative effects on returns to shareholders, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to the property. | |
(d) | Under GAAP, certain intangibles are accounted for at cost and reviewed at least annually for impairment, and certain intangibles are assumed to diminish predictably in value over time and amortized, similar to depreciation and amortization of other real estate related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, management believes that by excluding charges relating to amortization of these intangibles, MFFO provides useful supplemental information on the performance of the real estate. | |
(e) | Distribution data is presented for comparability; however, management utilizes our Adjusted Cash Flow from Operating Activities measure to analyze our dividend coverage. See below for a discussion of the source of these distributions. |
Adjusted Cash Flow from Operating Activities
Adjusted cash flow from operating activities refers to our cash flow from operating activities (as
computed in accordance with GAAP) adjusted, where applicable, primarily to: add cash distributions
that we receive from our investments in unconsolidated real estate joint ventures in excess of our
equity income; subtract cash distributions that we make to our noncontrolling partners in real
estate joint ventures that we consolidate; and eliminate changes in working capital. We hold a
number of interests in real estate joint ventures, and we believe that adjusting our GAAP cash flow
provided by operating activities to reflect these actual cash receipts and cash payments, as well
as eliminating the effect of timing differences between the payment of certain liabilities and the
receipt of certain receivables in a period other than that in which the item is recognized, may
give investors additional information about our actual cash flow that is not incorporated in cash
flow from operating activities as defined by GAAP.
We believe that adjusted cash flow from operating activities is a useful supplemental measure for
assessing the cash flow generated from our core operations as it gives investors important
information about our liquidity that is not provided within cash flow from operating activities as
defined by GAAP, and we use this measure when evaluating distributions to shareholders.
As we are still in our offering and investment stage, we also consider our expectations as to the
yields that may be generated on existing investments and our acquisition pipeline when evaluating
distributions to shareholders.
CPA®:17 Global 9/30/2011 10-Q 43
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Adjusted cash flow from operating activities for all periods presented is as follows (in
thousands):
Nine Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
Cash flow provided by operating activities |
$ | 71,237 | $ | 45,627 | ||||
Adjustments: |
||||||||
Distributions received from equity investments in real estate in excess of equity income, net |
11,743 | 1,650 | ||||||
Distributions paid to noncontrolling interests, net |
(14,040 | ) | (9,402 | ) | ||||
Changes in working capital |
3,197 | (3,196 | ) | |||||
Adjusted cash flow from operating activities (a) |
$ | 72,137 | $ | 34,679 | ||||
Distributions declared (b) |
$ | 81,050 | $ | 49,263 | ||||
(a) | During the first quarter of 2011, we made an adjustment to exclude the impact of escrow funds from Adjusted cash flow from operating activities as, more often than not, these funds represent investing and/or financing activities. Adjusted cash flow from operating activities for the nine months ended September 30, 2010 has been adjusted to reflect this reclassification. | |
(b) | During the nine months ended September 30, 2011 and 2010, 89% and 70%, respectively, of distributions were sourced from Adjusted cash flow from operating activities, with the remainder sourced from offering proceeds. From inception through September 30, 2011, cumulative distributions of $195.9 million, including cash distributions of $99.4 million, were sourced 74% from Adjusted cash flow from operating activities, with the remainder sourced from offering proceeds. |
While we believe that Adjusted cash flow from operating activities is an important supplemental
measure, it should not be considered an alternative to cash flow from operating activities as a
measure of liquidity. This non-GAAP measure should be used in conjunction with cash flow from
operating activities as defined by GAAP. Adjusted cash flow from operating activities, or similarly
titled measures disclosed by other REITs, may not be comparable to our Adjusted cash flow from
operating activities measure.
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. We 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 and follow-on offering, we will seek to ensure that our portfolio is
reasonably well diversified and does not contain any unusual concentration of market risks.
Generally, we do not use derivative instruments to manage foreign currency exchange rate exposure
and do not use derivative instruments to hedge credit/market risks or for speculative purposes.
However, from time to time, we may enter into foreign currency derivative contracts to hedge our
foreign currency cash flow exposures.
