10-Q 1 a13-8708_110q.htm 10-Q

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

R                                              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2013

 

or

 

o                                              TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from__________ to ___________

 

Commission File Number: 001-32162

 

GRAPHIC

 

CORPORATE PROPERTY ASSOCIATES 16 – GLOBAL INCORPORATED

(Exact name of registrant as specified in its charter)

 

Maryland

 

80-0067704

(State of incorporation)

 

(I.R.S. Employer Identification No.)

 

 

 

50 Rockefeller Plaza

 

 

New York, New York

 

10020

(Address of principal executive offices)

 

(Zip Code)

 

Investor Relations (212) 492-8920

(212) 492-1100

(Registrant’s 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 R 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 R 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 R

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 R

 

Registrant has 204,537,575 shares of common stock, $0.001 par value, outstanding at May 1, 2013.

 

 

 


 

INDEX

 

 

Page No.

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

Consolidated Balance Sheets

2

Consolidated Statements of Income

3

Consolidated Statements of Comprehensive (Loss) Income

4

Consolidated Statements of Cash Flows

5

Notes to Consolidated Financial Statements

6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 3. Quantitative and Qualitative Disclosures about Market Risk

37

Item 4. Controls and Procedures

39

 

 

PART II - OTHER INFORMATION

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

40

Item 6. Exhibits

41

Signatures

42

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q (the “Report”), including Management’s 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, 2012 as filed with the SEC on February 26, 2013 (the “2012 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our 2012 Annual Report. There has been no significant change in our critical accounting estimates. All references to “Notes” throughout the document refer to the footnotes to the consolidated financial statements of the registrant in Part I, Item 1, Financial Statements (Unaudited).

 

CPA®:16 – Global 3/31/2013 10-Q — 1

 


 

PART I

Item 1. Financial Statements

 

CORPORATE PROPERTY ASSOCIATES 16 – GLOBAL INCORPORATED

 

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share and per share amounts)

 

 

 

March 31, 2013

 

December 31, 2012

Assets

 

 

 

 

Investments in real estate:

 

 

 

 

Real estate, at cost (inclusive of amounts attributable to consolidated variable interest entities (“VIEs”) of $516,529 and $528,858, respectively)

 

$

2,195,084

 

$

2,243,470

Operating real estate, at cost (inclusive of amounts attributable to consolidated VIEs of $29,219 and $29,219, respectively)

 

85,646

 

85,565

Accumulated depreciation (inclusive of amounts attributable to consolidated VIEs of $70,222 and $68,529, respectively)

 

(269,279)

 

(258,655)

Net investments in properties

 

2,011,451

 

2,070,380

Net investments in direct financing leases (inclusive of amounts attributable to consolidated VIEs of $47,412 and $48,363, respectively)

 

459,706

 

467,831

Equity investments in real estate

 

221,604

 

227,675

Net investments in real estate

 

2,692,761

 

2,765,886

Notes receivable (inclusive of amounts attributable to consolidated VIEs of $32,834 and $33,558, respectively)

 

42,681

 

43,394

Cash and cash equivalents (inclusive of amounts attributable to consolidated VIEs of $10,339 and $10,993, respectively)

 

64,207

 

66,405

Intangible assets, net (inclusive of amounts attributable to consolidated VIEs of $60,470 and $62,182, respectively)

 

419,029

 

443,092

Funds in escrow (inclusive of amounts attributable to consolidated VIEs of $2,979 and $3,268, respectively)

 

23,904

 

23,274

Other assets, net (inclusive of amounts attributable to consolidated VIEs of $6,006 and $5,225, respectively)

 

62,853

 

64,741

Total assets

 

$

3,305,435

 

$

3,406,792

Liabilities and Equity

 

 

 

 

Liabilities:

 

 

 

 

Non-recourse debt (inclusive of amounts attributable to consolidated VIEs of $472,542 and $485,951, respectively)

 

$

1,621,252

 

$

1,644,180

Line of credit

 

100,000

 

143,000

Accounts payable, accrued expenses, and other liabilities (inclusive of amounts attributable to consolidated VIEs of $12,328 and $12,409, respectively)

 

38,436

 

40,931

Prepaid and deferred rental income and security deposits (inclusive of amounts attributable to consolidated VIEs of $24,650 and $25,402, respectively)

 

91,970

 

93,208

Due to affiliates

 

7,776

 

6,401

Distributions payable

 

34,150

 

33,965

Total liabilities

 

1,893,584

 

1,961,685

Redeemable noncontrolling interest

 

21,094

 

21,747

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

CPA®:16 – Global stockholders’ equity:

 

 

 

 

Common stock $0.001 par value, 400,000,000 shares authorized; 218,268,380 and 216,822,067 shares issued and outstanding, respectively

 

216

 

217

Additional paid-in capital

 

1,993,534

 

1,980,984

Distributions in excess of accumulated earnings

 

(531,457)

 

(500,050)

Accumulated other comprehensive loss

 

(32,258)

 

(27,043)

Less, treasury stock at cost, 14,789,503 and 14,204,793 shares, respectively

 

(131,180)

 

(126,228)

Total CPA®:16 – Global stockholders’ equity

 

1,298,855

 

1,327,880

Noncontrolling interests

 

91,902

 

95,480

Total equity

 

1,390,757

 

1,423,360

Total liabilities and equity

 

$

3,305,435

 

$

3,406,792

 

See Notes to Consolidated Financial Statements.

 

CPA®:16 – Global 3/31/2013 10-Q — 2

 


 

CORPORATE PROPERTY ASSOCIATES 16 – GLOBAL INCORPORATED

 

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except share and per share amounts)

 

 

 

Three Months Ended March 31,

 

 

2013

 

2012

Revenues

 

 

 

 

Rental income

 

$

59,959

 

$

61,887

Interest income from direct financing leases

 

10,081

 

10,081

Lease revenues

 

70,040

 

71,968

Other operating income

 

2,411

 

2,554

Interest income on notes receivable

 

735

 

1,172

Other real estate income

 

6,356

 

6,408

 

 

79,542

 

82,102

Operating Expenses

 

 

 

 

General and administrative

 

(5,923)

 

(4,729)

Depreciation and amortization

 

(22,819)

 

(23,847)

Property expenses

 

(9,613)

 

(9,073)

Other real estate expenses

 

(4,695)

 

(4,839)

Impairment charges

 

(9,313)

 

(10)

 

 

(52,363)

 

(42,498)

Other Income and Expenses

 

 

 

 

Net income from equity investments in real estate

 

5,525

 

7,544

Other income and (expenses)

 

(845)

 

862

Loss on extinguishment of debt

 

-

 

(507)

Interest expense

 

(24,389)

 

(27,282)

 

 

(19,709)

 

(19,383)

Income from continuing operations before income taxes

 

7,470

 

20,221

Provision for income taxes

 

(4,898)

 

(4,098)

Income from continuing operations

 

2,572

 

16,123

Discontinued Operations

 

 

 

 

Income (loss) from operations of discontinued properties

 

219

 

(1,999)

Gain (loss) on sale of real estate

 

2,701

 

(2,191)

Impairment charges

 

-

 

(485)

Income (loss) from discontinued operations, net of tax

 

2,920

 

(4,675)

Net Income

 

5,492

 

11,448

Less: Net income attributable to noncontrolling interests (inclusive of Available Cash Distributions to advisor of $3,614 and $4,281, respectively)

 

(4,651)

 

(3,773)

Net loss (income) attributable to redeemable noncontrolling interest

 

1,901

 

(355)

Net Income Attributable to CPA®:16 – Global Stockholders

 

$

2,742

 

$

7,320

Earnings Per Share

 

 

 

 

(Loss) income from continuing operations attributable to CPA®:16 – Global stockholders

 

$

-

 

$

0.06

Income (loss) from discontinued operations attributable to CPA®:16 – Global stockholders

 

0.01

 

(0.03)

Net income attributable to CPA®:16 – Global stockholders

 

$

0.01

 

$

0.03

Weighted Average Shares Outstanding

 

203,530,974

 

201,306,287

Amounts Attributable to CPA®:16 – Global Stockholders

 

 

 

 

(Loss) income from continuing operations, net of tax

 

$

(178)

 

$

11,995

Income (loss) from discontinued operations, net of tax

 

2,920

 

(4,675)

Net income attributable to CPA®:16 – Global stockholders

 

$

2,742

 

$

7,320

Distributions Declared Per Share

 

$

0.1678

 

$

0.1670

 

See Notes to Consolidated Financial Statements.

 

CPA®:16 – Global 3/31/2013 10-Q — 3

 


 

CORPORATE PROPERTY ASSOCIATES 16 – GLOBAL INCORPORATED

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

2013

 

2012

Net Income

 

$

5,492

 

$

11,448

Other Comprehensive (Loss) Income:

 

 

 

 

Foreign currency translation adjustments

 

(10,020)

 

10,119

Change in unrealized appreciation (depreciation) on marketable securities

 

3

 

(17)

Change in unrealized gain (loss) on derivative instruments

 

3,188

 

(1,095)

 

 

(6,829)

 

9,007

Comprehensive (Loss) Income

 

(1,337)

 

20,455

 

 

 

 

 

Amounts Attributable to Noncontrolling Interests:

 

 

 

 

Net income

 

(4,651)

 

(3,773)

Foreign currency translation adjustments

 

971

 

(1,176)

Comprehensive income attributable to noncontrolling interests

 

(3,680)

 

(4,949)

 

 

 

 

 

Amounts Attributable to Redeemable Noncontrolling Interest:

 

 

 

 

Net loss (income)

 

1,901

 

(355)

Foreign currency translation adjustments

 

643

 

(640)

Comprehensive loss (income) attributable to redeemable noncontrolling interest

 

2,544

 

(995)

 

 

 

 

 

Comprehensive (Loss) Income Attributable to CPA®:16 – Global Stockholders

 

$

(2,473)

 

$

14,511

 

See Notes to Consolidated Financial Statements.