Interest Rate Risk
The value of our real estate, related fixed-rate debt obligations and notes receivable is subject
to fluctuations based on changes in interest rates. The value of our real estate is also subject to
fluctuations based on local and regional economic conditions and changes in the creditworthiness of
lessees, all of which may affect our ability to refinance property-level mortgage debt when balloon
payments are scheduled. Interest rates are highly sensitive to many factors, including governmental
monetary and tax policies, domestic and international economic and political conditions, and other
factors beyond our control. An increase in interest rates would likely cause the value of our owned
assets to decrease. Increases in interest rates may also have an impact on the credit profile of
certain tenants.
We are exposed to the impact of interest rate changes primarily through our borrowing activities.
To limit this exposure, we attempt to obtain non-recourse mortgage financing on a long-term,
fixed-rate basis. However, from time to time, we or our venture partners may obtain variable-rate
non-recourse mortgage loans and, as a result, may enter into interest rate swap agreements or
interest rate cap agreements with lenders that effectively convert the variable-rate debt service
obligations of the loan to a fixed rate. Interest rate swaps are agreements in which one party
exchanges a stream of interest payments for a counterpartys stream of cash flows over a
CPA®:17 Global 9/30/2011 10-Q 44
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specific period, and interest rate caps limit the effective borrowing rate of variable-rate debt
obligations while allowing participants to share in downward shifts in interest rates. These
interest rate swaps and caps are derivative instruments designated as cash flow hedges on the
forecasted interest payments on the debt obligation. The notional, or face, amount on which the
swaps or caps are based is not exchanged. Our objective in using these derivatives is to limit our
exposure to interest rate movements. At September 30, 2011, we estimate that the net fair value of
our interest rate cap and interest rate swaps, which are included in Other assets, net and Accounts
payable, accrued expenses and other liabilities, respectively, in the consolidated financial
statements, was in a net liability position of $4.9 million (Note 8).
At September 30, 2011, all of our debt either bore interest at fixed rates, was swapped to a fixed
rate, was subject to an interest rate cap, or bore interest at fixed rates that were scheduled to
convert to then-prevailing market fixed rates at certain points during their term. The estimated
fair value of these instruments is affected by changes in market interest rates. The annual
interest rates on our fixed-rate debt at September 30, 2011 ranged from 3.6% to 6.6%. The annual
interest rates on our variable-rate debt at September 30, 2011 ranged from 2.8% to 6.6%. Our debt
obligations are more fully described under Financial Condition in Item 2 above. The following table
presents principal cash flows based upon expected maturity dates of our debt obligations
outstanding at September 30, 2011 (in thousands):
2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | Fair value | |||||||||||||||||||||||||
Fixed rate debt
|
$ | 2,595 | $ | 16,770 | $ | 14,034 | $ | 17,907 | $ | 59,682 | $ | 610,342 | $ | 721,330 | $ | 718,832 | ||||||||||||||||
Variable rate debt
|
$ | 1,059 | $ | 4,382 | $ | 4,509 | $ | 4,622 | $ | 4,739 | $ | 373,172 | $ | 392,483 | $ | 392,463 |
A decrease or increase in interest rates of 1% would change the estimated fair value of this debt
at September 30, 2011 by an aggregate increase of $56.1 million or an aggregate decrease of $53.0
million, respectively.
As more fully described under Financial Condition Summary of Financing in Item 2 above, a
portion of the debt classified as variable-rate debt in the table above bore interest at fixed
rates at September 30, 2011 but has interest rate reset features that will change the fixed
interest rates to then-prevailing market fixed rates at certain points during their term. This debt
is generally not subject to short-term fluctuations in interest rates.
Foreign Currency Exchange Rate Risk
We own international investments in Europe, and as a result are subject to risk from the effects of
exchange rate movements in the Euro and, to a lesser extent, the British Pound Sterling, which may
affect future costs and cash flows. Although all of our foreign investments through the third
quarter of 2011 were conducted in these currencies, we are likely to conduct business in other
currencies in the future 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. This reduces our overall
exposure to the actual equity that we have invested and the equity portion of our cash flow. In
addition, we may use currency hedging to further reduce the exposure to own equity cash flow. 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 net unrealized and realized foreign currency transaction losses of $0.1 million and
gains of $1.6 million, respectively, for the nine months ended September 30, 2011. These gains and
losses are included in Other income and (expenses) in the consolidated financial statements and
were primarily due to changes in the value of the foreign currency on accrued interest receivable
on notes receivable from consolidated subsidiaries.