 

CPA®:16 – Global 3/31/2013 10-Q — 4

 


 

CORPORATE PROPERTY ASSOCIATES 16 – GLOBAL INCORPORATED

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

2013

 

2012

Cash Flows — Operating Activities

 

 

 

 

Net income

 

$

5,492

 

$

11,448

Adjustments to net income:

 

 

 

 

Depreciation and amortization including intangible assets and deferred financing costs

 

23,915

 

28,295

Net income from equity investments in real estate in excess of distributions received

 

(650)

 

(3,096)

Issuance of shares to affiliate in satisfaction of fees due

 

3,773

 

4,781

(Gain) loss on sale of real estate

 

(2,701)

 

2,191

Unrealized loss (gain) on foreign currency transactions and other

 

1,433

 

(910)

Realized (gain) loss on foreign currency transactions and other

 

(367)

 

206

Straight-line rent adjustment and amortization of rent-related intangibles

 

4,166

 

2,407

Loss on extinguishment of debt, net

 

-

 

507

Impairment charges

 

9,313

 

495

Net changes in other operating assets and liabilities

 

3,789

 

188

Net Cash Provided by Operating Activities

 

48,163

 

46,512

 

 

 

 

 

Cash Flows — Investing Activities

 

 

 

 

Distributions received from equity investments in real estate in excess of equity income

 

4,427

 

4,047

Expenditures on capital improvements

 

(81)

 

(253)

Maturities of debt securities

 

66

 

42

Proceeds from sale of real estate

 

27,942

 

11,753

Funds placed in escrow

 

(3,875)

 

(1,651)

Funds released from escrow

 

2,966

 

2,449

Payment of deferred acquisition fees to an affiliate

 

(546)

 

(1,633)

Proceeds from repayment of notes receivable

 

70

 

24,021

Interest income from direct financing leases in excess of cash receipts

 

1,227

 

-

Net Cash Provided by Investing Activities

 

32,196

 

38,775

 

 

 

 

 

Cash Flows — Financing Activities

 

 

 

 

Distributions paid

 

(33,964)

 

(33,423)

Contributions from noncontrolling interests

 

2,480

 

2,754

Distributions to noncontrolling interests

 

(7,904)

 

(7,811)

Scheduled payments of mortgage principal

 

(10,586)

 

(21,613)

Prepayments of mortgage principal

 

(4,925)

 

(17,919)

Proceeds from mortgage financing

 

13,000

 

11,075

Proceeds from line of credit

 

25,000

 

-

Repayments of line of credit

 

(68,000)

 

(54,000)

Funds placed in escrow

 

-

 

422

Funds released from escrow

 

-

 

(423)

Deferred financing costs and mortgage deposits

 

(334)

 

(772)

Proceeds from issuance of shares, net of issuance costs

 

8,776

 

8,469

(Purchase) reissuance of treasury stock

 

(4,952)

 

117

Net Cash Used in Financing Activities

 

(81,409)

 

(113,124)

 

 

 

 

 

Change in Cash and Cash Equivalents During the Period

 

 

 

 

Effect of exchange rate changes on cash

 

(1,148)

 

1,043

Net decrease in cash and cash equivalents

 

(2,198)

 

(26,794)

Cash and cash equivalents, beginning of period

 

66,405

 

109,694

Cash and cash equivalents, end of period

 

$

64,207

 

$

82,900

 

See Notes to Consolidated Financial Statements.

 

CPA®:16 – Global 3/31/2013 10-Q — 5

 


 

CORPORATE PROPERTY ASSOCIATES 16 – GLOBAL INCORPORATED

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1. Business and Organization

 

Corporate Property Associates 16 – Global Incorporated (“CPA®:16 – 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. We were formed in 2003 and are managed by W. P. Carey Inc. (“WPC”) and its subsidiaries (collectively, the “advisor”). 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 primarily because of the timing of new lease transactions, lease terminations, lease expirations, contractual rent adjustments, tenant defaults, and sales of properties.

 

At March 31, 2013, our portfolio was comprised of our full or partial ownership interests in 494 properties, substantially all of which were triple-net leased to 140 tenants, and totaled approximately 47 million square feet, with an occupancy rate of approximately 97.4%. In addition, we own two hotel properties in Minnesota and Tennessee which had an aggregate carrying value of $68.8 million at March 31, 2013.

 

On May 2, 2011, Corporate Property Associates 14 Incorporated (“CPA®:14”) merged with and into CPA 16 Merger Sub, Inc. (“CPA 16 Merger Sub”), one of our wholly-owned subsidiaries (the “Merger”). Following the consummation of the Merger, we implemented an internal reorganization pursuant to which we were reorganized as an umbrella partnership real estate investment trust (the “UPREIT Reorganization”) to hold substantially all of our assets and liabilities in CPA 16 LLC (the “Operating Partnership”), a Delaware limited liability company subsidiary (Note 3). At March 31, 2013, we owned 99.985% of general and limited partnership interests in the Operating Partnership. The remaining 0.015% interest in the Operating Partnership is held by a subsidiary of WPC.

 

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, 2012, which are included in the 2012 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. The unaudited consolidated financial statements included in this Report have been retrospectively adjusted to reflect the disposition (or planned disposition) of certain properties as discontinued operations for all periods presented.

 

Basis of Consolidation

 

The consolidated financial statements reflect all of our accounts, including those of our majority-owned and/or controlled subsidiaries and our tenancy-in-common interests, as described below. The portion of equity in a consolidated subsidiary that is not attributable, directly or indirectly, to us is presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated.

 

We have investments in tenancy-in-common interests in various domestic and international properties. Consolidation of these investments is not required as such interests do not qualify as VIEs and do not meet the control requirement required for consolidation. Accordingly, we account for these investments using the equity method of accounting. We use the equity method of accounting

 

CPA®:16 – Global 3/31/2013 10-Q — 6

 


 

Notes to Consolidated Financial Statements

 

because the shared decision-making involved in a tenancy-in-common interest investment provides us with significant influence on the operating and financial decisions of these investments.

 

Additionally, we own interests in single-tenant net leased properties leased to companies through noncontrolling interests in partnerships and limited liability companies that we do not control but over which we exercise significant influence. We account for these investments under the equity method of accounting. At times, the carrying value of our equity investments may fall below zero for certain investments. We intend to fund our share of the jointly-owned investments’ future operating deficits should the need arise. However, we have no legal obligation to pay for any of the liabilities of such investments nor do we have any legal obligation to fund operating deficits.

 

We apply accounting guidance for consolidation of VIEs to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Fixed price purchase and renewal options within a lease as well as certain decision-making rights within a loan can cause us to consider an entity a VIE.

 

Information about International Geographic Areas

 

At the end of the reporting period, our international investments were comprised of investments in Europe (primarily Germany), Canada, Mexico, Malaysia, and Thailand. Foreign currency exposure and risk management are discussed in Note 9. The following tables present information about these investments (in thousands):

 

 

 

Three Months Ended March 31,

 

 

2013

 

2012

Revenues

 

$

25,886

 

$

28,879

Income from continuing operations before income taxes

 

4,398

 

7,375

Net (loss) income

 

(1,524)

 

4,934

 

 

 

March 31, 2013

 

December 31, 2012

Net investments in real estate

 

$

947,335

 

$

979,503

 

New Accounting Requirements

 

The following Accounting Standards Updates (“ASUs”) promulgated by Financial Accounting Standards Board (“FASB”) are applicable to us as indicated:

 

ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities — In January 2013, the FASB issued an update to ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU 2013-01 clarifies that the scope of ASU 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Sections 210-20-45 or Section 815-10-45 or subject to an enforceable master netting or similar arrangement. These amendments did not have a significant impact on our financial position or results of operations and are applicable to us for our interim and annual reports beginning in 2013 and shall be applied retrospectively.

 

ASU 2013-02, Other Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income — In February 2013, the FASB issued ASU 2013-02 requiring entities to disclose additional information about items reclassified out of accumulated other comprehensive income. This ASU impacts the form of our disclosures only, is applicable to us for our interim and annual reports beginning in 2013. The related additional disclosures are located in Note 12.

 

ASU 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date, a consensus of the FASB Emerging Issues Task Force — In February 2013, the FASB issued ASU 2013-04, which requires entities to measure obligations resulting from joint and several liability arrangements (in our case, tenancy-in-common arrangements) for which the total amount of the obligation is fixed as the sum of the amount the entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. This ASU is applicable to us for our interim and annual reports beginning in 2014, shall be applied

 

CPA®:16 – Global 3/31/2013 10-Q — 7

 


 

Notes to Consolidated Financial Statements

 

retrospectively, and is not expected to have a significant impact on our financial position or results of operations for any of the periods presented.

 

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 under a fee arrangement. On September 28, 2012, following the merger between our advisor and our affiliate, Corporate Property Associates 15 Incorporated, we entered into an amended and restated advisory agreement, which is scheduled to renew annually. As amended, the advisory agreement provides for the allocation of the advisor’s personnel expenses on the basis of our trailing four quarters of reported revenues and those of WPC and the other publicly-owned, non-listed REITs, which are managed by our advisor under the Corporate Property Associates brand name, and Carey Watermark Investors Incorporated (together, the “Managed REITs”) rather than on an allocation of time charges incurred by the advisor’s personnel on behalf of the Managed REITs. The fee structure related to asset management fees, initial acquisition fees, subordinated acquisition fees, and subordinated disposition fees remains unchanged, and the advisor remains entitled to 10% of the available cash of the Operating Partnership (the “Available Cash Distribution”), as described below. We also have certain agreements with affiliates regarding jointly-owned investments. 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 March 31,

 

 

2013

 

2012

Amounts Included in the Consolidated Statements of Income:

 

 

 

 

Asset management fees

 

$

4,498

 

$

4,701

Available Cash Distribution

 

3,614

 

4,281

Personnel reimbursements

 

3,376

 

1,626

Office rent reimbursements

 

380

 

311

 

 

$

11,868

 

$

10,919

 

 

 

 

 

Other Transaction Fees Incurred:

 

 

 

 

Mortgage refinancing fees

 

$

313

 

$

-

 

 

$

313

 

$

-

 

 

 

March 31, 2013

 

December 31, 2012

Unpaid Transaction Fees:

 

 

 

 

Deferred acquisition fees

 

$

1,212

 

$

1,757

Subordinated disposition fees

 

1,197

 

1,197

 

 

$

2,409

 

$

2,954

 

Asset Management Fees

 

We pay the advisor asset management fees, which are 0.5% per annum of our average invested assets and are computed as provided for in the advisory agreement. The asset management fees are payable in cash or shares of our common stock at the advisor’s option. If the advisor elects to receive all or a portion of its fees in shares, the number of shares issued is determined by dividing the dollar amount of fees by our most recently published net asset value per share (“NAV”) as approved by our board of directors. For 2013, the advisor elected to receive its asset management fees in shares of our common stock whereas in 2012 the advisor elected to receive 50% of its asset management fees in cash and 50% in shares of our common stock. Asset management fees are included in Property expenses in the consolidated financial statements.

 

Available Cash Distribution

 

In connection with the UPREIT Reorganization, WPC REIT Merger Sub Inc., a subsidiary of WPC (the “Special General Partner”), acquired a special membership interest (“Special Member Interest”) of 0.015% in the Operating Partnership entitling it to receive the Available Cash Distribution, which is measured and paid quarterly in either cash or shares of our common stock, at the advisor’s

 

CPA®:16 – Global 3/31/2013 10-Q — 8

 


 

Notes to Consolidated Financial Statements

 

election. The Available Cash Distribution is defined as cash generated from operations, excluding capital proceeds, as reduced by operating expenses and debt service, excluding prepayments and balloon payments. The Available Cash Distribution is contractually limited to 0.5% of our assets excluding cash, cash equivalents, and certain short-term investments and non-cash reserves. In the event of a capital transaction such as a sale, exchange, disposition, or refinancing of our net assets, the Special General Partner may also be entitled to receive a distribution in an amount equal to 15% of the excess, if any, of the consideration generated by the capital transaction (net of costs and expenses) after our stockholders have received a return of their invested capital plus a 6% priority return.

 

Personnel and Office Rent Reimbursements

 

We reimburse the advisor for various expenses it incurs in the course of providing services to us. We reimburse certain third-party expenses paid by the advisor on our behalf, including property-specific costs, professional fees, office expenses, and business development expenses. In addition, we reimburse the advisor for the allocated costs of personnel and overhead in managing our day-to-day operations, including accounting services, stockholder services, corporate management, and property management and operations. We do not reimburse the advisor for the cost of personnel if these personnel provide services for transactions for which the advisor receives a transaction fee, such as acquisitions, dispositions, and refinancings. Personnel and office rent reimbursements are included in General and administrative expenses in the consolidated financial statements.

 

The advisor is obligated to reimburse us for the amount by which our operating expenses exceeds the “2%/25% guidelines” (the greater of 2% of average invested assets or 25% of net income) as defined in the advisory agreement for any 12-month period. If in any year our operating expenses exceed the 2%/25% guidelines, the advisor will have an obligation to reimburse us for such excess, subject to certain conditions. If our independent directors find that the excess expenses were justified based on any unusual and nonrecurring factors that they deem sufficient, the advisor may be paid in future years for the full amount or any portion of such excess expenses, but only to the extent that the reimbursement would not cause our operating expenses to exceed this limit in any such year. We will record any reimbursement of operating expenses as a liability until any contingencies are resolved and will record the reimbursement as a reduction of asset management fees at such time that a reimbursement is fixed, determinable, and irrevocable. Our operating expenses have not exceeded the amount that would require the advisor to reimburse us.

 

Transaction Fees

 

We pay the advisor acquisition fees for structuring and negotiating investments and related mortgage financing on our behalf. Acquisition fees are 4.5% or less of the aggregate cost of investments acquired and are comprised of a current portion of 2.5%, which is paid at the date the property is purchased, and a deferred portion of 2%, which is payable in equal annual installments each January of the three calendar years following the date on which a property was purchased, subject to satisfying the 6% performance criterion. Interest is accrued on unpaid installments of the deferred portion at 5% per year. Current and deferred acquisition fees are capitalized and included in the cost basis of the assets acquired. Mortgage refinancing fees equal up to 1% of the principal and are capitalized to deferred financing costs and amortized over the life of the new loans.

 

We also pay fees to the advisor for services provided to us in connection with the disposition of investments. These fees, which are subordinated to the performance criterion and certain other provisions included in the advisory agreement, are deferred and are payable to the advisor only in connection with a liquidity event.

 

Jointly-Owned Investments and Other Transactions with Affiliates

 

We share with our affiliates leased office space used for the administration of our operations. Rental, occupancy, and leasehold improvement costs are allocated among us and our affiliates based on our respective gross revenues and are adjusted quarterly.

 

We own interests ranging from 25% to 90% in jointly-owned investments, 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. We also own interests in jointly-controlled tenancy-in-common interests in properties, which we account for under the equity method of accounting.

 

At March 31, 2013, the advisor owned 37,553,551 shares, or 18.5%, of our common stock, which excluded its ownership in the Special Member Interest.

 

CPA®:16 – Global 3/31/2013 10-Q — 9

 


 

Notes to Consolidated Financial Statements

 

Note 4. Net Investments in Properties

 

Real Estate

 

Real estate, which consists of land and buildings leased to others under operating leases and are carried at cost, is summarized as follows (in thousands):

 

 

 

March 31, 2013

 

December 31, 2012

Land

 

$

457,694

 

$

470,809

Buildings

 

1,737,390

 

1,772,661

Less: Accumulated depreciation

 

(252,461)

 

(242,648)

 

 

$

1,942,623

 

$

2,000,822

 

We did not acquire any real estate assets during the three months ended March 31, 2013. During this period, the U.S. dollar strengthened against the euro, as the end-of-period rate for the U.S. dollar in relation to the euro at March 31, 2013 decreased by 3.0% to $1.2821 from $1.3218 at December 31, 2012. The impact of this strengthening was a $17.8 million decrease in Real estate from December 31, 2012 to March 31, 2013. Assets disposed of during the three months ended March 31, 2013 also accounted for a significant portion of the decrease in real estate and are discussed in Note 13.

 

Operating Real Estate

 

Operating real estate, which consists of our two hotel operations, at cost, is summarized as follows (in thousands):

 

 

 

March 31, 2013

 

December 31, 2012

Land

 

$

8,296

 

$

8,296

Buildings

 

68,533

 

68,505

Furniture, fixtures, and equipment

 

8,817

 

8,764

Less: Accumulated depreciation

 

(16,818)

 

(16,007)

 

 

$

68,828

 

$

69,558

 

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.

 

Notes Receivable

 

Hellweg 2

 

Under the terms of the note receivable acquired in connection with the April 2007 investment in which we and our affiliates acquired a property-owning investment that in turn acquired a 24.7% ownership interest in a limited partnership and a lending investment that made a loan (“the note receivable”) to the holder of the remaining 75.3% interests in the limited partnership (“Hellweg 2 transaction”), the lending investment will receive interest at a fixed annual rate of 8%. The note receivable matures in April 2017. The note receivable had a principal balance of $21.1 million and $21.7 million, inclusive of our affiliates’ noncontrolling interest of $15.7 million and $16.1 million, at March 31, 2013 and December 31, 2012, respectively.

 

Production Resource Group, LLC

 

In January 2012, we restructured our lease with Production Resource Group, LLC (“PRG”) so as to extend the lease term to June 2029 and also give PRG the option to purchase the property at predetermined dates and prices during the lease term. If PRG does not exercise its purchase option during the term of the lease, the property transfers to the tenant for $1 at the end of the lease term. The restructured lease is accounted for as a sales-type lease due to the automatic transfer of title at the end of the lease. In addition, because the minimum initial and continuing investment criteria were not met at the inception of the sales-type lease, the sale of the asset is accounted for under the deposit method. The property is not derecognized and all periodic cash payments received under the lease are carried on the balance sheet as a deposit liability until approximately 5% of the purchase price has been collected. By October 2012,

 

CPA®:16 – Global 3/31/2013 10-Q — 10

 

 


 

Notes to Consolidated Financial Statements

 

the aggregate cash payments received crossed the 5% threshold and accordingly we derecognized the property and recognized a gain of $0.1 million. We also recognized a note receivable, which had a balance of $11.7 million and $11.8 million at March 31, 2013 and December 31, 2012, respectively, to reflect the expected future payments under the lease. The remaining deferred gain of $3.8 million as of March 31, 2013 will be recognized into income in proportion to the principal payments on the note until we have received 20% of the purchase price. At that time, the full gain will be recognized.

 

Other

 

We had a B-note receivable that totaled $9.8 million at both March 31, 2013 and December 31, 2012 with a fixed annual interest rate of 6.3% and a maturity date of February 11, 2015.

 

Credit Quality of Finance Receivables

 

We generally seek investments in facilities that we believe are critical to each tenant’s business and that we believe have a low risk of tenant defaults. At March 31, 2013 and December 31, 2012, none of the balances of our finance receivables were past due. Our allowance for uncollected accounts was $0.3 million and $0.2 million at March 31, 2013 and December 31, 2012, respectively. Additionally, there have been no modifications of finance receivables during the three months ended March 31, 2013. 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 first quarter of 2013.

 

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

 

March 31, 2013

 

December 31, 2012

 

March 31, 2013

 

December 31, 2012

 

1

 

1

 

1

 

$

43,124

 

$

43,213

 

2

 

1

 

2

 

26,893

 

35,197

 

3

 

12

 

13

 

200,083

 

230,527

 

4

 

9

 

7

 

183,576

 

152,902

 

5

 

1

 

1

 

6,030

 

5,992

 

 

 

 

 

 

 

$

459,706

 

$

467,831

 

 

 

 

Number of Obligors at

 

Notes Receivable at

 

Internal Credit Quality Indicator

 

March 31, 2013

 

December 31, 2012

 

March 31, 2013

 

December 31, 2012

 

1

 

-

 

-

 

$

-

 

$

-

 

2

 

1

 

1

 

9,847

 

9,836

 

3

 

2

 

2

 

32,834

 

33,558

 

4

 

-

 

-

 

-

 

-

 

5

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

$

42,681

 

$

43,394

 

 

Note 6. Equity Investments in Real Estate

 

We own equity interests in single-tenant net leased properties that are generally leased to companies 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). Investments in unconsolidated investments are required to be evaluated periodically. We compare an investment’s carrying value to its estimated fair value and recognize an impairment charge to the extent that the carrying value exceeds fair value and such decline is determined to be other than temporary.

 

CPA®:16 – Global 3/31/2013 10-Q — 11

 


 

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 (dollars in thousands):

 

 

 

Ownership Interest

 

Carrying Value at

 

Lessee

 

at March 31, 2013

 

March 31, 2013

 

December 31, 2012

 

True Value Company (a) (b) (c)

 

50%

 

$

40,521

 

$

43,100

 

The New York Times Company (d) (e)

 

27%

 

34,965

 

34,579

 

U-Haul Moving Partners, Inc. and Mercury Partners, LP (d) (f)

 

31%

 

30,746

 

30,932

 

Advanced Micro Devices, Inc. (a) (g) (h)

 

67%

 

27,738

 

28,619

 

Schuler A.G. (a) (h) (i)

 

33%

 

20,777

 

21,178

 

Hellweg Die Profi-Baumärkte GmbH & Co. KG (Hellweg 1) (a) (i)

 

25%

 

20,440

 

20,837

 

The Upper Deck Company (a)

 

50%

 

7,981

 

7,998

 

Frontier Spinning Mills, Inc. (j)

 

40%

 

6,263

 

6,265

 

Del Monte Corporation (a) (h)

 

50%

 

5,263

 

5,580

 

Actebis Peacock GmbH (i) (j)

 

30%

 

4,396

 

4,477

 

Police Prefecture, French Government (a) (i)

 

50%

 

4,373

 

5,010

 

TietoEnator Plc (a) (i)

 

40%

 

3,879

 

3,895

 

Town Sports International Holdings, Inc. (a)

 

56%

 

3,014

 

3,203

 

Barth Europa Transporte e.K/MSR Technologies GmbH (a) (i)

 

33%

 

3,005

 

3,219

 

Actuant Corporation (a) (i)

 

50%

 

2,600

 

2,711

 

OBI A.G. (a) (i) (k)

 

25%

 

2,021

 

1,819

 

Consolidated Systems, Inc. (a) (h)

 

40%

 

1,980

 

2,004

 

Thomson Broadcast, Veolia Transport, and Marchal Levage
(formerly Thales S.A.) (a) (i)

 

35%

 

1,295

 

1,606

 

Pohjola Non-life Insurance Company (a) (i)

 

40%

 

347

 

190

 

Talaria Holdings, LLC (l)

 

27%

 

-

 

453

 

 

 

 

 

$

221,604

 

$

227,675

 

 

__________

 

(a)

This investment is jointly-owned with WPC.

(b)

In January 2013, the investment repaid three mortgage loans encumbering seven of its properties totaling $64.8 million, of which our share was $32.4 million. Additionally, the investment obtained new non-recourse mortgage financing encumbering six of its properties with proceeds totaling $62.5 million, of which our share was $31.3 million.

(c)

We received distributions of $3.2 million and $1.1 million from this investment during the three months ended March 31, 2013 and 2012, respectively.

(d)

This investment is jointly-owned with WPC and Corporate Property Associates 17 – Global Incorporated (“CPA®:17 – Global”).

(e)

We received distributions of $1.2 million and $1.0 million from this investment during the three months ended March 31, 2013 and 2012, respectively.

(f)

We received distributions of $1.3 million and $1.4 million from this investment during the three months ended March 31, 2013 and 2012, respectively.

(g)

We received distributions of $1.3 million from this investment during both the three months ended March 31, 2013 and 2012, respectively.

(h)

These investments are considered tenancy-in-common interests, whereby the property is encumbered by debt for which we are jointly and severally liable. For these investments, the co-obligor is the advisor and the aggregate amount due under the arrangements is approximately $76.6 million. Of this amount, $46.5 million represents the amount we agreed to pay and is included within the carrying value of these investments. The carrying value of these investments also includes the undepreciated cost of the related properties.

(i)

The carrying value of this investment is affected by the impact of fluctuations in the exchange rate of the euro.

(j)

This investment is jointly-owned with CPA®:17 – Global.

(k)

This increase was primarily due to the investment’s share of other comprehensive income recognized on interest rate swap derivative instruments.

(l)

This decrease reflects an asset write-off recorded by the investment during the three months ended March 31, 2013.

 

CPA®:16 – Global 3/31/2013 10-Q — 12

 


 

Notes to Consolidated Financial Statements

 

We recognized net income from equity investments in real estate of $5.5 million and $7.5 million for the three months ended March 31, 2013 and 2012, respectively. Net income from equity investments in real estate represents our proportionate share of the income or losses of these investments as well as certain depreciation and amortization adjustments related to other-than-temporary impairment charges and basis differentials from acquisitions of certain investments.

 

Note 7. Intangible Assets and Liabilities

 

In connection with our acquisitions of properties, we have recorded net lease intangibles which are being amortized over periods ranging from four years to 40 years. There were no new intangible assets or liabilities recorded during the three months ended March 31, 2013. In-place lease, tenant relationship, above-market rent, below-market ground lease, management contract, and franchise agreement intangibles are included in Intangible assets, net in the consolidated financial statements. Below-market rent intangibles are included in Prepaid and deferred rental income and security deposits in the consolidated financial statements.

 

Intangible assets and liabilities are summarized as follows (in thousands):

 

 

 

March 31, 2013

 

December 31, 2012

 

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

Amortizable Intangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Management contract

 

$

874

 

$

(676)

 

$

198

 

$

874

 

$

(645)

 

$

229

 

Franchise agreement

 

2,240

 

(1,214)

 

1,026

 

2,240

 

(1,157)

 

1,083

 

 

 

3,114

 

(1,890)

 

1,224

 

3,114

 

(1,802)

 

1,312

 

Lease intangibles:

 

 

 

 

 

 

 

 

 

 

 

 

 

In-place lease

 

352,247

 

(108,102)

 

244,145

 

361,242

 

(101,122)

 

260,120

 

Tenant relationship

 

32,674

 

(7,765)

 

24,909

 

33,615

 

(7,544)

 

26,071

 

Above-market rent

 

193,270

 

(50,780)

 

142,490

 

195,985

 

(46,688)

 

149,297

 

Below-market ground lease

 

6,738

 

(477)

 

6,261

 

6,752

 

(460)

 

6,292

 

 

 

584,929

 

(167,124)

 

417,805

 

597,594

 

(155,814)

 

441,780

 

Total intangible assets

 

$

588,043

 

$

(169,014)

 

$

419,029

 

$

600,708

 

$

(157,616)

 

$

443,092

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortizable Below-Market Rent Intangible Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Below-market rent

 

$

(64,596)

 

$

13,682

 

$

(50,914)

 

$

(65,148)

 

$

13,001

 

$

(52,147)

 

Total intangible liabilities

 

$

(64,596)

 

$

13,682

 

$

(50,914)

 

$

(65,148)

 

$

13,001

 

$

(52,147)

 

 

Net amortization of intangibles, including the effect of foreign currency translation, was $12.9 million and $14.1 million for the three months ended March 31, 2013 and 2012, respectively. Amortization of above-market rent, below-market rent, and below-market ground lease intangibles is recorded as an adjustment to Lease revenues, while amortization of management contract, franchise agreement, in-place lease, and tenant relationship intangibles is included in Depreciation and amortization.

 

Based on the intangible assets and liabilities recorded at March 31, 2013, scheduled net annual amortization of intangibles for the remainder of 2013, each of the next four calendar years following December 31, 2013, and thereafter is as follows (in thousands):

 

Years Ending December 31, 

 

Total

2013 (remainder)

 

$

43,702

2014

 

54,116

2015

 

47,499

2016

 

40,320

2017

 

37,223

Thereafter

 

145,255

 

 

$

368,115

 

CPA®:16 – Global 3/31/2013 10-Q — 13

 


 

Notes to Consolidated Financial Statements

 

Note 8. 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 securities that do not fall into Level 1 or Level 2 and for which little or no market data exists, therefore requiring us to develop our own assumptions.

 

Items Measured at Fair Value on a Recurring Basis

 

The methods and assumptions described below were used to estimate the fair value of each class of financial instrument. For significant Level 3 items we have also provided the unobservable inputs along with their weighted average ranges.

 

Derivative Assets — Our derivative assets are comprised of foreign currency forward contracts and an interest rate cap, as well as stock warrants that were granted to us by lessees in connection with structuring initial lease transactions. These assets are included in Other assets, net in the consolidated financial statements. The foreign currency collars and forward contracts and interest rate cap were measured at fair value using readily observable market inputs, such as quotations on interest rates and were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market. Our stock warrants are not traded in an active market. We estimated the fair value of these assets using internal valuation models that incorporate market inputs and our own assumptions about future cash flows. We classified these assets as Level 3.

 

Derivative Liabilities — Our derivative liabilities are comprised of interest rate swaps and foreign currency forward contracts and are included in Accounts payable, accrued expenses, and other liabilities in the consolidated financial statements. These derivative instruments were measured at fair value using readily observable market inputs, such as quotations on interest rates. These derivative instruments were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market.

 

Our other financial instruments had the following carrying values and fair values as of the dates shown (in thousands):

 

 

 

 

 

March 31, 2013

 

December 31, 2012

 

 

 

Level

 

Carrying Value

 

Fair Value

 

Carrying Value

 

Fair Value

 

Non-recourse debt (a)

 

3

 

$

1,621,252

 

$

1,631,483

 

$

1,644,180

 

$

1,656,684

 

Line of credit

 

3

 

100,000

 

100,000

 

143,000

 

143,000

 

Notes receivable (a)

 

3

 

42,681

 

43,572

 

43,394

 

44,363

 

 

__________

 

(a)         We determined the estimated fair value of our other financial instruments using a discounted cash flow model with rates that take into account the credit of the tenant/obligor and interest rate risk. We also considered the value of the underlying collateral, taking into account the quality of the collateral, the credit quality of the tenant/obligor, the time until maturity, and the current market interest rate.

 

We estimated that our remaining financial assets and liabilities (excluding net investments in direct financing leases) had fair values that approximated their carrying values at both March 31, 2013 and December 31, 2012.

 

Items Measured at Fair Value on a Non-Recurring Basis (Including Impairment Charges)

 

We periodically assess whether there are any indicators that the value of our real estate investments may be impaired or that their carrying value may not be recoverable. For investments in real estate in which an impairment indicator is identified, we follow a two-step process to determine whether the investment is impaired and to determine the amount of the charge. First, we compare the carrying value of the real estate to the future undiscounted net cash flows that we expect the real estate will generate, including any estimated proceeds from the eventual sale of the real estate. If this amount is less than the carrying value, the real estate is considered to be impaired, and we then measure the loss as the excess of the carrying value of the real estate over the estimated fair value of the real estate, which is primarily determined using market information such as recent comparable sales or broker quotes. If relevant market information is not available or is not deemed appropriate, we perform a future net cash flow analysis discounted for inherent risk associated with each investment. We determined that the significant inputs used to value these investments fall within Level 3 for

 

CPA®:16 – Global 3/31/2013 10-Q — 14

 


 

Notes to Consolidated Financial Statements

 

fair value accounting. As a result of our assessments, we calculated impairment charges based on market conditions and assumptions that existed at the time. The valuation of real estate is subject to significant judgment and actual results may differ materially if market conditions or the underlying assumptions change.

 

The following table presents information about our assets that were measured on a fair value basis (in thousands):

 

 

 

Three Months Ended March 31, 2013

 

Three Months Ended March 31, 2012

 

 

 

Total Fair Value

 

Total Impairment

 

Total Fair Value

 

Total Impairment

 

 

 

Measurements (a)

 

Charges

 

Measurements

 

Charges

 

Net investments in properties

 

$

8,730

 

$

9,313

 

$

-

 

$

-

 

Net investments in direct financing leases

 

-

 

-

 

-

 

10

 

Total impairment charges included in expenses

 

8,730

 

9,313

 

-

 

10

 

Total impairment charges included in income from continuing operations

 

8,730

 

9,313

 

-

 

10

 

Impairment charges included in discontinued operations

 

-

 

-

 

4,200

 

485

 

Total impairment charges

 

$

8,730

 

$

9,313

 

$

4,200

 

$

495

 

 

__________

 

(a)         The fair value measurement for Net investments in properties was developed by a third-party source, subject to our corroboration for reasonableness. The third-party source utilized local average rent rates for the previous five years and sales of comparable properties to determine a fair value range of $75-$85 per square foot.

 

Significant impairment charges, and their related triggering events, recognized during the three months ended March 31, 2013 and 2012 were as follows:

 

Real Estate

 

2013 — During the three months ended March 31, 2013, we recognized an impairment charge of $9.3 million on a property in order to reduce its carrying value to its estimated fair value due to the property’s tenant filing for bankruptcy during the first quarter of 2013. A market participant would likely not ascribe any value to the tenant’s lease, so the fair value of the property now reflects the value as if it were vacant.

 

Properties Sold

 

2012 — During the three months ended March 31, 2012, we recognized an impairment charge of $0.5 million on a property in order to reduce its carrying value to its estimated fair value due to the tenant vacating the property. The property was subsequently sold in June 2012. The results of operations for this property are included in Income (loss) from discontinued operations, net of tax in the consolidated financial statements.

 

Note 9. 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 that impact us: interest rate risk, credit risk, and market risk. We are primarily subject to interest rate risk on our interest-bearing assets and liabilities, including our secured credit agreement (the “Credit Agreement,” Note 10). Credit risk is the risk of default on our operations and our tenants’ inability or unwillingness to make contractually required payments. Market risk includes changes in the value of our properties and related loans as well as changes in the value of our other securities due to changes in interest rates or other market factors. In addition, as we own investments outside the U.S., we 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

 

CPA®:16 – Global 3/31/2013 10-Q — 15

 


 

Notes to Consolidated Financial Statements

 

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, which are considered to be derivative instruments. The primary risks related to our use of derivative instruments include default by a counterparty to a hedging arrangement on its obligation and a downgrade in the credit quality of a counterparty to such an extent that our ability to sell or assign our side of the hedging transaction is impaired. 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.

 

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 cash flow hedge, the effective portion of the change in fair value of the derivative is recognized in Other comprehensive (loss) income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings.

 

The following table sets forth certain information regarding our derivative instruments (in thousands):

 

Derivatives Designated

 

 

 

Asset Derivatives Fair Value at

 

Liability Derivatives Fair Value at

 

   as Hedging Instruments 

 

Balance Sheet Location

 

March 31, 2013

 

December 31, 2012

 

March 31, 2013

 

December 31, 2012

 

Foreign currency contracts

 

Other assets, net

 

$

365

 

$

172

 

$

-

 

$

-

 

Foreign currency contracts

 

Accounts payable,

 

 

 

 

 

 

 

 

 

 

 

accrued expenses and

 

 

 

 

 

 

 

 

 

 

 

other liabilities

 

-

 

-

 

(114)

 

(2,361

)

Interest rate cap

 

Other assets, net

 

48

 

36

 

-

 

-

 

Interest rate swaps

 

Accounts payable,

 

 

 

 

 

 

 

 

 

 

 

accrued expenses and

 

 

 

 

 

 

 

 

 

 

 

other liabilities

 

-

 

-

 

(5,078)

 

(5,411

)

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives Not Designated

 

 

 

 

 

 

 

 

 

 

 

   as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

Stock warrants

 

Other assets, net

 

1,161

 

1,161

 

-

 

-

 

Total derivatives

 

 

 

$

1,574

 

$

1,369

 

$

(5,192)

 

$

(7,772

)

 

All derivative transactions with an individual counterparty are governed by a master International Swap and Derivatives Association agreement, which can be considered as a master netting arrangement; however, we report all our derivative instruments on a gross basis on the balance sheet. At March 31, 2013, no cash collateral has been posted nor received for any of our derivative positions.

 

The following tables present the impact of derivative instruments on the consolidated financial statements (in thousands):

 

 

 

Amount of Gain (Loss) Recognized in

 

 

 

Other Comprehensive (Loss) Income on Derivatives (Effective Portion)

 

 

 

Three Months Ended March 31,

 

Derivatives in Cash Flow Hedging Relationships

 

2013

 

2012

 

Interest rate swaps

 

$

226

 

$

48

 

Interest rate cap

 

14

 

(467

)

Foreign currency contracts

 

2,440

 

(568

)

Total

 

$

2,680

 

$

(987

)

 

CPA®:16 – Global 3/31/2013 10-Q — 16

 


 

Notes to Consolidated Financial Statements

 

 

 

Amount of Gain (Loss) Reclassified from

 

 

 

Other Comprehensive (Loss) Income into Income (Effective Portion)

 

 

 

Three Months Ended March 31,

 

Derivatives in Cash Flow Hedging Relationships

 

2013

 

2012

 

Interest rate swaps (a)

 

$

(325)

 

$

(238

)

Foreign currency contracts (b)

 

278

 

148

 

Total

 

$

(47)

 

$

(90

)

__________

 

(a)         During both the three months ended March 31, 2013 and 2012, we reclassified $0.1 million from Other comprehensive (loss) income into income related to ineffective portions of hedging relationships on certain interest rate swaps.

(b)         Gains (losses) reclassified from Other comprehensive (loss) income into income for contracts that have settled are included in Other income and (expenses).

 

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 entities, 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 investment partners 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 counterparty’s stream of cash flow over a specific period. The notional, or face, amount on which the swaps are based is not exchanged. Interest rate caps limit the effective borrowing rate of variable-rate debt obligations while allowing participants to share in downward shifts in interest rates. Our objective in using these derivatives is to limit our exposure to interest rate movements.

 

The interest rate swaps and caps that we had outstanding on our consolidated subsidiaries at March 31, 2013 are summarized as follows (currency in thousands):

 

 

 

 

 

Notional

 

Cap

 

Effective

 

Effective

 

Expiration

 

Fair Value at

 

Description

 

Type

 

Amount

 

Rate

 

Interest Rate

 

Date

 

Date

 

March 31, 2013

 

1-Month London Interbank Offered Rate (“LIBOR”)

 

“Pay-fixed” swap

 

$

3,626

 

N/A

 

6.7%

 

2/2008

 

2/2018

 

$

(583

)

1-Month LIBOR

 

“Pay-fixed” swap

 

$

11,179

 

N/A

 

5.6%

 

3/2008

 

3/2018

 

(1,586

)

1-Month LIBOR

 

“Pay-fixed” swap

 

$

5,947

 

N/A

 

6.4%

 

7/2008

 

7/2018

 

(999

)

1-Month LIBOR

 

“Pay-fixed” swap

 

$

3,803

 

N/A

 

6.9%

 

3/2011

 

3/2021

 

(557

)

1-Month LIBOR

 

“Pay-fixed” swap

 

$

5,664

 

N/A

 

5.4%

 

11/2011

 

12/2020

 

(250

)

1-Month LIBOR

 

“Pay-fixed” swap

 

$

5,846

 

N/A

 

4.9%

 

12/2011

 

12/2021

 

(242

)

1-Month LIBOR

 

“Pay-fixed” swap

 

$

8,710

 

N/A

 

5.1%

 

3/2012

 

11/2019

 

(426

)

3-Month Euro Interbank Offered Rate (“Euribor”) (a)

 

Interest rate cap

 

53,083

 

3.0%

 

N/A

 

4/2012

 

4/2017

 

48

 

1-Month LIBOR

 

“Pay-fixed” swap

 

$

1,942

 

N/A

 

4.6%

 

5/2012

 

11/2017

 

(48

)

1-Month LIBOR

 

“Pay-fixed” swap

 

$

9,800

 

N/A

 

3.3%

 

6/2012

 

6/2017

 

(150

)

1-Month LIBOR

 

“Pay-fixed” swap

 

$

9,887

 

N/A

 

1.6%

 

9/2012

 

10/2020

 

(108

)

1-Month LIBOR

 

“Pay-fixed” swap

 

$

3,993

 

N/A

 

4.9%

 

2/2013

 

2/2023

 

(129

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

  (5,030

)

 

__________

 

(a)         Fair value amount is based on the applicable exchange rate at March 31, 2013.

 

CPA®:16 – Global 3/31/2013 10-Q — 17

 


 

Notes to Consolidated Financial Statements

 

The interest rate swaps and caps that our unconsolidated jointly-owned investments had outstanding at March 31, 2013 were designated as cash flow hedges and are summarized as follows (currency in thousands):

 

 

 

Ownership

 

 

 

 

 

 

 

 

 

Effective

 

 

 

 

 

 

 

 

 

Interest at

 

 

 

Notional

 

Cap

 

 

 

Interest

 

Effective

 

Expiration

 

Fair Value at

 

Description

 

March 31, 2013

 

Type

 

Amount

 

Rate

 

Spread

 

Rate

 

Date

 

Date

 

March 31, 2013

 

3-Month LIBOR (a)

 

25.0%

 

“Pay-fixed” swap

 

111,838

 

N/A

 

N/A

 

5.0%-
5.6%

 

7/2006-
4/2008

 

10/2015-
7/2016

 

$

  (14,512

)

3-Month LIBOR

 

27.3%

 

Interest rate cap

 

$

118,374

 

4%

 

1.2%

 

N/A

 

8/2009

 

8/2014

 

-

 

3-Month Euribor (a)

 

35.0%

 

“Pay-fixed” swap

 

15,970

 

N/A

 

N/A

 

0.9%

 

4/2012

 

7/2013

 

(44

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

  (14,556

)

 

__________

 

(a)         Fair value amounts are based on the applicable exchange rate at March 31, 2013.

 

Foreign Currency Contracts

 

We are exposed to foreign currency exchange rate movements, primarily in the euro and, to a lesser extent, certain other currencies. We manage foreign currency exchange rate movements by generally placing our debt service obligation on an investment in the same currency as the tenant’s rental obligation to us. This reduces our overall exposure to the net cash flow from that investment. 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 and collars. 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 and holding them to maturity, we are locked into a future currency exchange rate for the term of the contract. A foreign currency collar consists of a written call option and a purchased put option to sell the foreign currency. These instruments lock the range in which the foreign currency exchange rate will fluctuate.

 

The following table presents the foreign currency derivative contracts we had outstanding and their designations at March 31, 2013 (currency in thousands, except strike price):

 

 

 

Notional

 

Strike

 

Effective

 

Expiration

 

Fair Value at

 

Type

 

Amount

 

Price

 

Date

 

Date

 

March 31, 2013

 

Forward contracts

 

53,550

 

$   1.28 - 1.30

 

5/2012

 

6/2013 - 6/2017

 

$

(114

)

Forward contracts

 

9,800

 

1.35     

 

12/2012

 

9/2017 - 3/2018

 

365

 

 

 

63,350

 

 

 

 

 

 

 

$

251

 

 

Stock Warrants

 

We own stock warrants that were generally granted to us by lessees in connection with structuring initial lease transactions. These warrants are defined as derivative instruments because they are readily convertible to cash or provide for net cash settlement upon conversion.

 

Other

 

Amounts reported in Other comprehensive (loss) income related to interest rate swaps will be reclassified to interest expense as interest payments are made on our variable-rate debt. Amounts reported in Other comprehensive (loss) income related to foreign currency contracts will be reclassified to Other income and (expenses) when the hedged foreign currency proceeds from foreign operations are repatriated to the U.S. At March 31, 2013, we estimate that an additional $1.4 million will be reclassified as interest expense during the next 12 months related to our interest rate swaps and caps and less than $0.1 million will be reclassified to Other income and (expenses) related to our foreign currency contracts and collars.

 

CPA®:16 – Global 3/31/2013 10-Q — 18

 


 

Notes to Consolidated Financial Statements

 

We measure our credit exposure on a counterparty basis as the net positive aggregate estimated fair value of our derivatives, net of collateral received, if any. No collateral was received as of March 31, 2013. At March 31, 2013, our total credit exposure was $0.2 million and the maximum exposure to any single counterparty was $0.1 million.

 

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 March 31, 2013, 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 $5.3 million and $7.9 million at March 31, 2013 and December 31, 2012, respectively, which included accrued interest and any adjustment for nonperformance risk. If we had breached any of these provisions at either March 31, 2013 or December 31, 2012, we could have been required to settle our obligations under these agreements at their aggregate termination value of $5.8 million or $8.5 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 first quarter of 2013, in certain areas. There were no significant changes to our portfolio concentrations at March 31, 2013 as compared to December 31, 2012.

 

Note 10. Debt

 

Non-Recourse Debt

 

Non-recourse debt consists of mortgage notes payable, which are collateralized by the assignment of real property and direct financing leases, with an aggregate carrying value of $2.4 billion at both March 31, 2013 and December 31, 2012. At March 31, 2013, our mortgage notes payable had fixed annual interest rates ranging from 4.3% to 7.8% and variable annual effective interest rates ranging from 1.2% to 6.9%, with maturity dates ranging from 2014 to 2031.

 

During the three months ended March 31, 2013, we obtained new non-recourse mortgage financing totaling $13.0 million, with a weighted-average annual interest rate and term of 4.5% and 13.0 years, respectively. Of the total financing, $4.0 million bears interest at a variable rate that has been effectively converted to a fixed annual interest rate through the use of an interest rate swap.

 

At March 31, 2013, two of our property-owning subsidiaries were in default on their respective non-recourse mortgage obligations with an aggregate outstanding balance of $16.7 million. In each case, the default was related to the tenant filing for bankruptcy.

 

During 2012, we entered into an arrangement with one of our lenders on a non-recourse financing that enabled us to repay the outstanding indebtedness of approximately $10.0 million for cash of approximately $8.7 million at a discount. As part of this arrangement, we have a contingent obligation to pay the lender any proceeds received from a sale of the previously-collateralized property in excess of $6.0 million within two years. We have accounted for this as a troubled debt restructuring and, accordingly, we have not recognized a gain on the discounted payoff. We will recognize this gain upon expiration of the contingent obligation.

 

Line of Credit

 

On May 2, 2011, we entered into the Credit Agreement with several banks, including Bank of America, N.A., which acts as the administrative agent. CPA 16 Merger Sub is the borrower, and we and the Operating Partnership are guarantors. On August 1, 2012, we amended the Credit Agreement to reduce the amount available under the secured revolving credit facility from $320.0 million to $225.0 million, to reduce our annual interest rate from LIBOR plus 3.25% to LIBOR plus 2.50%, and to decrease the number of properties in our borrowing base pool. The Credit Agreement is scheduled to mature on August 1, 2015, with an option by CPA 16 Merger Sub to extend the maturity date for an additional 12 months subject to the conditions provided in the Credit Agreement. We incurred costs of $1.1 million to amend the facility, which are being amortized over the term of the Credit Agreement.

 

Availability under the Credit Agreement is dependent upon the number, operating performance, cash flows and diversification of the properties comprising the borrowing base pool. At March 31, 2013, availability under the line was $211.5 million, of which we had drawn $100.0 million.

 

CPA®:16 – Global 3/31/2013 10-Q — 19


 

Notes to Consolidated Financial Statements

 

The Credit Agreement is fully recourse to us and contains customary affirmative and negative covenants, including covenants that restrict our and our subsidiaries’ ability to, among other things, incur additional indebtedness (other than non-recourse indebtedness), grant liens, dispose of assets, merge or consolidate, make investments, make acquisitions, pay distributions, enter into certain transactions with affiliates, and change the nature of our business or fiscal year. In addition, the Credit Agreement contains customary events of default.

 

The Credit Agreement stipulates certain financial covenants that require us to maintain certain ratios and benchmarks at the end of each quarter. We were in compliance with these covenants at March 31, 2013.

 

Scheduled Debt Principal Payments

 

Scheduled debt principal payments during the remainder of 2013, each of the next four calendar years following December 31, 2013, and thereafter are as follows (in thousands):

 

Years Ending December 31, 

 

Total (a)

 

2013 (remainder)

 

$

33,566

 

2014 

 

100,545

 

2015  (b)

 

253,637

 

2016 

 

243,563

 

2017 

 

623,728

 

Thereafter through 2031

 

470,891

 

 

 

1,725,930

 

Unamortized discount, net (c)

 

(4,678

)

Total

 

$

1,721,252

 

 


(a)         Certain amounts are based on the applicable foreign currency exchange rate at March 31, 2013.

(b)         Includes $100.0 million outstanding under our Credit Agreement, which is scheduled to mature in 2015, unless extended pursuant to its terms.

(c)          Represents the fair value adjustment of $6.0 million resulting from the assumption of property-level debt in connection with the Merger, partially offset by a $1.3 million unamortized discount on a non-recourse loan that we repurchased from the lender.

 

Certain amounts in the table above are based on the applicable foreign currency exchange rate at March 31, 2013. In addition, due to the strengthening of the U.S. dollar relative to foreign currencies during the three months ended March 31, 2013, debt decreased by $20.6 million from December 31, 2012 to March 31, 2013.

 

Note 11. 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 12. Equity

 

Noncontrolling Interests

 

Noncontrolling interests is the portion of equity in a subsidiary not attributable, directly or indirectly, to us. There were no changes in our ownership interest in any of our consolidated subsidiaries for the three months ended March 31, 2013.

 

CPA®:16 – Global 3/31/2013 10-Q — 20


 

Notes to Consolidated Financial Statements

 

The following table presents a reconciliation of total equity, the equity attributable to our stockholders, and the equity attributable to noncontrolling interests (in thousands, except share amounts):

 

 

 

Three Months Ended March 31, 2013

 

 

 

 

 

CPA®:16 – Global

 

Noncontrolling

 

 

 

Total Equity

 

Stockholders

 

Interests

 

Balance – beginning of period

 

 $

1,423,360

 

 $

1,327,880

 

 $

95,480

 

Shares issued (1,435,476 total shares issued)

 

12,549

 

12,549

 

-

 

Contributions

 

180

 

-

 

180

 

Net income

 

7,393

 

2,742

 

4,651

 

Distributions

 

(37,973)

 

(34,149)

 

(3,824)

 

Available Cash Distribution to the advisor

 

(3,614)

 

-

 

(3,614)

 

Change in Other comprehensive (loss) income

 

(6,186)

 

(5,215)

 

(971)

 

Shares repurchased

 

(4,952)

 

(4,952)

 

-

 

Balance – end of period

 

 $

1,390,757

 

 $

1,298,855

 

 $

91,902

 

 

 

 

Three Months Ended March 31, 2012

 

 

 

 

 

CPA®:16 – Global

 

Noncontrolling

 

 

 

Total Equity

 

Stockholders

 

Interests

 

Balance – beginning of period

 

$

1,501,283

 

$

1,424,057

 

$

77,226

 

Shares issued (1,532,378 total shares issued)

 

13,250

 

13,250

 

-

 

Contributions

 

2,754

 

-

 

2,754

 

Net income

 

11,093

 

7,320

 

3,773

 

Distributions

 

(36,790)

 

(33,720)

 

(3,070)

 

Available Cash Distribution to the advisor

 

(4,281)

 

-

 

(4,281)

 

Change in Other comprehensive (loss) income

 

8,367

 

7,191

 

1,176

 

Shares reissued

 

117

 

117

 

-

 

Balance – end of period

 

$

1,495,793

 

$

1,418,215

 

$

77,578

 

 

Redeemable Noncontrolling Interest

 

We account for the noncontrolling interest in an entity that holds a note receivable recorded in connection with the Hellweg 2 transaction as redeemable noncontrolling interest because the transaction contains put options that, if exercised, would obligate the partners to settle in cash. The partners’ interests are reflected at estimated redemption value for all periods presented.

 

The following table presents a reconciliation of redeemable noncontrolling interest (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2013

 

2012

 

Balance – beginning of period

 

$

21,747

 

$

21,306

 

Net income

 

(1,845)

 

-

 

Contributions

 

2,300

 

-

 

Distributions

 

(465)

 

-

 

Foreign currency translation adjustment

 

(643)

 

640

 

Balance – end of period

 

$

21,094

 

$

21,946

 

 

CPA®:16 – Global 3/31/2013 10-Q — 21


 

Notes to Consolidated Financial Statements

 

Reclassifications Out of Accumulated Other Comprehensive Loss

 

The following table presents a reconciliation of changes in accumulated other comprehensive loss by component (in thousands):

 

 

 

Three Months Ended March 31, 2013

 

 

 

Gains and Losses on
Derivative
Instruments

 

 

Unrealized Gains
and Losses on
Marketable
Securities

 

 

Foreign Currency
Translation
Adjustments

 

 

Total

 

Balance – beginning of period

 

 $

(10,472

)

 

 $

(10

)

 

 $

(16,561

)

 

 $

(27,043

)

Other comprehensive (loss) income before reclassifications

 

3,134

 

 

3

 

 

(8,406

)

 

(5,269

)

Amounts reclassified from accumulated other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

325

 

 

-

 

 

-

 

 

325

 

Other income and (expenses)

 

(278

)

 

-

 

 

-

 

 

(278

)

Net income from equity investments in real estate

 

7

 

 

-

 

 

-

 

 

7

 

Total

 

54

 

 

-

 

 

-

 

 

54

 

Net current-period Other comprehensive (loss) income

 

3,188

 

 

3

 

 

(8,406

)

 

(5,215

)

Balance – end of period

 

 $

(7,284

)

 

 $

(7

)

 

 $

(24,967

)

 

 $

(32,258

)

 

 

 

Three Months Ended March 31, 2012

 

 

 

Gains and Losses on
Derivative
Instruments

 

 

Unrealized Gains
and Losses on
Marketable
Securities

 

 

Foreign Currency
Translation
Adjustments

 

 

Total

 

Balance – beginning of period

 

 $

(4,622

)

 

 $

(52

)

 

 $

(22,856

)

 

 $

(27,530

)

Other comprehensive (loss) income before reclassifications

 

(1,479

)

 

(17

)

 

8,303

 

 

6,807

 

Amounts reclassified from accumulated other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

238

 

 

-

 

 

-

 

 

238

 

Other income and (expenses)

 

(148

)

 

-

 

 

-

 

 

(148

)

Net income from equity investments in real estate

 

294

 

 

-

 

 

-

 

 

294

 

Total

 

384

 

 

-

 

 

-

 

 

384

 

Net current-period Other comprehensive (loss) income

 

(1,095

)

 

(17

)

 

8,303

 

 

7,191

 

Balance – end of period

 

 $

(5,717

)

 

 $

(69

)

 

 $

(14,553

)

 

 $

(20,339

)

 

Note 13. Discontinued Operations

 

From time to time, we decide to sell a property. We may make a decision to dispose of a property when it is vacant as a result of tenants vacating space, tenants electing not to renew their leases, tenant insolvency, or lease rejection in the bankruptcy process. In such cases, we assess whether we can obtain the highest value from the property by selling it, as opposed to re-leasing it. When it is appropriate to do so, upon the evaluation of the disposition 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.

 

CPA®:16 – Global 3/31/2013 10-Q — 22

 


 

Notes to Consolidated Financial Statements

 

The results of operations for properties that are held for sale or have been sold and with which we have no continuing involvement are reflected in the consolidated financial statements as discontinued operations and are summarized as follows (in thousands, net of tax):

 

 

 

Three Months Ended March 31,

 

 

 

2013

 

 

2012

 

Revenues

 

$

537

 

 

$

2,114

 

Expenses

 

(318

)

 

(4,113

)

Gain (loss) on sale of real estate

 

2,701

 

 

(2,191

)

Impairment charges

 

-

 

 

(485

)

Income (loss) from discontinued operations

 

$

2,920

 

 

$

(4,675

)

 

2013 — During the three months ended March 31, 2013, we sold four domestic properties for an aggregate of $27.9 million, net of selling costs, and recognized a net gain on the sales totaling $2.7 million, excluding an impairment charge of $1.2 million previously recognized during 2012.

 

2012 — During the three months ended March 31, 2012, we sold five domestic properties for an aggregate of $11.8 million, net of selling costs, and recognized a net loss on the sales totaling $2.2 million and lease termination income totaling $0.8 million.

 

We sold six additional properties during 2012 subsequent to first quarter of 2012. The results of operations for these properties are included in Income (loss) from discontinued operations, net of tax in the consolidated financial statements for the three months ended March 31, 2012.

 

Note 14. Subsequent Event

 

In April 2013, we entered into an agreement to sell and subsequently sold five properties (“Sold Properties”) to the city of Waterloo, Wisconsin for an amount that was approximately $5.5 million below the properties’ aggregate carrying value at March 31, 2013. The determination to sell these properties in April 2013 was in conjunction with a modification to the lease agreement with the tenant at the Sold Properties, which requires that the tenant pay all amounts owed relating to the Sold Properties over the remaining lease term (“Modified Lease Payments”). As a result, the difference between the carrying value and the fair value of the consideration we expect to receive, inclusive of the Modified Lease Payments, is not expected to be material and will be recognized in the second quarter of 2013.

 

 

CPA®:16 – Global 3/31/2013 10-Q — 23

 

 


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Management’s 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 2012 Annual Report.

 

Business Overview

 

As described in more detail in Item 1 in our 2012 Annual Report, we are a publicly owned, non-listed REIT that invests in commercial properties leased to companies domestically and internationally. As a REIT, we are not subject to U.S. federal income taxation as long as we satisfy certain requirements, principally relating to the nature of our income, the level of our distributions, and other factors. We earn revenue principally by leasing the properties we own to single corporate tenants, primarily on a triple-net lease basis, which requires the tenant to pay substantially all of the costs associated with operating and maintaining the property. Revenue is subject to fluctuation because of the timing of new lease transactions, lease terminations, lease expirations, contractual rent adjustments, tenant defaults, and sales of properties.

 

Financial and Operating Highlights

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2013

 

 

2012

 

Total revenues

 

$

79,542

 

 

$

82,102

 

Net income attributable to CPA®:16 – Global stockholders

 

2,742

 

 

7,320

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

48,163

 

 

46,512

 

Net cash provided by investing activities

 

32,196

 

 

38,775

 

Net cash used in financing activities

 

(81,409

)

 

(113,124

)

 

 

 

 

 

 

 

Cash distributions paid

 

33,964

 

 

33,423

 

 

 

 

 

 

 

 

Supplemental financial measure:

 

 

 

 

 

 

Modified funds from operations (a)

 

40,417

 

 

40,962

 

 


 

(a)         We consider the performance metrics listed above, including Modified funds from operations (“MFFO”), a supplemental measure that is not defined by GAAP (“non-GAAP”), to be important measures in the evaluation of our results of operations 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 stockholders. See Supplemental Financial Measures below for our definition of this non-GAAP measure and a reconciliation to its most directly comparable GAAP measure.

 

Total revenues and Net income attributable to CPA®:16 – Global stockholders decreased for the three months ended March 31, 2013 as compared to the same period in 2012, primarily due to the impact of Carrefour France, SAS, one of our lessees, declining to exercise its lease termination options on five properties at June 30, 2012, thereby increasing the period over which straight-line revenue is recognized, and, in the case of Net income attributable to CPA®:16 – Global stockholders, impairment charges recognized during the three months ended March 31, 2013. These decreases were partially offset by the favorable impact of foreign currency fluctuations on operations and, in the case of Net income attributable to CPA®:16 – Global stockholders, the gain on the sales of several properties recognized during the three months ended March 31, 2013.

 

Net cash provided by operating activities increased for the three months ended March 31, 2013 as compared to the same period in 2012. An amendment to the advisory agreement in 2012 changed the basis of allocating advisor personnel expenses amongst WPC and the Managed REITs from individual time records to trailing four quarters of reported revenues, which increased management expenses for the three months ended March 31, 2013 as compared to the same period in 2012. However, at March 31, 2013, we had not yet paid the advisor for expenses incurred during the three months then ended, resulting in the increase in Net cash provided by operating activities for the three months ended March 31, 2013 as compared to the same period in 2012.

 

 

CPA®:16 – Global 3/31/2013 10-Q — 24

 

 


 

Our MFFO supplemental measure decreased for the three months ended March 31, 2013 as compared to the same period in 2012, primarily as a result of the decrease in revenue as described above.

 

Our quarterly cash distribution was $0.1678 per share for the first quarter of 2013, which equates to $0.6712 per share on an annualized basis.

 

Recent Developments

 

Possible Liquidity Transaction

 

We have previously stated our intention to consider liquidity events for investors generally commencing eight to twelve years following the investment of substantially all of the net proceeds from our initial public offering. We substantially invested those net proceeds as of December 2005. During the first quarter of 2013, our board of directors formed a special committee of independent directors to explore possible liquidity transactions, including transactions which may be proposed by our advisor. The special committee has retained legal and financial advisors to assist the committee in its review. A liquidity transaction could take a variety of forms, including, without limitation, a merger, sale of assets either on a portfolio basis or individually, or a listing of our shares on a stock exchange, and could involve our advisor and/or one or more entities managed by our advisor. The execution of a liquidity transaction could be affected by a variety of factors, such as conditions in the economy, stock market volatility, conditions in the commercial real estate market, and the performance of our tenants and the availability of financing on acceptable terms, many of which are factors outside of our control. There can be no assurance that a liquidity transaction will occur in the near future or at all.

 

Net Asset Values

 

The advisor generally calculates our estimated NAV by relying in part on an estimate of the fair market value of our real estate provided by a third party, adjusted to give effect to the estimated fair value of mortgages encumbering our assets (also provided by a third party) as well as other adjustments. Our NAV is based on a number of variables, including, among others, changes in the credit profiles of individual tenants; lease terms, expirations, and non-renewals; lending credit spreads; foreign currency exchange rates; potential asset sales; and tenant defaults and bankruptcies. We do not control all of these variables and, as such, cannot predict how they will change in the future.

 

The advisor usually calculates our NAV annually as of year-end. Our most recently published estimated NAV as of December 31, 2012 was $8.70 per share, compared to $9.10 per share as of December 31, 2011. Declines in the real estate value from approximately $3.73 billion at December 31, 2011 to approximately $3.61 billion at December 31, 2012 were somewhat offset by improvements in the fair value of our mortgage debt from approximately $1.74 billion to approximately $1.70 billion and a reduction in the outstanding balance of our Credit Agreement. The decline in the real estate value was primarily driven by circumstances related to specific assets, including notification by several tenants that they intend to vacate their properties at the end of their respective lease terms (beginning in 2015), asset sales, including at prices that were below the appraised values of the properties as of December 31, 2011, and tenant credit issues.

 

 

CPA®:16 – Global 3/31/2013 10-Q — 25

 

 


 

Results of Operations

 

The following tables present other operating data that management finds useful in evaluating results of operations:

 

 

 

March 31, 2013

 

December 31, 2012

Occupancy rate (a)

 

97.4%

 

96.9%

Number of leased properties (a)

 

494