We enter into foreign currency forward contracts, collars, and put options to hedge certain of our
foreign currency cash flow exposures. A foreign currency forward contract is a commitment to
deliver a certain amount of currency at a certain price on a specific date in the future. A foreign
currency collar consists of a purchased call option to buy and a written put option to sell the
foreign currency. A foreign currency put option is the right to sell the currency at a
predetermined price. By entering into forward contracts, we are locked into a future currency
exchange rate for the term of the contract. A foreign currency collar guarantees that the exchange
rate of the currency will not fluctuate beyond the range of the options strike prices. Protective
put options limit our exposure to the movement in foreign currency exchange rates below a strike
price. The total estimated fair value of these instruments, which is included in Other assets, net,
and Accounts payable, accrued expenses and other liabilities, was $7.3 million at September 30,
2011.
Other
We own stock warrants that were granted to us by lessees in connection with structuring initial
lease transactions and are defined as derivative instruments because they are readily convertible
to cash or provide for net settlement upon conversion. Changes in the fair
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value of these derivative instruments are determined using an option pricing model and are
recognized currently in earnings as gains or losses. At September 30, 2011, warrants issued to us
were classified as derivative instruments and had an aggregate estimated fair value of $1.4
million, which is included in Other assets, net within the consolidated financial statements.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our disclosure controls and procedures include our controls and other procedures designed to
provide reasonable assurance that information required to be disclosed in this and other reports
filed under the Securities Exchange Act of 1934, as amended (the Exchange Act) is recorded,
processed, summarized and reported within the required time periods specified in the SECs rules
and forms and that such information is accumulated and communicated to management, including our
chief executive officer and chief financial officer, to allow timely decisions regarding required
disclosures. 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 chief financial officer, after conducting an evaluation, together
with members of our management, of the effectiveness of the design and operation of our disclosure
controls and procedures at September 30, 2011, 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,
2011 at a reasonable level of assurance.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during our most
recently completed fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
For the three months ended September 30, 2011, we issued 220,160 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 follow-on 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, the shares issued were deemed to be exempt from registration. In acquiring our
shares, the advisor represented that such interests were being acquired by it for the purpose of
investment and not with a view to the distribution thereof.
Issuer Purchases of Equity Securities
During the third quarter of 2011, we received requests to redeem 223,015 shares of our common
stock, which were redeemed in the fourth quarter of 2011.
CPA®:17 Global 9/30/2011 10-Q 46
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Item 6. Exhibits
The following exhibits are filed with this Report, except where indicated.
Exhibit No. | Description | |
31.1
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32
|
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101
|
The following materials from Corporate Property Associates 17 Global Incorporateds Quarterly Report on Form 10-Q for the quarter ended at September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at at September 30, 2011 and December 31, 2010, (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2011, and 2010, (iii) Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended September 30, 2011 and 2010, (iv) Consolidated Statements of Equity for the nine months ended September 30, 2011 and the year ended December 31, 2010, (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2011, and 2010, and (vi) Notes to Consolidated Financial Statements.* |
* | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
CPA®:17 Global 9/30/2011 10-Q 47
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this Report to be signed on its behalf by the undersigned thereunto duly authorized.
Corporate Property Associates 17 Global Incorporated |
||||
Date: November 10, 2011 | By: | /s/ Mark J. DeCesaris | ||
Mark J. DeCesaris | ||||
Chief Financial Officer (Principal Financial Officer) |
||||
Date: November 10, 2011 | By: | /s/ Thomas J. Ridings, Jr. | ||
Thomas J. Ridings, Jr. | ||||
Chief Accounting Officer (Principal Accounting Officer) |
||||
CPA®:17 Global 9/30/2011 10-Q 48
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EXHIBIT INDEX
The following exhibits are filed with this Report, except where indicated.
Exhibit No. | Description | |
31.1
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32
|
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101
|
The following materials from Corporate Property Associates 17 Global Incorporateds Quarterly Report on Form 10-Q for the quarter ended at September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at at September 30, 2011 and December 31, 2010, (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2011, and 2010, (iii) Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended September 30, 2011 and 2010, (iv) Consolidated Statements of Equity for the nine months ended September 30, 2011 and the year ended December 31, 2010, (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2011, and 2010, and (vi) Notes to Consolidated Financial Statements.* |
* | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |