UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the fiscal year ended December 31, 2014 |
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| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the transition period from to |
Commission File Number: 000-52891
CORPORATE PROPERTY ASSOCIATES 17 – GLOBAL INCORPORATED
(Exact name of registrant as specified in its charter) |
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| Maryland | | 20-8429087 |
| (State of incorporation) | | (I.R.S. Employer Identification No.) |
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| 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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.001 Per Share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
Registrant has no active market for its common stock. Non-affiliates held 315,488,162 shares of common stock at June 30, 2014.
As of March 23, 2015, there were 331,564,488 shares of common stock of registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant incorporates by reference its definitive Proxy Statement with respect to its 2015 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of its fiscal year, into Part III of this Annual Report on Form 10-K.
INDEX
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| Item 6. | | |
| Item 7. | | |
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| PART IV | | |
| Item 15. | | |
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Forward-Looking Statements
This Annual Report on Form 10-K, or this Report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of Part II of this Report, contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. It is important to note that our actual results could be materially different from those projected in such forward-looking statements. You should exercise caution in relying on forward-looking statements as they involve known and unknown risks, uncertainties, and other factors that may materially affect our future results, performance, achievements, or transactions. Information on factors that 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, or the SEC, including but not limited to those described in Item 1A. Risk Factors of this Report. We do not undertake to revise or update any forward-looking statements.
CPA®:17 – Global 2014 10-K — 1
PART I
Item 1. Business.
General Development of Business
Overview
Corporate Property Associates 17 – Global Incorporated, or CPA®:17 – Global, and, together with its consolidated subsidiaries, we, us, or our, is a publicly-owned, non-listed real estate investment trust, or REIT, that invests in a diversified portfolio of income-producing commercial properties and other real estate-related assets, both domestically and outside the United States. 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 conduct substantially all of our investment activities and own all of our assets through CPA®:17 Limited Partnership, which is our Operating Partnership. In addition to being a general partner and a limited partner of the Operating Partnership, we also own a 99.99% capital interest in the Operating Partnership. W. P. Carey Holdings, LLC, or Carey Holdings, also known as the Special General Partner, an indirect subsidiary of our sponsor, W. P. Carey Inc., or WPC, holds a special general partner interest in the Operating Partnership.
Our core investment strategy is to acquire, own, and manage a portfolio of commercial real estate properties leased to a diversified group of companies on a single-tenant, net-lease basis. Our net leases generally require the tenant to pay substantially all of the costs associated with operating and maintaining the property, such as maintenance, insurance, taxes, structural repairs, and other operating expenses. Leases of this type are referred to as triple-net leases. We generally seek to include in our leases:
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| • | clauses providing for mandated rent increases or periodic rent increases over the term of the lease tied to increases in the Consumer Price Index, or CPI, or other similar index for the jurisdiction in which the property is located or, when appropriate, increases tied to the volume of sales at the property; |
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| • | indemnification for environmental and other liabilities; |
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| • | operational or financial covenants of the tenant; and |
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| • | guarantees of lease obligations from parent companies or letters of credit. |
We are managed by WPC through certain of its subsidiaries, or collectively the advisor. WPC is a publicly-traded REIT listed on the New York Stock Exchange under the symbol “WPC.” Pursuant to an advisory agreement, the advisor provides both strategic and day-to-day management services for us, including investment research and analysis, investment financing and other investment-related services, asset management, disposition of assets, investor relations, and administrative services. The advisor also provides office space and other facilities for us. We pay asset management fees and certain transactional fees to the advisor and also reimburse the advisor for certain expenses incurred in providing services to us, including those fees associated with personnel provided for administration of our operations. The current advisory agreement is scheduled to expire on December 31, 2015, unless extended. As of December 31, 2014, the advisor also served in this capacity for Corporate Property Associates 18 – Global Incorporated, or CPA®:18 – Global, a publicly-owned, non-listed REIT with an investment strategy similar to ours, which, together with us, is referred to as the CPA® REITs; and Carey Watermark Investors Incorporated, or CWI, a publicly-owned, non-listed REIT that invests in lodging and lodging-related properties, which, together with the CPA® REITs, is referred to as the Managed REITs. The advisor also currently serves in this capacity for Carey Watermark Investors Incorporated 2, or CWI 2, a new non-traded lodging REIT.
We were formed as a Maryland corporation in February 2007. We commenced our initial public offering in November 2007 and our follow-on offering in April 2011. We issued approximately 289,000,000 shares of our common stock and raised aggregate gross proceeds of approximately $2.9 billion from our initial public offering, which ended in April 2011, and our follow-on offering, which closed in January 2013. Through December 31, 2014, we have issued approximately 39,019,000 shares ($366.7 million) through our distribution reinvestment and stock purchase plan. We repurchased approximately 8,363,000 shares ($77.9 million) of our common stock under our redemption plan from inception through December 31, 2014. We intend to continue to use our cash reserves, cash generated from operations, and proceeds from our distribution reinvestment and stock purchase plan to acquire, own, and manage a portfolio of commercial properties leased to a diversified group of companies primarily on a single-tenant, net-lease basis.
In January 2013, we amended our articles of incorporation to increase our authorized capital stock to 950,000,000 shares, consisting of 900,000,000 shares of common stock, $0.001 par value per share, and 50,000,000 shares of preferred stock, $0.001 par value per share. In January 2013, we also filed a registration statement on Form S-3 (File No. 333-186182) with the
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SEC to register 200,000,000 shares of our common stock to be offered through our distribution reinvestment and stock purchase plan.
The advisor calculated our estimated net asset value per share as of December 31, 2014 to be $9.72.
We have no employees. At December 31, 2014, the advisor employed 272 individuals who are available to perform services for us under our agreement with the advisor (Note 4).
Financial Information About Segments
We operate in one reportable segment, real estate ownership, with domestic and foreign investments. Refer to Note 16 for financial information about our segment and geographic concentrations.
Business Objectives and Strategy
Our objectives are to:
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| • | provide attractive risk-adjusted returns for our stockholders; |
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| • | generate sufficient cash flow over time to provide investors with increasing distributions; |
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| • | seek investments with potential for capital appreciation; and |
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| • | use leverage to enhance the returns on our investments. |
We seek to achieve these objectives by investing in a portfolio of income-producing commercial properties, which are primarily leased to a diversified group of companies on a net-lease basis.
We intend our portfolio to be diversified by property type, geography, tenant, and industry. We are not required to meet any diversification standards and have no specific policies or restrictions regarding the geographic areas where we make investments, the industries in which our tenants or borrowers may conduct business, or the percentage of our capital that we may invest in a particular asset type.
Our Portfolio
At December 31, 2014, our portfolio was comprised of full or partial ownership interests in 365 fully-occupied properties, substantially all of which were triple-net leased to 115 tenants, and totaled approximately 36 million square feet. The remainder of our portfolio comprises interests in 71 self-storage properties and one hotel property, for an aggregate of approximately 5 million square feet. Our operating real estate includes full ownership interests in 66 self-storage properties. The remaining five self-storage properties and the hotel are accounted for under the equity method of accounting. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Portfolio Overview for more information about our portfolio.
Asset Management
The advisor is generally responsible for all aspects of our operations, including selecting our investments, formulating and evaluating the terms of each proposed acquisition, arranging for the acquisition of the investment, negotiating the terms of borrowings, managing our day-to-day operations, and arranging for and negotiating sales of assets. With respect to our net-lease investments, asset management functions include restructuring transactions to meet the evolving needs of current tenants, re-leasing properties, refinancing debt, selling assets, and utilizing knowledge of the bankruptcy process.
The advisor monitors compliance by tenants with their lease obligations and other factors that could affect the financial performance of any of our properties. Monitoring involves verifying that each tenant has paid real estate taxes, assessments, and other expenses relating to the properties it occupies and confirming that appropriate insurance coverage is being maintained by the tenant. The advisor also utilizes third-party asset managers for certain domestic and international investments. The advisor reviews financial statements of our tenants and undertakes physical inspections of the condition and maintenance of our properties. Additionally, the advisor periodically analyzes each tenant’s financial condition, the industry in which each tenant operates, and each tenant’s relative strength in its industry. With respect to other real estate-related assets such as debentures, mortgage loans, B Notes, and mezzanine loans, asset management operations include evaluating potential borrowers’ creditworthiness, operating history, and capital structure. With respect to any investments in commercial mortgage-backed securities, or CMBS, or other mortgage-related instruments that we may make, the advisor will be responsible for selecting, acquiring, and facilitating the acquisition or disposition of such investments, including monitoring the portfolio on an ongoing
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basis. The advisor also monitors our portfolio to ensure that investments in equity and debt securities of companies engaged in real estate activities do not require us to register as an “investment company.”
Our board of directors has authorized the advisor to retain one or more subadvisors with expertise in our target asset classes to assist the advisor with investment decisions and asset management. If the advisor retains any subadvisor, the advisor will pay the subadvisor a portion of the fees that it receives from us.
Holding Period
We generally intend to hold each property we invest in for an extended period. The determination of whether a particular property should be sold or otherwise disposed of will be made after consideration of relevant factors, including prevailing economic conditions, with a view to achieving maximum capital appreciation for our stockholders or avoiding increases in risk. No assurance can be given that these objectives will be realized.
Our intention is to consider alternatives for providing liquidity for our stockholders generally commencing eight years following the investment of substantially all of the net proceeds from our initial public offering, which terminated in April 2011. We may provide liquidity for our stockholders through sales of assets (either on a portfolio basis or individually), a listing of our shares on a stock exchange, a merger (which may include a merger with one or more of the Managed REITs or the advisor), or another transaction approved by our board of directors. We are under no obligation to liquidate our portfolio within any particular period since the precise timing will depend on real estate and financial markets, economic conditions of the areas in which the properties are located, and tax effects on stockholders that may prevail in the future. Furthermore, there can be no assurance that we will be able to consummate a liquidity event. In the two most recent instances in which stockholders of non-traded REITs managed by the advisor were provided with liquidity, Corporate Property Associates 15 Incorporated, or CPA®:15, and Corporate Property Associates 16 – Global Incorporated, or CPA®:16 – Global, merged with and into subsidiaries of the advisor on September 28, 2012 and January 31, 2014, respectively. Prior to that, the liquidating entity merged with another, later-formed REIT managed by WPC, as with the merger of Corporate Property Associates 14 Incorporated, or CPA®:14, with CPA®:16 – Global on May 2, 2011.
Financing Strategies
Consistent with our investment policies, we use leverage when available on terms we believe are favorable. We will generally borrow in the same currency that is used to pay rent on the property. This enables us to hedge a portion of our currency risk on international investments. We, through the subsidiaries we form to make investments, generally will seek to borrow on a non-recourse basis and in amounts that we believe will maximize the return to our stockholders, although we may also borrow at the corporate level. The use of non-recourse financing may allow us to improve returns to our stockholders and to limit our exposure on any investment to the amount invested. Non-recourse indebtedness means the indebtedness of the borrower or its subsidiaries that is secured only by the assets to which such indebtedness relates without recourse to the borrower or any of its subsidiaries, other than in case of customary carve-outs for which the borrower or its subsidiaries acts as guarantor in connection with such indebtedness, such as fraud, misappropriation, misapplication of funds, environmental conditions, and material misrepresentation. Since non-recourse financing generally restricts the lender’s claim on the assets of the borrower, the lender generally may only take back the asset securing the debt, which protects our other assets. In some cases, particularly with respect to non-U.S. investments, the lenders may require that they have recourse to other assets owned by a subsidiary borrower, in addition to the asset securing the debt. Such recourse generally would not extend to the assets of our other subsidiaries. Lenders typically seek to include change of control provisions in the terms of a loan, making the termination or replacement of the advisor, or the dissolution of the advisor, events of default or events requiring the immediate repayment of the full outstanding balance of the loan. While we will attempt through negotiations not to include such provisions, lenders may require them.
We currently estimate that we will borrow, on average, approximately 50%-60% of the value of our investments. Aggregate borrowings on our portfolio as a whole may not exceed, on average, the lesser of 75% of the total costs of all investments or 300% of our net assets, unless the excess is approved by a majority of the independent directors and disclosed to stockholders in our next quarterly report, along with the reason for the excess. Net assets are our total assets (other than intangibles), valued at cost before deducting depreciation, reserves for bad debts and other non-cash reserves, less total liabilities.
Investment Strategies
Generally, most of our investments are long-term net leases. As opportunities arise, we may also seek to expand our portfolio to include other types of real estate investments, as described below.
CPA®:17 – Global 2014 10-K — 4
Real Estate Properties
Long-Term Net-Leased Assets
We invest primarily in income-producing properties that are, upon acquisition, improved or being developed or that are to be developed within a reasonable period after acquisition. Most of our acquisitions are subject to long-term net leases, which require the tenant to pay substantially all of the costs associated with operating and maintaining the property. In analyzing potential investments, the advisor reviews various aspects of a transaction, including tenant underlying real estate fundamentals, to determine whether a potential investment and lease can be structured to satisfy our investment criteria. In evaluating net-lease transactions, the advisor generally considers, among other things, the following aspects of each transaction:
Tenant/Borrower Evaluation — The advisor evaluates each potential tenant or borrower for its creditworthiness, typically considering factors such as management experience, industry position and fundamentals, operating history, and capital structure, as well as other factors that may be relevant to a particular investment. The advisor seeks opportunities in which it believes the tenant may have a stable or improving credit profile or credit potential that has not been recognized by the market. Whether a prospective tenant or borrower is creditworthy will be determined by the advisor’s investment department and the investment committee, as described below. The advisor defines creditworthiness as a risk-reward relationship appropriate to its investment strategies, which may or may not coincide with ratings issued by the credit rating agencies. As such, creditworthy does not mean “investment grade,” as defined by the credit rating agencies.
Properties Critical to Tenant/Borrower Operations — The advisor generally focuses on properties that it believes are critical to the ongoing operations of the tenant. The advisor believes that these properties provide better protection generally as well as in the event of a bankruptcy, since a tenant or borrower is less likely to risk the loss of a critically important lease or property in a bankruptcy proceeding or otherwise.
Diversification — The advisor attempts to diversify our portfolio to avoid dependence on any one particular tenant, borrower, collateral type, geographic location, or tenant/borrower industry. By diversifying our portfolio, the advisor seeks to reduce the adverse effect of a single under-performing investment or a downturn in any particular industry or geographic region.
Lease Terms — Generally, the net-leased properties in which we invest will be leased on a full-recourse basis to the tenants or their affiliates. In addition, the advisor seeks to include a clause in each lease that provides for increases in rent over the term of the lease. These increases are fixed or tied generally to increases in indices such as the CPI or other similar index in the jurisdiction in which the property is located, but may contain caps or other limitations, either on an annual or overall basis. In the case of retail stores and hotels, the lease may provide for participation in gross revenues of the tenant at the property above a stated level, which we refer to as percentage rent. Alternatively, a lease may provide for mandated rental increases on specific dates.
Real Estate Evaluation — The advisor reviews and evaluates the physical condition of the property and the market in which it is located. The advisor considers a variety of factors, including current market rents, replacement cost, residual valuation, property operating history, demographic characteristics of the location and accessibility, competitive properties, and suitability for re-leasing. The advisor obtains third-party environmental and engineering reports and market studies, if needed. The advisor will also consider factors particular to the laws of foreign countries, in addition to the risks normally associated with real property investments, when considering an investment outside the United States.
Transaction Provisions to Enhance and Protect Value — The advisor attempts to include provisions in our leases it believes may help protect our investment from changes in the operating and financial characteristics of a tenant that may affect the tenant’s ability to satisfy its obligations to us or reduce the value of our investment. Such provisions include requiring our consent to specified tenant activity, requiring the tenant to provide indemnification protections, and requiring the tenant to satisfy specific operating tests. The advisor may also seek to enhance the likelihood of a tenant’s lease obligations being satisfied through a guaranty of obligations from the tenant’s corporate parent or other entity, security deposits, or through a letter of credit. This credit enhancement, if obtained, provides us with additional financial security. However, in markets where competition for net-lease transactions is strong, some or all of these provisions may be difficult to obtain. In addition, in some circumstances, tenants may retain the right to repurchase the property leased by the tenant. The option purchase price is generally the greater of the contract purchase price or the fair market value of the property at the time the option is exercised.
Self-Storage Investments — The advisor has a team of professionals dedicated to investments in the self-storage sector. The team, which was formed in 2006, combines a rigorous underwriting process and active oversight of property managers with a
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goal to generate attractive risk-adjusted returns. We had full or partial ownership interests in 71 self-storage properties as of December 31, 2014.
Other Equity Enhancements — The advisor may attempt to obtain equity enhancements in connection with transactions. These equity enhancements may involve warrants exercisable at a future time to purchase stock of the tenant or borrower or their parent. If warrants are obtained, and become exercisable, and if the value of the stock subsequently exceeds the exercise price of the warrant, equity enhancements can help us to achieve our goal of increasing investor returns.
Operating Real Estate
Our operating real estate portfolio comprises interests in 71 self-storage properties and one hotel property. As of December 31, 2014, these properties were managed by third parties that receive management fees. We previously owned another hotel property, which we sold in October 2013 (Note 15).
Real Estate-Related Assets
We may acquire other real estate assets, including the following:
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| • | Opportunistic Investments — These may include short-term net leases, vacant property, land, multi-tenanted property, non-commercial property, and property leased to non-related tenants. |
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| • | Mortgage Loans Collateralized by Commercial Real Properties — We have invested in, and may in the future invest in, commercial mortgages and other commercial real estate interests consistent with the requirements for qualification as a REIT. |
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| • | B Notes — We may purchase from third parties, and may retain from mortgage loans we originate and securitize or sell, subordinated interests referred to as B Notes. |
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| • | Mezzanine Loans — We may invest in mezzanine loans. Investments in mezzanine loans take the form of subordinated loans secured by second mortgages on the underlying property or loans secured by a pledge of the ownership interests in the entity that directly or indirectly owns the property. |
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| • | Commercial Mortgage-Backed Securities — We have invested in, and may in the future invest in, CMBS and other mortgage-related or asset-backed instruments, including CMBS issued or guaranteed by agencies of the U.S. government, non-agency mortgage instruments, and collateralized mortgage obligations that are fully collateralized by a portfolio of mortgages or mortgage-related securities to the extent consistent with the requirements for qualification as a REIT. In most cases, mortgage-backed securities distribute principal and interest payments on the mortgages to investors. Interest rates on these instruments can be fixed or variable. Some classes of mortgage-backed securities may be entitled to receive mortgage prepayments before other classes do. Therefore, the prepayment risk for a particular instrument may be different than for other mortgage-related securities. We have designated our CMBS investments as securities held to maturity. |
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| • | Equity and Debt Securities of Companies Engaged in Real Estate Activities, including other REITs — We have invested in, and may in the future invest in, equity and debt securities (including common and preferred stock, as well as limited partnership or other interests) of companies engaged in real estate activities. |
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Investment Decisions
The advisor’s investment department, under the oversight of its chief investment officer, is primarily responsible for evaluating, negotiating, and structuring potential investment opportunities for the CPA® REITs and WPC. The advisor also has an investment committee that provides services to the CPA® REITs and WPC. Before an investment is made, the transaction is generally reviewed by the advisor’s investment committee, except under the limited circumstances described below. The investment committee is not directly involved in originating or negotiating potential investments but instead functions as a separate and final step in the investment process. The advisor places special emphasis on having experienced individuals serve on its investment committee. The advisor generally will not invest in a transaction on our behalf unless it is approved by the investment committee, except that investments in property of up to $10.0 million in equity (including acquisition-related costs and fees but excluding transaction costs), with a total cost of up to $20.0 million, may be approved by either the chairman of the investment committee or the advisor’s chief investment officer (up to, in the case of investments other than long-term net leases, an aggregate cap of $30.0 million or an aggregate 5% of the total amount raised in our public offering, whichever is greater, provided that such investments may not have a credit rating of less than BBB- or its equivalent). For transactions that meet the investment criteria of more than one of the CPA® REITs, the chief investment officer has discretion to allocate the investment to or among the CPA® REITs. In cases where two or more of the CPA® REITs, or one or more of the CPA® REITs and WPC, will hold the investment, a majority of our directors (including a majority of our independent directors) not otherwise interested in the transaction must also approve the allocation of the transaction.
The advisor is required to use its best efforts to present a continuing and suitable investment program to us but is not required to present to us any particular investment opportunity, even if it is of a character that, if presented, could be taken by us.
Competition
We face active competition from many sources for investment opportunities in commercial properties net leased to major corporations both domestically and internationally. In general, we believe the advisor’s experience in real estate, credit underwriting, and transaction structuring should allow us to compete effectively for commercial properties and other real estate-related assets. However, competitors may be willing to accept rates of returns, lease terms, other transaction terms, or levels of risk that we may find unacceptable.
We may also compete for investment opportunities with WPC, the other Managed REITs, and entities that may in the future be managed by the advisor. The advisor has undertaken in the advisory agreement to use its best efforts to present investment opportunities to us and to provide us with a continuing and suitable investment program. The advisor follows allocation guidelines set forth in the advisory agreement when allocating investments among us, WPC, the other Managed REITs, and entities that may in the future be managed by the advisor. Each quarter, our independent directors review the allocations made by the advisor during the most recently-completed quarter. Compliance with the allocation guidelines is one of the factors that our independent directors expect to consider when considering whether to renew the advisory agreement each year.
Environmental Matters
We have invested in, and expect to continue to invest in, properties currently or historically used as industrial, manufacturing, and commercial properties. Under various federal, state, and local environmental laws and regulations, current and former owners and operators of property may have liability for the cost of investigating, cleaning-up, or disposing of hazardous materials released at, on, under, in, or from the property. These laws typically impose responsibility and liability without regard to whether the owner or operator knew of or was responsible for the presence of hazardous materials or contamination, and liability under these laws is often joint and several. Third parties may also make claims against owners or operators of properties for personal injuries and property damage associated with releases of hazardous materials. As part of our efforts to mitigate these risks, we typically engage third parties to perform assessments of potential environmental risks when evaluating a new acquisition of property, and we frequently require sellers to address them before closing or obtain contractual protection (indemnities, cash reserves, letters of credit, or other instruments) from property sellers, tenants, a tenant’s parent company, or another third party to address known or potential environmental issues. With respect to our hotel and self-storage investments, which are not subject to net-lease arrangements, there is no tenant of the property to provide indemnification, so we may be liable for costs associated with environmental contamination in the event any such circumstances arise after we acquire the property.
Transactions With Affiliates
We have entered, and expect in the future to enter, into transactions with our affiliates, including the other CPA® REITs and the advisor or its affiliates, if we believe that doing so is consistent with our investment objectives and we comply with our
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investment policies and procedures. These transactions typically take the form of equity investments in jointly-owned entities, direct purchases of assets, mergers, or another type of transaction. Like us, the other Managed REITs intend to consider alternatives for providing liquidity for their stockholders some years after they have invested substantially all of the net proceeds from their initial public offerings. Investments with WPC or affiliates of WPC are permitted only if a majority of our directors (including a majority of our independent directors) not otherwise interested in the transaction approve the allocation of the transaction among the affiliates as being fair and reasonable to us and the affiliate makes its investment on substantially the same terms and conditions as us. Our transactions with affiliates are discussed in Note 4 and our jointly-owned investments are described further in Note 7.
Financial Information About Geographic Areas
Available Information
All filings we make with the SEC, including this Report, our quarterly reports on Form 10-Q, and our current reports on Form 8-K, and any amendments to those reports, are available for free on our website, http://www.cpa17global.com, as soon as reasonably practicable after they are filed or furnished to the SEC. Our SEC filings are available to be read or copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information regarding the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Our filings can also be obtained for free on the SEC’s website at http://www.sec.gov. We are providing our website address solely for the information of investors. We do not intend our website to be an active link or to otherwise incorporate the information contained on our website into this Report or other filings with the SEC. Our Code of Business Conduct and Ethics, which applies to all employees, including our Chief Executive Officer and Chief Financial Officer, is available on our website, http://www.cpa17global.com. We intend to make available on our website any future amendments or waivers to our Code of Business Conduct and Ethics within four business days after any such amendments or waivers. We will supply to any stockholder, upon written request and without charge, a copy of this Report as filed with the SEC.
Item 1A. Risk Factors.
Our business, results of operations, financial condition, and ability to pay distributions at the current rate could be materially adversely affected by various risks and uncertainties, including those enumerated below. These risk factors may have affected, and in the future could affect, our actual operating and financial results and could cause such results to differ materially from those in any forward-looking statements. You should not consider this list exhaustive. New risk factors emerge periodically and we cannot assure you that the factors described below list all risks that may become material to us at any later time.
Adverse changes in general economic conditions can adversely affect our business.
Our success is dependent upon economic conditions in the United States generally and in the geographic areas in which a substantial number of our investments are located. Adverse changes in national economic conditions or in the economic conditions of the regions in which we conduct substantial business would likely have an adverse effect on real estate values and, accordingly, our financial performance and our ability to pay dividends.
Our distributions have exceeded, and may in the future exceed, our cash flow from operating activities and our earnings in accordance with accounting principles generally accepted in the United States, or GAAP.
Over the life of our company, the regular quarterly cash distributions we pay are expected to be principally sourced from cash flow from operating activities as determined under GAAP. However, we have funded a portion of our cash distributions paid to date using net proceeds from our public offerings, and there can be no assurance that our GAAP cash flow from operating activities will be sufficient to cover our future distributions. We may use other sources of funds, such as proceeds from borrowings and asset sales, to fund portions of our future distributions. In addition, our distributions in 2014 exceeded, and future distributions may exceed, our GAAP earnings primarily because our GAAP earnings are affected by non-cash charges such as depreciation and impairments.
For U.S. federal income tax purposes, portions of the distributions we make may represent return of capital to our stockholders if they exceed our earnings and profits.
CPA®:17 – Global 2014 10-K — 8
The offering price for shares being offered through our distribution reinvestment and stock purchase plan was determined by our board of directors and may not be indicative of the price at which the shares would trade if they were listed on an exchange or were actively traded by brokers.
The offering price of the shares being offered through our distribution reinvestment and stock purchase plan was determined by our board of directors in the exercise of its business judgment. This price may not be indicative of the price at which shares would trade if they were listed on an exchange or actively traded by brokers, the proceeds that a stockholder would receive if we were liquidated or dissolved, or the value of our portfolio at the time the shares are purchased.
If we recognize substantial impairment charges on our properties or investments, our net income may be reduced.
We have previously recognized impairment charges, and in the future, we may incur substantial impairment charges, which we are required to recognize whenever we sell a property for less than its carrying value or we determine that the carrying amount of the property is not recoverable and exceeds its fair value (or, for direct financing leases, that the unguaranteed residual value of the underlying property has declined or, for equity investments, that the estimated fair value of the investment’s underlying net assets in comparison with the carrying value of our interest in the investment has declined). By their nature, the timing and extent of impairment charges are not predictable. Impairment charges reduce our net income, although they do not necessarily affect our cash flow from operations.
Our board of directors may change our investment policies without stockholder approval, which could alter the nature of their investment.
Our charter requires that our independent directors review our investment policies at least annually to determine that the policies we are following are in the best interest of our stockholders. These policies may change over time. The methods of implementing our investment policies may also vary, as new investment techniques are developed. Our investment policies, the methods for their implementation, and our other objectives, policies, and procedures may be altered by a majority of the directors (which must include a majority of the independent directors), without the approval of our stockholders. As a result, the nature of stockholders’ investment could change without their consent. A change in our investment strategy may, among other things, increase our exposure to interest rate risk, default risk, and commercial real property market fluctuations, all of which could materially adversely affect our ability to achieve our investment objectives.
We are not required to meet any diversification standards; therefore, our investments may become subject to concentration of risk.
Subject to our intention to maintain our qualification as a REIT, there are no limitations on the number or value of particular types of investments that we may make. We are not required to meet any diversification standards, including geographic diversification standards. Our investments may become concentrated in type or geographic location, which could subject us to significant concentration of risk with potentially adverse effects on our investment objectives. Approximately 10% of our consolidated contractual minimum annualized base rent, or ABR, as of December 31, 2014 pertained to our lease with Metro Cash & Carry Italia S.p.A. (Note 16). A failure by Metro Cash & Carry Italia S.p.A. to meet its obligations to us could have a material adverse effect on our financial condition and results of operations and on our ability to pay distributions to our stockholders.
Our success is dependent on the performance of the advisor.
Our ability to achieve our investment objectives and to pay distributions is largely dependent upon the performance of the advisor in the acquisition of investments, the selection of tenants, the determination of any financing arrangements, and the management of our assets. The advisory agreement currently in effect is scheduled to expire on December 31, 2015 and may be renewed upon expiration. The past performance of partnerships and REITs managed by the advisor may not be indicative of the advisor’s performance with respect to us. We cannot guarantee that the advisor will be able to successfully manage and achieve liquidity for our stockholders to the extent it has done so for prior programs.
We have invested in, and may continue to invest in, assets outside the advisor’s core expertise and incur losses as a result.
We are not restricted in the types of investments we may make and we have invested in, and may continue to invest in, assets outside the advisor’s core expertise of long-term, net-leased properties. The advisor may not be as familiar with the potential risks of investments outside net-leased properties. If we invest in assets outside the advisor’s core expertise, the fact that the advisor does not have the same level of experience in evaluating investments outside its core business could result in such
CPA®:17 – Global 2014 10-K — 9
investments performing more poorly than long-term, net-lease investments, which in turn could adversely affect our revenues, net asset values, and distributions to stockholders.
WPC and our dealer manager are parties to a settlement agreement with the SEC and are subject to a federal court injunction as well as a consent order with the Maryland Division of Securities.
In 2008, WPC and Carey Financial, LLC, or Carey Financial, the dealer manager for our public offerings, settled all matters relating to an investigation by the SEC, including matters relating to payments by certain non-listed REITs managed by the advisor during 2000-2003 to broker-dealers that distributed their shares, which were alleged by the SEC to be undisclosed underwriting compensation, which WPC and Carey Financial neither admitted nor denied. In connection with implementing the settlement, a federal court injunction was entered against WPC and Carey Financial enjoining them from violating a number of provisions of the federal securities laws. Any further violation of these laws by WPC or Carey Financial could result in civil remedies, including sanctions, fines, and penalties, which may be more severe than if the violation had occurred without the injunction being in place. Additionally, if WPC or Carey Financial breaches the terms of the injunction, the SEC may petition the court to vacate the settlement and restore the SEC’s original action to the active docket for all purposes.
In 2012, CPA®:15, WPC, and Carey Financial settled all matters relating to an investigation by the state of Maryland regarding the sale of unregistered securities of CPA®:15 in 2002 and 2003. Under the consent order, CPA®:15, WPC, and Carey Financial agreed, without admitting or denying liability, to cease and desist from any further violations of selling unregistered securities in Maryland. Contemporaneous with the issuance of the consent order, CPA®:15, WPC, and Carey Financial paid the Maryland Division of Securities a civil penalty of $10,000.
Additional regulatory action, litigation, or governmental proceedings could adversely affect us by, among other things, distracting WPC from its duties to us, resulting in significant monetary damages to WPC that could adversely affect its ability to perform services for us, or resulting in injunctions or other restrictions on WPC’s ability to act as the advisor in the United States or in one or more states.
Exercising our right to repurchase all or a portion of Carey Holdings’ interests in our Operating Partnership upon certain termination events could be prohibitively expensive and could deter us from terminating the advisory agreement.
The termination of Carey Asset Management Corp., a subsidiary of WPC, as the advisor, including by non-renewal of the advisory agreement and replacement with an entity that is not an affiliate of Carey Asset Management Corp., or the resignation of the advisor, would give our Operating Partnership the right, but not the obligation, to repurchase all or a portion of Carey Holdings’ interests in our Operating Partnership at a value based on the lesser of: (i) five times the amount of the last completed fiscal year’s special general partner distributions; and (ii) the discounted present value of the estimated future special general partner distributions until 2021. This repurchase could be prohibitively expensive, could require the Operating Partnership to sell assets in order to raise sufficient funds to complete the repurchase, and could discourage or deter us from terminating the advisory agreement. Alternatively, if our Operating Partnership does not exercise its repurchase right and Carey Holdings’ interest is converted into a special limited partnership interest, we might be unable to find another entity that would be willing to act as the advisor while Carey Holdings owns a significant interest in the Operating Partnership. If we do find another entity to act as the advisor, we may be subject to higher fees than the fees charged by Carey Asset Management Corp.
The repurchase of Carey Holdings’ special general partner interest in our Operating Partnership upon the termination of Carey Asset Management Corp. as the advisor may discourage certain business combination transactions.
In the event of a merger in which our advisory agreement is terminated and Carey Asset Management Corp. is not replaced by an affiliate of Carey Asset Management Corp. as the advisor, the Operating Partnership must either repurchase all or a portion of Carey Holdings’ special general partner interest in our Operating Partnership at the value described in the immediately preceding paragraph or obtain the consent of Carey Holdings to the merger. This obligation may deter a transaction that could result in a merger in which we are not the acquiring entity. This deterrence may limit the opportunity for stockholders to receive a premium for their shares of common stock that might otherwise exist if a third party were to attempt to acquire us through a merger.
The termination or replacement of the advisor could trigger a default or repayment event under our financing arrangements for some of our assets.
Lenders for certain of our loans may request change of control provisions in the loan documentation that would make the termination or replacement of WPC or its affiliates as the advisor an event of default or an event requiring the immediate
CPA®:17 – Global 2014 10-K — 10
repayment of the full outstanding balance of the loan. If an event of default or repayment event occurs with respect to any of our loans, our revenues and distributions to our stockholders may be adversely affected.
Payment of fees to the advisor and distributions to our special general partner will reduce cash available for investment and distribution.
The advisor will perform services for us in connection with the selection and acquisition of our investments, the management and leasing of our properties, and the administration of our other investments. Unless the advisor elects to receive shares of our common stock in lieu of cash compensation, and our board of directors approves such election, we will pay the advisor substantial cash fees for these services. In addition, our special general partner is entitled to certain distributions from our Operating Partnership. The payment of these fees and distributions will reduce the amount of cash available for investments or distribution to our stockholders.
The advisor and its affiliates may be subject to conflicts of interest.
The advisor manages our business and selects our investments. The advisor and its affiliates have potential conflicts of interest in their dealings with us. Circumstances under which a conflict could arise between us and the advisor and its affiliates include:
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| • | the receipt of compensation by the advisor for acquisitions of investments, leases, sales, and financing for us, which may cause the advisor to engage in transactions that generate higher fees, rather than transactions that are more appropriate or beneficial for our business; |
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| • | agreements between us and the advisor, including agreements regarding compensation, will not be negotiated on an arm’s-length basis, as would occur if the agreements were with unaffiliated third parties; |
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| • | acquisitions of single assets or portfolios of assets from affiliates, including the other Managed REITs, subject to our investment policies and procedures, which may take the form of a direct purchase of assets, a merger, or another type of transaction; |
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| • | competition with WPC and entities managed by it for investment acquisitions, which are resolved by the advisor (although the advisor is required to use its best efforts to present a continuing and suitable investment program to us, decisions as to the allocation of investment opportunities present conflicts of interest, which may not be resolved in the manner that is most favorable to our interests); |
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| • | a decision by the advisor (on our behalf) of whether to hold or sell an asset, which could impact the timing and amount of fees payable to the advisor, as well as allocations and distributions payable to the Special General Partner pursuant to its special general partner interests (e.g., the advisor receives asset management fees and may decide not to sell an asset; however, the Special General Partner will be entitled to certain profit allocations and cash distributions based upon sales of assets as a result of its Operating Partnership profits interest); |
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| • | business combination transactions, including mergers, with WPC or another Managed REIT; |
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| • | decisions regarding liquidity events, which may entitle the advisor and its affiliates to receive additional fees and distributions in respect of the liquidations; |
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| • | a recommendation by the advisor that we declare distributions at a particular rate because the advisor and Special General Partner may begin collecting subordinated fees once the applicable preferred return rate has been met; |
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| • | disposition fees based on the sale price of assets and interests in disposition proceeds based on net cash proceeds from the sale, exchange, or other disposition of assets may cause a conflict between the advisor’s desire to sell an asset and our plans to hold or sell the asset; and |
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| • | the termination of the advisory agreement and other agreements with the advisor and its affiliates. |
We face active competition from unrelated parties for the investments we make.
We face active competition for our investments from many sources, including insurance companies, credit companies, pension funds, private individuals, financial institutions, finance companies, investment companies, and other REITs. We also face competition from institutions that provide or arrange for other types of commercial financing through private or public offerings of equity or debt or traditional bank financings. These institutions may accept greater risk or lower returns, allowing them to offer more attractive terms to prospective tenants. In addition, the advisor’s evaluation of the acceptability of rates of return on our behalf will be affected by our relative cost of capital. Thus, to the extent our fee structure is higher than those of our competitors, we may be limited in the amount of new acquisitions we are able to make.
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We delegate our management functions to the advisor.
We delegate our management functions to the advisor, for which it earns fees pursuant to an advisory agreement. Although at least a majority of our board of directors must be independent, because the advisor earns fees from us and has an ownership interest in us, we have limited independence from the advisor.
Our net asset value is computed by the advisor relying in part on information that the advisor provides to a third party.
Our net asset value is computed by the advisor relying in part upon an annual third-party valuation of our real estate and debt. Any valuation includes the use of estimates and our valuation may be influenced by the information provided to the third party by the advisor. Because net asset value is an estimate and can change as interest rate and real estate markets fluctuate, there is no assurance that a stockholder will realize such net asset value in connection with any liquidity event.
We face competition from affiliates of the advisor, and the advisor itself, in the purchase, sale, lease, and operation of properties.
WPC and its affiliates specialize in providing lease financing services to corporations and in sponsoring funds that invest in real estate, such as CPA®:18 – Global, and, to a lesser extent, CWI and CWI 2. WPC and CPA®:18 – Global have investment policies and return objectives that are similar to ours and they, as well as CWI and CWI 2, are currently actively seeking opportunities to invest capital. Therefore, WPC and its affiliates, including CPA®:18 – Global, CWI, and CWI 2, and future entities advised by WPC, may compete with us with respect to properties, potential purchasers, sellers, and lessees of properties, and mortgage financing for properties. We do not have a non-competition agreement with WPC, CPA®:18 – Global, CWI, or CWI 2 and there are no restrictions on WPC’s ability to sponsor or manage funds or other investment vehicles that may compete with us in the future. Some of the entities formed and managed by WPC may be focused specifically on particular types of investments and receive preference in the allocation of those types of investments.
If we internalize our management functions, the percentage of our outstanding common stock owned by our other stockholders could be reduced and we could incur other significant costs associated with being self-managed.
In the future, our board of directors may consider internalizing the functions currently performed for us by the advisor. The method by which we could internalize these functions could take many forms. There is no assurance that internalizing our management functions will be beneficial to us and our stockholders. An acquisition of the advisor could also result in dilution of your interests as a stockholder and could reduce earnings per share and funds from operations, or FFO, per share. Additionally, we may not realize the perceived benefits, be able to properly integrate a new staff of managers and employees, or be able to effectively replicate the services provided previously by the advisor. Internalization transactions, including without limitation transactions involving the acquisition of advisors or property managers affiliated with entity sponsors, have also, in some cases, been the subject of litigation. Even if these claims are without merit, we could be forced to spend significant amounts of money defending claims, which would reduce the amount of funds available for us to invest in properties or other investments and to pay distributions. All of these factors could have a material adverse effect on our results of operations, financial condition, and ability to pay distributions.
We could be adversely affected if the advisor completed an internalization with another Managed REIT.
If WPC were to sell or otherwise transfer its advisory business to another Managed REIT, we could be adversely affected because the advisor could be incentivized to make decisions regarding investment allocation, asset management, liquidity transactions, and other matters that are more favorable to its Managed REIT owner than to us. If we terminate the advisory agreement and repurchase the special general partner interest in our Operating Partnership, which we would have the right to do in such circumstances, the costs to us could be substantial and we may have difficulty finding a replacement advisor that would perform at a level at least as high as that of the advisor.
The advisor may hire subadvisors in areas where the advisor is seeking additional expertise. Stockholders will not be able to review these subadvisors and the advisor may not have sufficient expertise to monitor the subadvisors.
The advisor has the right to appoint one or more subadvisors with expertise in our target asset classes to assist the advisor with investment decisions and asset management. We do not have control over which subadvisors the advisor may choose and the advisor may not have the necessary expertise to effectively monitor the subadvisors’ investment decisions.
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Our ability to control the management of our net-leased properties may be limited.
The tenants or managers of net-leased properties are responsible for maintenance and other day-to-day management of the properties. If a property is not adequately maintained in accordance with the terms of the applicable lease, we may incur expenses for deferred maintenance expenditures or other liabilities once the property becomes free of the lease. A bankrupt or financially-troubled tenant may be more likely to defer maintenance and it may be more difficult to enforce remedies, including those provided in the applicable lease, against such a tenant. In addition, to the extent tenants are unable to conduct their operation of the property on a financially-successful basis, their ability to pay rent may be adversely affected. Monitoring of compliance by tenants with their lease obligations and other factors that could affect the financial performance of our properties may not in all circumstances ascertain or forestall deterioration either in the condition of a property or the financial circumstances of a tenant.
Our participation in equity investments in jointly-owned entities creates additional risk.
From time to time, we participate in equity investments in jointly-owned entities and purchase assets jointly with the other Managed REITs and/or WPC, and may do so as well with third parties. There are additional risks involved in such investment transactions. As a co-investor in a joint investment, we would not be in a position to exercise sole decision-making authority relating to the property, the jointly-owned entity, or our investment partner. In addition, there is the potential that our investment partner may become bankrupt or that we may have diverging or inconsistent economic or business interests. These diverging interests could, among other things, expose us to liabilities in the investment in excess of our proportionate share of these liabilities. The partition rights of each owner in a jointly-owned property could reduce the value of each portion of the divided property. In addition, the fiduciary obligation that the advisor or members of our board of directors may owe to our partner in an affiliated transaction may make it more difficult for us to enforce our rights.
Our operations could be restricted if we become subject to the Investment Company Act and your investment return, if any, may be reduced if we are required to register as an investment company under the Investment Company Act.
A person will generally be deemed to be an “investment company” for purposes of the Investment Company Act of 1940, or the Investment Company Act, if:
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| • | it is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities; or |
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| • | it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis, which is referred to as the “40% test.” |
We believe that we and our subsidiaries are engaged primarily in the business of acquiring and owning interests in real estate. We hold ourselves out as a real estate firm and do not engage primarily in the business of investing, reinvesting, or trading in securities. Accordingly, we do not believe that we are an investment company as defined in section 3(a)(1)(A) of the Investment Company Act and described in the first bullet point above. Excepted from the term “investment securities” for purposes of the 40% test described in the second bullet point above are securities issued by majority-owned subsidiaries, such as our operating partnership, that are not themselves investment companies and are not relying on the exception from the definition of investment company set forth in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act.
Our operating partnership generally expects to satisfy the 40% test; however, depending on the nature of its investments, our operating partnership may rely upon the exclusion from registration as an investment company pursuant to Section 3(c)(5)(C) of the Investment Company Act, which is available for entities “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” This exclusion generally requires that at least 55% of the operating partnership's assets must be comprised of qualifying real estate assets and at least 80% of its portfolio must be comprised of qualifying real estate assets and real estate-related assets. Qualifying assets for this purpose include mortgage loans and other assets, including certain mezzanine loans and B notes, that the SEC staff in various no-action letters has affirmed can be treated as qualifying assets. We treat the following as real estate-related assets: commercial mortgage-backed securities, debt and equity securities of companies primarily engaged in real estate businesses, and securities issued by pass through entities of which substantially all the assets consist of qualifying assets and/or real estate-related assets. We rely on guidance published by the SEC staff or on our analyses of guidance published with respect to other types of assets to determine which assets are qualifying real estate assets and real estate-related assets. In August 2011, the SEC issued a concept release soliciting public comment on a wide range of issues relating to Section (3)(c)(5)(C), including the nature of the assets that qualify for purposes of the exemption and whether mortgage REITs should be regulated in a manner similar to investment companies. There can be no assurance that the laws and regulations governing the Investment Company Act status of REITs,
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including the guidance of the SEC or its staff regarding this exclusion, will not change in a manner that adversely affects our operations. To the extent that the SEC staff publishes new or different guidance with respect to these matters, we may be required to adjust our strategy accordingly. In addition, we may be limited in our ability to make certain investments and these limitations could result in the operating partnership holding assets we might wish to sell or selling assets we might wish to hold.
To maintain compliance with an Investment Company Act exemption or exclusion, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may have to acquire additional income or loss generating assets that we might not otherwise have acquired or may have to forego opportunities to acquire interests in companies that we would otherwise want to acquire and would be important to our investment strategy. If we were required to register as an investment company, we would be prohibited from engaging in our business as currently contemplated because the Investment Company Act imposes significant limitations on leverage. In addition, we would have to seek to restructure the advisory agreement because the compensation that it contemplates would not comply with the Investment Company Act. If we fail to comply with the Investment Company Act, criminal and civil actions could be brought against us, our contracts could be unenforceable unless a court were to require enforcement, and a court could appoint a receiver to take control of us and liquidate our business.
Because the operating partnership is not an investment company and does not rely on the exclusion from investment company registration provided by Section 3(c)(1) or 3(c)(7), and the operating partnership is our majority-owned subsidiary, our interests in the operating partnership do not constitute investment securities for purposes of the 40% test. Our interest in the operating partnership is our only material asset; therefore, we believe that we satisfy the 40% test.
We use derivative financial instruments to hedge against interest rate and currency fluctuations, which could reduce the overall returns on your investment.
We use derivative financial instruments to hedge exposures to changes in interest rates and currency rates. These instruments involve risk, such as the risk that counterparties may fail to perform under the terms of the derivative contract or that such arrangements may not be effective in reducing our exposure to interest rate changes. In addition, the possible use of such instruments may reduce the overall return on our investments. These instruments may also generate income that may not be treated as qualifying REIT income for purposes of the 75% or 95% REIT income test.
Because we invest in properties located outside the United States, we are exposed to additional risks.
We have invested in, and may continue to invest in, properties located outside the United States. At December 31, 2014, our directly-owned real estate properties located outside of the United States represented 36% of consolidated ABR. These investments may be affected by factors particular to the laws of the jurisdiction in which the property is located and expose us to risks that are different from, and in addition to, those commonly found in the United States, including:
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| • | changing governmental rules and policies; |
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| • | enactment of laws relating to the foreign ownership of property and laws relating to the ability of foreign entities to remove invested capital or profits earned from activities within the country to the United States; |
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| • | expropriation of investments; |
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| • | legal systems under which our ability to enforce contractual rights and remedies may be more limited than would be the case under U.S. law; |
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| • | difficulty in conforming obligations in other countries and the burden of complying with a wide variety of foreign laws, which may be more stringent than U.S. laws, including tax requirements and land use, zoning, and environmental laws, as well as changes in such laws; |
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| • | adverse market conditions caused by changes in national or local economic or political conditions; |
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| • | tax requirements vary by country and we may be subject to additional taxes as a result of our international investments; |
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| • | changes in relative interest rates; |
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| • | changes in the availability, cost, and terms of mortgage funds resulting from varying national economic policies; |
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| • | changes in real estate and other tax rates and other operating expenses in particular countries; |
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| • | changes in land use and zoning laws; |
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| • | more stringent environmental laws or changes in such laws; and |
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| • | restrictions and/or significant costs in repatriating cash and cash equivalents held in foreign bank accounts. |
In addition, the lack of publicly-available information in certain jurisdictions in accordance with GAAP could impair our ability to analyze transactions and may cause us to forego an investment opportunity. It may also impair our ability to receive timely
CPA®:17 – Global 2014 10-K — 14
and accurate financial information from tenants necessary to meet our reporting obligations to financial institutions or governmental or regulatory agencies. Certain of these risks may be greater in emerging markets and less developed countries. The advisor’s expertise to date has primarily been in the United States and certain countries in Europe and Asia, and the advisor has less experience in other international markets. The advisor may not be as familiar with the potential risks to our investments in these other areas, and we could incur losses as a result.
Also, we may engage third-party asset managers in international jurisdictions to monitor compliance with legal requirements and lending agreements with respect to properties we own. Failure to comply with applicable requirements may expose us or our operating subsidiaries to additional liabilities.
Moreover, we are subject to changes in foreign exchange rates due to potential fluctuations in exchange rates between foreign currencies and the U.S. dollar. Our principal foreign currency exposures are to the euro and, to a lesser extent, the British pound sterling, the Japanese yen, the Indian rupee, and the Norwegian krone. We attempt to mitigate a portion of the risk of currency fluctuation by financing our properties in the local currency denominations, although there can be no assurance that this will be effective. Because we generally place both our debt obligation to the lender and the tenant’s rental obligation to us in the same currency, the results of our foreign operations benefit from a weaker U.S. dollar and are adversely affected by a stronger U.S. dollar relative to foreign currencies (i.e., absent other considerations, a weaker U.S. dollar will tend to increase both our revenues and our expenses, while a stronger U.S. dollar will tend to reduce both our revenues and our expenses).
Because we use debt to finance investments, our cash flow could be adversely affected.
Historically, most of our investments have been made by borrowing a portion of the total investment and securing the loan with a mortgage on the property. We generally borrow on a non-recourse basis to limit our exposure on any property to the amount of equity invested in the property. If we are unable to make our debt payments as required, a lender could foreclose on the property or properties securing its debt. Additionally, lenders for our international mortgage loan transactions typically incorporate various covenants and other provisions that can cause a technical loan default, including a loan to value ratio, a debt service coverage ratio, and a material adverse change in the borrower’s or tenant’s business. Accordingly, if the real estate value declines or the tenant defaults, the lender would have the right to foreclose on its security. If any of these events were to occur, it could cause us to lose part or all of our investment, which in turn could cause the value of our portfolio, and revenues available for distribution to our stockholders, to be reduced.
Some of our financing may also require us to make a balloon payment at maturity. Our ability to make balloon payments on debt will depend upon our ability either to refinance the obligation when due, invest additional equity in the property, or to sell the related property. When a balloon payment is due, we may be unable to refinance the balloon payment on terms as favorable as the original loan or sell the property at a price sufficient to cover the balloon payment. Our ability to accomplish these goals will be affected by various factors existing at the relevant time, such as the state of the national and regional economies, local real estate conditions, available mortgage or interest rates, availability of credit, our equity in the mortgaged properties, our financial condition, the operating history of the mortgaged properties, and tax laws. A refinancing or sale could affect the rate of return to stockholders and the projected time of disposition of our assets.
Because most of our properties are occupied by a single tenant, our success is materially dependent upon their financial stability.
Most of our commercial real estate properties are occupied by a single tenant; therefore, the success of our investments is materially dependent on the financial stability of these tenants. Revenues from several of our tenants/guarantors constitute a significant percentage of our lease revenues. Our five largest tenants/guarantors represented approximately 38% of our consolidated ABR as of December 31, 2014. Lease payment defaults by tenants could negatively impact our net income and reduce the amounts available for distributions to our stockholders. A tenant default on lease payments to us could cause us to lose the revenue from the property and, if the property is subject to a mortgage, require us to find an alternative source of revenue to meet any mortgage payment and prevent a foreclosure. In the event of a default, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-leasing our property. If a lease is terminated, there is no assurance that we will be able to re-lease the property for the rent previously received or sell the property without incurring a loss. Approximately 10% of our consolidated ABR as of December 31, 2014 pertained to our lease with Metro Cash & Carry Italia S.p.A. A failure by Metro Cash & Carry Italia S.p.A. to meet its obligations to us could have a material adverse effect on our financial condition and results of operations and on our ability to pay distributions to our stockholders.
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The bankruptcy or insolvency of tenants or borrowers may cause a reduction in our revenue and an increase in our expenses.
Bankruptcy or insolvency of a tenant or borrower could cause:
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| • | the loss of lease or interest and principal payments; |
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| • | an increase in the costs incurred to carry the asset; |
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| • | a reduction in the value of our shares; and |
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| • | a decrease in distributions to our stockholders. |
Under U.S. bankruptcy law, a tenant who is the subject of bankruptcy proceedings has the option of assuming or rejecting any unexpired lease. If the tenant rejects the lease, any resulting claim we have for breach of the lease (excluding collateral securing the claim) will be treated as a general unsecured claim. The maximum claim will be capped at the amount owed for unpaid rent prior to the bankruptcy unrelated to the termination, plus the greater of one year’s lease payments or 15% of the remaining lease payments payable under the lease (but no more than three years’ lease payments). In addition, due to the long-term nature of our leases and, in some cases, terms providing for the repurchase of a property by the tenant, a bankruptcy court could recharacterize a net-lease transaction as a secured lending transaction. If that were to occur, we would not be treated as the owner of the property, but we might have rights as a secured creditor. Those rights would not include a right to compel the tenant to timely perform its obligations under the lease but may instead entitle us to “adequate protection,” a bankruptcy concept that applies to protect against a decrease in the value of the property if the value of the property is less than the balance owed to us.
Insolvency laws outside of the United States may not be as favorable to reorganization or to the protection of a debtor’s rights as tenants under a lease. Our rights to terminate a lease for default may be more likely to be enforceable in countries other than the United States, in which a debtor/tenant or its insolvency representative may be less likely to have rights to force continuation of a lease without our consent. Nonetheless, such laws may permit a tenant or an appointed insolvency representative to terminate a lease if it so chooses.
However, in circumstances where the bankruptcy laws of the United States are considered to be more favorable to debtors and to their reorganization, entities that are not ordinarily perceived as U.S. entities may seek to take advantage of the U.S. bankruptcy laws if they are eligible. An entity would be eligible to be a debtor under the U.S. bankruptcy laws if it had a domicile (state of incorporation or registration), place of business, or assets in the United States. If a tenant became a debtor under the U.S. bankruptcy laws, then it would have the option of assuming or rejecting any unexpired lease. As a general matter, after the commencement of bankruptcy proceedings and prior to assumption or rejection of an expired lease, U.S. bankruptcy laws provide that until an unexpired lease is assumed or rejected, the tenant (or its trustee if one has been appointed) must timely perform obligations of the tenant under the lease. However, under certain circumstances, the time period for performance of such obligations may be extended by an order of the bankruptcy court.
We and several other non-traded REITs previously managed by the advisor have had tenants (including several international tenants) file for bankruptcy protection in the past and have been involved in bankruptcy-related litigation. Four prior programs managed by the advisor reduced the rate of distributions to their investors as a result of adverse developments involving tenants.
Similarly, if a borrower under one of our loan transactions declares bankruptcy, there may not be sufficient funds to satisfy its payment obligations to us, which may adversely affect our revenue and distributions to our stockholders. The mortgage loans in which we may invest and the mortgage loans underlying the CMBS in which we have invested and may invest may be subject to delinquency, foreclosure, and loss, which could result in losses to us.
Highly-leveraged tenants may have a higher possibility of filing for bankruptcy or insolvency.
Highly-leveraged tenants that experience downturns in their operating results due to adverse changes to their business or economic conditions may have a higher possibility of filing for bankruptcy or insolvency. In bankruptcy or insolvency, a tenant may have the option of vacating a property instead of paying rent. Until such a property is released from bankruptcy, our revenues may be reduced and could cause us to reduce distributions to stockholders.
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The credit profiles of our tenants may create a higher risk of lease defaults and therefore lower revenues.
Generally, no credit rating agencies evaluate or rank the debt or the credit risk of many of our tenants, as we seek tenants that we believe will have stable or improving credit profiles that have not been recognized by the traditional credit market. Our long-term leases with certain of these tenants may therefore pose a higher risk of default than would long-term leases with tenants whose credit is rated highly by a rating agency.
We may incur costs to finish build-to-suit properties.
We may acquire undeveloped land or partially developed buildings for the purpose of owning to-be-built facilities for a prospective tenant. The primary risks of a build-to-suit project are potential for failing to meet an agreed-upon delivery schedule and cost-overruns, which may, among other things, cause the total project costs to exceed the original appraisal. In some cases, the prospective tenant will bear these risks. However, in other instances we may be required to bear these risks, which means that we may have to advance funds to cover cost overruns that we would not be able to recover through increased rent payments or that we may experience delays in the project that delay commencement of rent. We will attempt to minimize these risks through guaranteed maximum price contracts, review of contractor financials, and completed plans and specifications prior to commencement of construction. The incurrence of the costs described above or any non-occupancy by the tenant upon completion may reduce the project’s and our portfolio’s returns or result in losses to us.
A potential change in U.S. accounting standards regarding operating leases may make the leasing of facilities less attractive to our potential domestic tenants, which could reduce overall demand for our leasing services.
A lease is classified by a tenant as a capital lease if the significant risks and rewards of ownership are considered to reside with the tenant. This situation is generally considered to be met if, among other things, the non-cancelable lease term is more than 75% of the useful life of the asset or if the present value of the minimum lease payments equals 90% or more of the leased property’s fair value. Under capital lease accounting for a tenant, both the leased asset and liability are reflected on their balance sheet. If the lease does not meet any of the criteria for a capital lease, the lease is considered an operating lease by the tenant and the obligation does not appear on the tenant’s balance sheet; rather, the contractual future minimum payment obligations are only disclosed in the footnotes thereto. Thus, entering into an operating lease can appear to enhance a tenant’s balance sheet in comparison to direct ownership. In response to concerns caused by a 2005 SEC study that the current model does not have sufficient transparency, the Financial Accounting Standards Board and the International Accounting Standards Board issued an Exposure Draft on a joint proposal that would dramatically transform lease accounting from the existing model. In May 2013, the Financial Accounting Standards Board and the International Accounting Standards Board issued a revised exposure draft for public comment and the comment period ended in September 2013. As of the date of this Report, the Financial Accounting Standards Board and the International Accounting Standards Board continue their redeliberations of the proposals included in the May 2013 Exposure Draft based on the comments received and the proposed guidance has not yet been finalized. Changes to the accounting guidance could affect our accounting for leases, as well as that of our tenants. These changes would impact most companies but are particularly applicable to those that are significant users of real estate. The proposal outlines a completely new model for accounting by lessees, whereby their rights and obligations under all leases, existing and new, would be capitalized and recorded on the balance sheet. For some companies, the new accounting guidance may influence whether or not, or the extent to which, they would enter into the type of sale-leaseback transactions in which we specialize.
We are subject, in part, to the risks of real estate ownership, which could reduce the value of our properties.
Our performance and asset value are subject, in part, to risks incident to the ownership and operation of real estate, including:
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| • | changes in the general economic climate; |
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| • | changes in local conditions such as an oversupply of space or reduction in demand for commercial real estate; |
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| • | changes in interest rates and the availability of financing; and |
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| • | changes in laws and governmental regulations, including those governing real estate usage, zoning, and taxes. |
We may have difficulty selling or re-leasing our properties and this lack of liquidity may limit our ability to quickly change our portfolio in response to changes in economic or other conditions.
Real estate investments generally have less liquidity compared to other financial assets and this lack of liquidity may limit our ability to quickly change our portfolio in response to changes in economic or other conditions. The leases we may enter into or acquire may be for properties that are specially suited to the particular needs of our tenant. With these properties, if the current lease is terminated or not renewed, we may be required to renovate the property or to make rent concessions in order to lease
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the property to another tenant. In addition, if we are forced to sell the property, we may have difficulty selling it to a party other than the tenant due to the special purpose for which the property may have been designed. These and other limitations may affect our ability to sell properties without adversely affecting returns to our stockholders.
Because we are subject to possible liabilities relating to environmental matters, we could incur unexpected costs and our ability to sell or otherwise dispose of a property may be negatively impacted.
Our properties are currently used for industrial, manufacturing, and other commercial purposes, and some of our tenants may handle hazardous or toxic substances, generate hazardous wastes, or discharge regulated pollutants to the environment. We therefore may own properties that have known or potential environmental contamination as a result of historical or ongoing operations. Buildings and structures on the properties we purchase may have known or suspected asbestos-containing building materials. We may invest in properties located in countries that have adopted laws or observe environmental management standards that are less stringent than those generally followed in the United States, which may pose a greater risk that releases of hazardous or toxic substances have occurred. Leasing properties to tenants that engage in these activities, and owning properties historically and currently used for industrial, manufacturing, and commercial purposes, will cause us to be subject to the risk of liabilities under environmental laws. Some of these laws could impose the following on us:
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| • | responsibility and liability for the costs of investigation, and removal or remediation of hazardous or toxic substances released on or from our real property, generally without regard to our knowledge of, or responsibility for, the presence of these contaminants; |
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| • | liability for the costs of investigation and removal or remediation of hazardous substances at disposal facilities for persons who arrange for the disposal or treatment of such substances; |
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| • | liability for claims by third parties based on damages to natural resources or property, personal injuries, or costs of removal or remediation of hazardous or toxic substances in, on, or migrating from our property; and |
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| • | responsibility for managing asbestos-containing building materials, and third-party claims for exposure to those materials. |
Our costs of investigation, remediation, or removal of hazardous or toxic substances, or for third-party claims for damages, may be substantial. The presence of hazardous or toxic substances on one of our properties, or the failure to properly remediate a contaminated property, could give rise to a lien in favor of the government for costs it may incur to address the contamination, or otherwise adversely affect our ability to sell or lease the property or to borrow using the property as collateral. In addition, environmental liabilities, or costs or operating limitations imposed on a tenant to comply with environmental laws, could affect its ability to make rental payments to us. Also, we may be required, in connection with any future divestitures of property, to provide buyers with indemnification against potential environmental liabilities.
We and our independent property operators will rely on information technology in our operations, and any material failure, inadequacy, interruption, or security failure of that technology could harm our business.
We and our independent property operators will rely on information technology networks and systems, including the internet, to process, transmit, and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, personal identifying information, reservations, billing, and operating data. We will purchase some of our information technology from vendors, on whom our systems depend. We rely on commercially available systems, software, tools, and monitoring to provide security for processing, transmission, and storage of confidential customer information, such as individually identifiable information, including information relating to financial accounts. It is possible that our safety and security measures will not be able to prevent the systems’ improper functioning or damage, or the improper access or disclosure of personally identifiable information such as in the event of cyber-attacks. Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers, and similar breaches, can create system disruptions, shutdowns, or unauthorized disclosure of confidential information. Any failure to maintain proper function, security, and availability of our information systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties, and could have a material adverse effect on our business, financial condition, and results of operations.
Liability for uninsured losses could adversely affect our financial condition.
Losses from disaster-type occurrences (such as wars, terrorist activities, floods, or earthquakes) may be either uninsurable or not insurable on economically-viable terms. Should an uninsured loss or a loss in excess of the limits of our insurance occur, we could lose our capital investment and/or anticipated profits and cash flow from one or more investments, which in turn could cause the value of the shares and distributions to our stockholders to be reduced.
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Valuations that we obtain may include leases in place on the property being appraised, and if the leases terminate, the value of the property may become significantly lower.
The initial appraisals that we obtain on our properties are generally based on the value of the properties when they are leased. If the leases on the properties terminate, the value of the properties may fall significantly below the appraised value, which could result in impairment charges on the properties.
The mortgage loans in which we may invest and the mortgage loans underlying the CMBS in which we have invested and may invest will be subject to delinquency, foreclosure, and loss, which could result in losses to us.
The ability of a borrower to repay a loan secured by an income-producing property typically is dependent upon the successful operation of the property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired. The net operating income of an income-producing property can be affected by the risks particular to real property described above, as well as, among other things:
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| • | success of tenant businesses; |
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| • | property management decisions; |
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| • | property location and condition; |
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| • | competition from comparable types of properties; |
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| • | changes in specific industry segments; |
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| • | declines in regional or local real estate values, or rental or occupancy rates; and |
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| • | increases in interest rates, real estate tax rates and other operating expenses. |
In the event of any default under a mortgage loan (or any financing lease or net lease that is recharacterized as a mortgage loan) held directly by us, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan, which could have a material adverse effect on our ability to achieve our investment objectives, including, without limitation, diversification of our commercial real estate properties portfolio by property type and location, moderate financial leverage, low to moderate operating risk, and an attractive level of current income. In the event of the bankruptcy of a mortgage loan borrower (or any tenant under a financing lease or a net lease that is recharacterized as a mortgage loan), the mortgage loan (or any financing lease or net lease that is recharacterized as a mortgage loan) to that borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a mortgage loan (or any financing lease or net lease that is recharacterized as a mortgage loan) can be an expensive and lengthy process that could have a substantial negative effect on our anticipated return on the foreclosed mortgage loan.
The B Notes, C Notes, subordinate mortgage notes, mezzanine loans, and participation interests in mortgage and mezzanine loans in which we have invested and may invest may be subject to risks relating to the structure and terms of the transactions, as well as subordination in bankruptcy, and there may not be sufficient funds or assets remaining to satisfy the subordinate notes in which we may have invested, which may result in losses to us.
We have invested in, and may continue to invest in, B Notes, C Notes, subordinate mortgage notes, mezzanine loans, and participation interests in mortgage and mezzanine loans, to the extent consistent with our investment guidelines and the rules applicable to REITs. These investments are subordinate to first mortgages on commercial real estate properties and are secured by subordinate rights to the commercial real estate properties or by equity interests in the commercial entity. If a borrower defaults or declares bankruptcy, after senior obligations are met, there may not be sufficient funds or assets remaining to satisfy the subordinate notes in which we may have invested. Because each transaction is privately negotiated, B Notes, C Notes, and subordinate mortgage notes can vary in their structural characteristics and lender rights. Our rights to control the default or bankruptcy process following a default will vary from transaction to transaction. The subordinate real estate-related debt in which we intend to invest may not give us the right to demand foreclosure. Furthermore, the presence of intercreditor agreements may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies, and control decisions made in bankruptcy proceedings relating to borrowers. Bankruptcy and borrower litigation can significantly increase the time needed for us to acquire underlying collateral in the event of a default, during which time the collateral may decline in value. In addition, there are significant costs and delays associated with the foreclosure process. The Internal Revenue Service has issued restrictive guidance as to when a loan secured by equity in an entity will be treated as a qualifying REIT asset. Failure to comply with such guidance could jeopardize our ability to continue to qualify as a REIT.
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Interest rate fluctuations and changes in prepayment rates could reduce our ability to generate income on our investments in commercial mortgage loans.
The yield on our investments in commercial mortgage loans may be sensitive to changes in prevailing interest rates and changes in prepayment rates. Therefore, changes in interest rates may affect our net interest income, which is the difference between the interest income we earn on our interest-earning investments and the interest expense we incur in financing these investments. We will often price loans at a spread to either U.S. Treasury obligations, swaps, or the London Inter-Bank Offered Rate. A decrease in these indexes may lower the yield on our investments. Conversely, if these indexes rise materially, borrowers may become delinquent or default on the high-leverage loans we occasionally target. As discussed below with respect to mortgage loans underlying CMBS, when a borrower prepays a mortgage loan more quickly than we expect, our expected return on the investment generally will be adversely affected.
We may invest in subordinate CMBS, which are subject to a greater risk of loss than more senior securities.
We may invest in a variety of subordinate CMBS, to the extent consistent with our investment guidelines and the rules applicable to REITs. The ability of a borrower to make payments on a loan underlying these securities is dependent primarily upon the successful operation of the property rather than upon the existence of independent income or assets of the borrower. In the event of default and the exhaustion of any equity support, reserve fund, letter of credit, and any classes of securities junior to those in which we invest, we may not be able to recover all of our investment in the securities we purchase.
Expenses of enforcing the underlying mortgage loans (including litigation expenses), expenses of protecting the properties securing the mortgage loans and the lien on the mortgaged properties, and, if such expenses are advanced by the servicer of the mortgage loans, interest on such advances, will all be allocated to junior securities prior to more senior classes of securities issued in the securitization. Prior to the reduction of distributions to more senior securities, distributions to the junior securities may also be reduced by payments of compensation to any servicer engaged to enforce a defaulted mortgage loan. Such expenses and servicing compensation may be substantial and consequently, in the event of a default or loss on one or more mortgage loans contained in a securitization, we may not recover our investment.
Investments in B Notes and C Notes may be subject to additional risks relating to the privately-negotiated structure and terms of the transaction, which may result in losses to us.
We have invested in, and may continue to invest in, B Notes and C Notes. A B Note is a mortgage loan typically (i) secured by a first mortgage on a single large commercial property or group of related properties and (ii) subordinated to an A Note secured by the same first mortgage on the same collateral. As a result, if a borrower defaults, there may not be sufficient funds remaining for B Note owners after payment to the A Note owners. B Notes, including C Notes, which are junior to B Notes, reflect similar credit risks to comparably-rated CMBS. However, since each transaction is privately negotiated, B Notes can vary in their structural characteristics and risks. For example, the rights of holders of B Notes to control the process following a borrower default may be limited in certain investments. We cannot predict the terms of each B Note investment. Further, B Notes typically are secured by a single property and so reflect the increased risks associated with a single property compared to a pool of properties. B Notes also are less liquid than CMBS, and thus we may be unable to dispose of underperforming or non-performing investments. The higher risks associated with our subordinate position in B Note investments could subject us to increased risk of losses.
Investment in non-conforming and non-investment grade loans may involve increased risk of loss.
We may acquire or originate certain loans that do not conform to conventional loan criteria applied by traditional lenders and are not rated or are rated as non-investment grade (i.e., lower than Baa3 for investments rated by Moody’s Investors Service and BBB- or below for Standard & Poor’s Ratings Services). The non-investment grade ratings for these loans typically result from the overall leverage of the loans, the lack of a strong operating history for the properties underlying the loans, the borrowers’ credit history, the properties’ underlying cash flow, or other factors. As a result, these loans have a higher risk of default and loss than conventional loans. Any loss we incur may reduce distributions to our stockholders. There are no limits on the percentage of unrated or non-investment grade assets we may hold in our portfolio.
Investments in mezzanine loans involve greater risks of loss than senior loans secured by income producing properties.
We may invest in mezzanine loans. Investments in mezzanine loans take the form of subordinated loans secured by second mortgages on the underlying property or loans secured by a pledge of the ownership interests in the entity that directly or indirectly owns the property. These types of investments involve a higher degree of risk than a senior mortgage loan because the investment may become unsecured as a result of foreclosure by the senior lender. In the event of a bankruptcy of the entity
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providing the pledge of its ownership interests as security, we may not have full recourse to the assets of the property-owning entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt is paid in full. As a result, we may not recover some or all of our investment, which could result in losses. In addition, mezzanine loans may have higher loan-to-value ratios than conventional mortgage loans, resulting in less equity in the property and increasing the risk of loss of principal.
Our investments in debt securities are subject to specific risks relating to the particular issuer of securities and to the general risks of investing in subordinated real estate securities.
Our investments in debt securities involve special risks. Our investments in debt are subject to the risks described above with respect to mortgage loans and mortgage-backed securities and similar risks, including:
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| • | risks of delinquency and foreclosure, and risks of loss in the event thereof; |
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| • | the dependence upon the successful operation of and net income from real property; |
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| • | risks generally incident to interests in real property; and |
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| • | risk that may be presented by the type and use of a particular commercial property. |
Debt securities are generally unsecured and may also be subordinated to other obligations of the issuer. We may also invest in debt securities that are rated below investment grade. As a result, investment in debt securities are also subject to risks of:
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| • | limited liquidity in the secondary trading market; |
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| • | substantial market price volatility resulting from changes in prevailing interest rates; |
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| • | subordination to the prior claims of banks and other senior lenders to the issuer; |
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| • | the operation of mandatory sinking fund or call/redemption provisions during periods of declining interest rates that could cause the issuer to reinvest premature redemption proceeds in lower yielding assets; |
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| • | the possibility that earnings of the debt security issuer may be insufficient to meet its debt service; and |
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| • | the declining creditworthiness and potential for insolvency of the issuer of such debt securities during periods of rising interest rates and economic downturn. |
The risks may adversely affect the value of outstanding debt securities and the ability of the issuers thereof to repay principal and interest.
Investments in loans collateralized by non-real estate assets create additional risk and may adversely affect our REIT qualification.
We may invest in secured corporate loans, which are loans collateralized by real property, personal property connected to real property (i.e., fixtures), and/or personal property, on which another lender may hold a first priority lien. If a default occurs, the value of the collateral may not be sufficient to repay all of the lenders that have an interest in the collateral. Our right in bankruptcy will be different for these loans than typical net-lease transactions. To the extent that loans are collateralized by personal property only, or to the extent the value of the real estate collateral is less than the aggregate amount of our loans and equal or higher-priority loans secured by the real estate collateral, that portion of the loan will not be considered a “real estate asset” for purposes of the 75% REIT asset test. Also, income from that portion of such a loan will not qualify under the 75% REIT income test for REIT qualification.
Investments in securities of REITs, real estate operating companies and companies with significant real estate assets will expose us to many of the same general risks associated with direct real property ownership.
Investments we may make in other REITs, real estate operating companies, and companies with significant real estate assets, directly or indirectly through other real estate funds, will be subject to many of the same general risks associated with direct real property ownership. In particular, equity REITs may be affected by changes in the value of the underlying property owned by us, while mortgage REITs may be affected by the quality of any credit extended. Since REIT investments, however, are securities, they also may be exposed to market risk and price volatility due to changes in financial market conditions and changes as discussed below.
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The value of the equity securities of companies engaged in real estate activities that we may invest in may be volatile and may decline.
The value of equity securities of companies engaged in real estate activities, including those of REITs, fluctuates in response to issuer, political, market, and economic developments. In the short term, equity prices can fluctuate dramatically in response to these developments. Different parts of the market and different types of equity securities can react differently to these developments and they can affect a single issuer, multiple issuers within an industry, economic sector, or geographic region, or the market as a whole. These fluctuations in value could result in significant gains or losses being reported in our financial statements because we will be required to mark such investments to market periodically.
The real estate industry is sensitive to economic downturns. The value of securities of companies engaged in real estate activities can be adversely affected by changes in real estate values and rental income, property taxes, interest rates, and tax and regulatory requirements. In addition, the value of a REIT’s equity securities can depend on the structure and amount of cash flow generated by the REIT. It is possible that our investments in securities may decline in value even though the obligor on the securities is not in default of its obligations to us.
The lack of an active public trading market for our shares combined with the limit on the number of our shares a person may own may discourage a takeover and make it difficult for stockholders to sell shares quickly.
There is no active public trading market for our shares and we do not expect there ever will be one. Moreover, we are not required to complete a liquidity event by a specified date. To assist us in meeting the REIT qualification rules, among other things, our charter also prohibits the ownership by one person or affiliated group of more than 9.8% in value of our stock or more than 9.8% in value or number, whichever is more restrictive, of our outstanding shares of common stock, unless exempted by our board of directors. This ownership limitation may discourage third parties from making a potentially financially attractive tender offer for your shares, thereby inhibiting a change of control in us. Moreover, you should not rely on our redemption plan as a method to sell shares promptly because our redemption plan includes numerous restrictions that limit your ability to sell your shares to us, and our board of directors may amend, suspend, or terminate our redemption plan without giving you advance notice. In particular, the redemption plan provides that we may redeem shares only if we have sufficient funds available for redemption and to the extent the total number of shares for which redemption is requested in any quarter, together with the aggregate number of shares redeemed in the preceding three fiscal quarters, does not exceed five percent of the total number of our shares outstanding as of the last day of the immediately preceding fiscal quarter. Therefore, it may be difficult for you to sell your shares promptly or at all. In addition, the price received for any shares sold prior to a liquidity event is likely to be less than the proportionate value of the real estate we own. Investor suitability standards imposed by certain states may also make it more difficult to sell your shares to someone in those states. As a result, our shares should only be purchased as a long-term investment.
Failing to continue to qualify as a REIT would adversely affect our operations and ability to make distributions.
If we fail to continue to qualify as a REIT in any taxable year, we would be subject to U.S. federal income tax on our net taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year we lost our REIT qualification. Losing our REIT qualification would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability, and we would no longer be required to make distributions. We might be required to borrow funds or liquidate some investments in order to pay the applicable tax.
Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which there are only limited judicial and administrative interpretations. The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT. In order to qualify as a REIT, we must satisfy a number of requirements regarding the composition of our assets and the sources of our gross income. Also, we must make distributions to our stockholders aggregating annually at least 90% of our REIT net taxable income, excluding net capital gains. Because we have investments in foreign real property, we are subject to foreign currency gains and losses. Foreign currency gains may or may not be taken into account for purposes of the REIT income requirements. In addition, legislation, new regulations, administrative interpretations, or court decisions may adversely affect our investors, our ability to qualify as a REIT for U.S. federal income tax purposes, or the desirability of an investment in a REIT relative to other investments.
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The Internal Revenue Service may treat sale-leaseback transactions as loans, which could jeopardize our REIT qualification.
The Internal Revenue Service may take the position that specific sale-leaseback transactions we treat as true leases are not true leases for U.S. federal income tax purposes but are, instead, financing arrangements or loans. If a sale-leaseback transaction were so recharacterized, we might fail to satisfy the qualification requirements applicable to REITs.
We do not operate our hotel and, as a result, we do not have complete control over implementation of our strategic decisions.
In order for us to satisfy certain REIT qualification rules, we cannot directly operate our hotel. Instead, we must engage an independent management company to operate our hotel. Our taxable REIT subsidiary, or TRS, engages an independent management company as the property manager for our hotel, as required by the REIT qualification rules. The management company operating our hotel makes and implements strategic business decisions, such as decisions with respect to the repositioning of the franchise or food and beverage operations and other similar decisions. Decisions made by the management company operating the hotel may not be in the best interests of the hotel or us. Accordingly, we cannot assure you that the management company operating our hotel will operate it in a manner that is in our best interests.
Distributions payable by REITs generally do not qualify for reduced U.S. federal income tax rates because qualifying REITs do not pay U.S. federal income tax on their distributed net income.
The maximum U.S. federal income tax rate for distributions payable by domestic corporations to taxable U.S. stockholders is 20% under current law. Distributions payable by REITs, however, are generally not eligible for the reduced rates, except to the extent that they are attributable to distributions paid by a TRS or a C corporation, or relate to certain other activities. This is because qualifying REITs receive an entity level tax benefit from not having to pay U.S. federal income tax on their distributed net income. As a result, the more favorable rates applicable to regular corporate distributions could cause stockholders who are individuals to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay distributions, which could adversely affect the value of the stock of REITs, including our common stock. In addition, the relative attractiveness of real estate in general may be adversely affected by the reduced U.S. federal income tax rates applicable to corporate distributions, which could negatively affect the value of our properties.
Our board of directors may revoke our REIT election without stockholder approval, which may cause adverse consequences to our stockholders.
Our organizational documents permit our board of directors to revoke or otherwise terminate our REIT election, without the approval of our stockholders, if the board determines that it is not in our best interest to qualify as a REIT. In such a case, we would become subject to U.S. federal income tax on our net taxable income and we would no longer be required to distribute most of our net taxable income to our stockholders, which may have adverse consequences on the total return to our stockholders.
Conflicts of interest may arise between holders of our common shares and holders of partnership interests in our Operating Partnership.
Our directors and officers have duties to us and to our stockholders under Maryland law in connection with their management of us. At the same time, because our Operating Partnership was formed in Delaware, we as general partner will have fiduciary duties under Delaware law to our Operating Partnership and to the limited partners in connection with the management of our Operating Partnership. Our duties as general partner of our Operating Partnership may come into conflict with the duties of our directors and officers to us and our stockholders.
Under Delaware law, a general partner of a Delaware limited partnership owes its limited partners the duties of good faith and fair dealing. Other duties, including fiduciary duties, may be modified or eliminated in the partnership’s partnership agreement. The partnership agreement of our Operating Partnership provides that, for so long as we own a controlling interest in our Operating Partnership, any conflict that cannot be resolved in a manner not adverse to either our stockholders or the limited partners will be resolved in favor of our stockholders.
Additionally, the partnership agreement expressly limits our liability by providing that we and our officers, directors, employees, and designees will not be liable or accountable to our Operating Partnership for losses sustained, liabilities incurred, or benefits not derived if we or our officers, directors, agents, employees, or designees, as the case may be, acted in good faith. In addition, our Operating Partnership is required to indemnify us and our officers, directors, agents, employees, and
CPA®:17 – Global 2014 10-K — 23
designees to the extent permitted by applicable law from and against any and all claims arising from operations of our Operating Partnership, unless it is established that: (i) the act or omission was committed in bad faith, was fraudulent, or was the result of active and deliberate dishonesty; (ii) the indemnified party actually received an improper personal benefit in money, property or services; or (iii) in the case of a criminal proceeding, the indemnified person had reasonable cause to believe that the act or omission was unlawful. These limitations on liability do not supersede the indemnification provisions of our charter.
The provisions of Delaware law that allow the fiduciary duties of a general partner to be modified by a partnership agreement have not been tested in a court of law, and we have not obtained an opinion of counsel covering the provisions set forth in the partnership agreement that purport to waive or restrict our fiduciary duties.
Maryland law could restrict a change in control, which could have the effect of inhibiting a change in control even if a change in control were in our stockholders’ interest.
Provisions of Maryland law applicable to us prohibit business combinations with:
| |
| • | any person who beneficially owns 10% or more of the voting power of our outstanding voting shares, referred to as an interested stockholder; |
| |
| • | an affiliate who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of our outstanding shares, also referred to as an interested stockholder; or |
| |
| • | an affiliate of an interested stockholder. |
These prohibitions last for five years after the most recent date on which the interested stockholder became an interested stockholder. Thereafter, any business combination must be recommended by our board of directors and approved by the affirmative vote of at least 80% of the votes entitled to be cast by holders of our outstanding voting shares and two-thirds of the votes entitled to be cast by holders of our voting shares (other than voting shares held by the interested stockholder or by an affiliate or associate of the interested stockholder). These requirements could have the effect of inhibiting a change in control even if a change in control were in our stockholders’ interest. These provisions of Maryland law do not apply, however, to business combinations that are approved or exempted by our board of directors prior to the time that someone becomes an interested stockholder. In addition, a person is not an interested stockholder if the board of directors approved in advance the transaction by which he or she otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.
Our charter permits our board of directors to issue stock with terms that may subordinate the rights of the holders of our current common stock or discourage a third party from acquiring us.
Our board of directors may determine that it is in our best interest to classify or reclassify any unissued stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications, and terms or conditions of redemption of any such stock. Thus, our board of directors could authorize the issuance of such stock with terms and conditions that could subordinate the rights of the holders of our common stock or have the effect of delaying, deferring, or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer, or sale of all or substantially all of our assets) that might provide a premium price for holders of our common stock. However, the issuance of preferred stock must also be approved by a majority of independent directors not otherwise interested in the transaction, who will have access at our expense to our legal counsel or to independent legal counsel. In addition, the board of directors, with the approval of a majority of the entire board and without any action by the stockholders, may amend our charter from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series that we have authority to issue. If our board of directors determines to take any such action, it will do so in accordance with the duties it owes to holders of our common stock.
Our revenues from our operating real estate are significantly influenced by demand for self-storage space generally, and a decrease in such demand would likely have an adverse effect on such revenues.
A decrease in the demand for self-storage space would have an adverse effect on our revenues from our operating real estate. Demand for self-storage space has been and could be adversely affected by weakness in the national, regional, and local economies, changes in supply of, or demand for, similar or competing self-storage facilities in an area, and the excess amount of self-storage space in a particular market. To the extent that any of these conditions occur, they are likely to affect market rents for self-storage space, which could cause a decrease in our revenues.
CPA®:17 – Global 2014 10-K — 24
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our principal corporate offices are located in the offices of the advisor at 50 Rockefeller Plaza, New York, NY 10020. The advisor also has primary international investment offices located in London and Amsterdam, as well as additional office space domestically in New York and Dallas, Texas and internationally in Hong Kong and Shanghai. The advisor leases all of these offices and believes these leases are suitable for our operations for the foreseeable future.
Item 3. Legal Proceedings.
At December 31, 2014, we were not involved in any material litigation.
Various claims and lawsuits arising in the normal course of business are pending against us. The results of these proceedings are not expected to have a material adverse effect on our consolidated financial position or results of operations.
Item 4. Mine Safety Disclosures.
Not applicable.
CPA®:17 – Global 2014 10-K — 25
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Unlisted Shares and Distributions
There is no active public trading market for our shares. At March 23, 2015, there were 82,447 holders of record of our shares.
We are required to distribute annually at least 90% of our distributable REIT net taxable income to maintain our status as a REIT. Quarterly distributions paid by us for the past two years are as follows:
|
| | | | | | | |
| | Years Ended December 31, |
| | 2014 | | 2013 |
| First quarter | $ | 0.1625 |
| | $ | 0.1625 |
|
| Second quarter | 0.1625 |
| | 0.1625 |
|
| Third quarter | 0.1625 |
| | 0.1625 |
|
| Fourth quarter | 0.1625 |
| | 0.1625 |
|
| | $ | 0.6500 |
| | $ | 0.6500 |
|
Unregistered Sales of Equity Securities
During the three months ended December 31, 2014, we issued 702,194 shares of our common stock to the advisor as consideration for asset management fees. These shares were issued at $9.50 per share, which represents our most recently published net asset value per share as approved by the board of directors at the date of issuance. Since none of these transactions were considered to have involved a “public offering” within the meaning of Section 4(a)(2) of the Securities Act of 1933, the shares issued were deemed to be exempt from registration. In acquiring our shares, the advisor represented that such interests were being acquired by it for the purposes of investment and not with a view to the distribution thereof. From inception and through December 31, 2014, we have issued 8,791,517 shares of our common stock to the advisor as aggregate consideration for asset management fees.
All prior sales of unregistered securities have been reported in our previously filed quarterly reports on Form 10-Q.
Issuer Purchases of Equity Securities
|
| | | | | | | | | | | |
| | | Total number of shares purchased (a) | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or program (a) | | Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or program (a) |
| 2014 Period | | | | |
| October | | — |
| | $ | — |
| | N/A | | N/A |
| November | | — |
| | — |
| | N/A | | N/A |
| December | | 999,691 |
| | 9.04 |
| | N/A | | N/A |
| Total | | 999,691 |
| | |
| | | | |
___________
| |
| (a) | Represents shares of our common stock repurchased under our redemption plan, pursuant to which we may elect to redeem shares at the request of our stockholders, subject to certain exceptions, conditions, and limitations. The maximum amount of shares purchasable by us in any period depends on a number of factors and is at the discretion of our board of directors. We satisfied all of the above redemption requests received during the three months ended December 31, 2014. We generally receive fees in connection with share redemptions. |
CPA®:17 – Global 2014 10-K — 26
Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction with the consolidated financial statements and related notes in Item 8 (in thousands, except per share data): |
| | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2014 | | 2013 | | 2012 | | 2011 | | 2010 |
Operating Data (a) | | | | | | | | | |
| Revenues from continuing operations | $ | 396,706 |
| | $ | 362,772 |
| | $ | 289,977 |
| | $ | 192,114 |
| | $ | 97,161 |
|
| Income from continuing operations | 106,993 |
| | 60,162 |
| | 68,171 |
| | 73,848 |
| | 48,551 |
|
| Net income | 106,993 |
| | 67,649 |
| | 70,094 |
| | 75,933 |
| | 48,056 |
|
| Net income attributable to noncontrolling interests | (32,842 | ) | | (28,935 | ) | | (26,498 | ) | | (21,190 | ) | | (15,335 | ) |
Net income attributable to CPA®:17 – Global | 74,151 |
| | 38,714 |
| | 43,596 |
| | 54,743 |
| | 32,721 |
|
| | | | | | | | | | |
| Income per share: | | | | | | | | | |
Income from continuing operations attributable to CPA®:17 – Global | 0.23 |
| | 0.10 |
| | 0.16 |
| | 0.30 |
| | 0.30 |
|
Net income attributable to CPA®:17 – Global | 0.23 |
| | 0.12 |
| | 0.17 |
| | 0.31 |
| | 0.30 |
|
| | | | | | | | | | |
| Cash distributions declared per share | 0.6500 |
| | 0.6500 |
| | 0.6500 |
| | 0.6475 |
| | 0.6400 |
|
Balance Sheet Data (a) | | | | | | | | | |
| Total assets | $ | 4,605,897 |
| | $ | 4,712,539 |
| | $ | 4,426,063 |
| | $ | 3,052,363 |
| | $ | 1,991,396 |
|
Net investments in real estate (b) | 3,062,287 |
| | 3,149,131 |
| | 2,824,246 |
| | 2,191,309 |
| | 1,376,918 |
|
Long-term obligations (c) | 1,905,883 |
| | 1,931,174 |
| | 1,660,068 |
| | 1,177,771 |
| | 687,640 |
|
Other Information (a) | | | | | | | | | |
| Net cash provided by operating activities | $ | 210,055 |
| | $ | 182,598 |
| | $ | 158,004 |
| | $ | 102,590 |
| | $ | 69,797 |
|
| Cash distributions paid | 209,054 |
| | 198,440 |
| | 147,649 |
| | 102,503 |
| | 60,937 |
|
Payments of mortgage principal (d) | 28,091 |
| | 22,260 |
| | 17,525 |
| | 14,136 |
| | 6,541 |
|
___________
| |
| (a) | Certain prior year amounts have been revised due to the correction of errors and for a change in accounting for one of our equity investments in real estate (Note 2 and Note 3). |
| |
| (b) | Net investments in real estate consists of Net investments in properties, Net investments in direct financing leases, and Real estate under construction. |
| |
| (c) | Represents non-recourse mortgage obligations (Note 11) and deferred acquisition fee installments, including interest. |
| |
| (d) | Represents scheduled mortgage principal payments. |
CPA®:17 – Global 2014 10-K — 27
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis of Financial Condition and Results of Operations 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. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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.
The following discussion should be read in conjunction with our consolidated financial statements included in Item 8 of this Report and the matters described under Item 1A. Risk Factors.
Business Overview
We are a publicly-owned, non-listed REIT that invests primarily in commercial properties leased to companies domestically and internationally. As opportunities arise, we also make other types of commercial real estate-related investments. 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, sales of properties, and foreign currency exchange rates. We were formed in 2007 and are managed by the advisor. We hold substantially all of our assets and conduct substantially all of our business through our Operating Partnership. We are the general partner of, and own 99.99% of the interests in, the Operating Partnership. The remaining interest in the Operating Partnership is held by a subsidiary of WPC.
Economic Overview
In the United States, the overall economic environment continued to improve in 2014. Gross domestic product growth outpaced 2013 levels, and the unemployment rate fell to its lowest mark since 2008. General business conditions continued to recover, and the Federal Reserve completed the tapering of its bond-buying stimulus program in October. Despite the sharp increase in long-term rates in May 2013, interest rates declined over the course of 2014 and remain at historic lows. The interest rate environment contributed to a lower cost of capital for investors purchasing commercial properties. A low cost of capital in conjunction with moderate new supply and strong demand resulted in commercial property yields, or capitalization rates, declining over the course of the year as competition for assets, including net-leased properties, in the United States remained high. In addition, interest rate sensitive stocks, such as REITs, outperformed in 2014. The decline in energy prices in 2014 had a negative impact on the CPI, a useful measure of economic growth and inflation, which experienced 0.8% growth.
In Europe, the economic environment continued to be mixed in 2014. Conditions in most countries across northern and western Europe generally remained stable, with some countries, including the United Kingdom and Germany, experiencing modest economic growth rates and lower relative unemployment rates. However, many European countries, including those considered emerging economies, continued to operate at recessionary levels and have negative economic growth and high unemployment. The strengthening and stability of the euro relative to the dollar reversed course in 2014 as the euro / dollar exchange rate reached multi-year lows, and interest rates remain at historically low levels. In addition, the Harmonized Index of Consumer Prices, an indicator of inflation and price stability in the European Union, decreased 0.2% during the year. In an effort to prevent deflation and combat economic weakness, the European Central Bank cut key interest rates in 2014 and, more recently, announced an approximately €1.1 trillion “quantitative easing” program to buy financial assets, including sovereign bonds. Attractive borrowing rates, in conjunction with higher capitalization rates on commercial properties with similar risk profiles to those in the United States contributed to a favorable climate for investing in net-lease assets in Europe.
Significant Developments
Acquisition Activity — During 2014, we entered into 12 investments at a total cost of approximately $291.3 million, including $202.2 million for seven international investments, inclusive of acquisition-related costs and fees. Amounts are based on the exchange rate of the foreign currency at the date of acquisition, as applicable.
Financing Activity — During 2014, we obtained non-recourse mortgage financing totaling $92.8 million with a weighted-average annual interest rate and term of 4.9% and 8.8 years, respectively. This included two non-recourse mortgage loans totaling $22.1 million that we refinanced with new non-recourse mortgage loans totaling $24.9 million with a weighted-average annual interest rate and term of 7.0% and 13.7 years, respectively. We also assumed a non-recourse mortgage loan of $10.3
CPA®:17 – Global 2014 10-K — 28
million, including unamortized premium of $1.3 million, in connection with an investment acquired during 2014. Amounts are based on the exchange rate of the foreign currency at the date of financing, as applicable.
Distributions — Our distributions to stockholders totaled $0.6500 per share for both the years ended December 31, 2014 and 2013.
Net Asset Value — The advisor calculates our net asset value per share annually as of year-end, and the advisor has determined that our net asset value per share as of December 31, 2014 was $9.72. The advisor generally calculates our estimated net asset value per share 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 mortgage loans encumbering our assets (also provided by a third party) as well as other adjustments. Our net asset value per share is based on a number of variables, including individual tenant credits, lease terms, lending credit spreads, foreign currency exchange rates, and tenant defaults, among others. We do not control all of these variables and, as such, cannot predict how they will change in the future. For additional information on our calculation of our net asset value per share at December 31, 2014, please see our Current Report on Form 8-K dated March 31, 2015.
Portfolio Overview
We intend to continue to acquire a diversified portfolio of income-producing commercial properties and other real estate-related assets. We expect to make these investments both domestically and outside of the United States. Portfolio information is provided on a consolidated basis to facilitate the review of our accompanying consolidated financial statements. In addition, we provide such information on a pro rata basis to better illustrate the economic impact of our various net-leased, jointly-owned investments.
Portfolio Summary
|
| | | | | | | | |
| | | December 31, |
| | | 2014 | | 2013 |
| Number of net-leased properties | | 365 |
| | 352 |
|
Number of operating properties (a) | | 72 |
| | 75 |
|
Number of tenants (b) | | 115 |
| | 99 |
|
Total square footage (in thousands) (c) | | 41,243 |
| | 39,665 |
|
Occupancy (b) | | 100.0 | % | | 100.0 | % |
Weighted-average lease term (in years) (b) | | 14.1 |
| | 15.3 |
|
| Number of countries | | 11 |
| | 10 |
|
Total assets (in thousands) (d) | | $ | 4,605,897 |
| | $ | 4,712,539 |
|
Net investments in real estate (in thousands) (d) | | 3,062,287 |
| | 3,149,131 |
|
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2014 | | 2013 | | 2012 |
Acquisition volume — consolidated (in millions) (d) (e) (f) | $ | 121.5 |
| | $ | 351.5 |
| | $ | 1,035.5 |
|
Acquisition volume — pro rata (in millions) (c) (f) | 291.3 |
| | 516.6 |
| | 1,034.0 |
|
Financing obtained — consolidated (in millions) (d) (g) | 92.8 |
| | 313.1 |
| | 469.6 |
|
Financing obtained — pro rata (in millions) (c) (g) (h) | 164.1 |
| | 427.2 |
| | 478.4 |
|
Funds raised (in millions) (i) | — |
| | 1.3 |
| | 927.3 |
|
Average U.S. dollar/euro exchange rate (j) | 1.3295 |
| | 1.3284 |
| | 1.2861 |
|
Increase in the U.S. CPI (k) | 0.8 | % | | 1.5 | % | | 1.7 | % |
(Decrease) increase in the Harmonized Index of Consumer Prices (k) | (0.2 | )% | | 0.8 | % | | 2.2 | % |
CPA®:17 – Global 2014 10-K — 29
__________
| |
| (a) | At December 31, 2014, operating properties are comprised of full or partial ownership interests in 71 self-storage properties and one hotel, all of which are managed by third parties. |
| |
| (b) | Excludes operating properties. |
| |
| (d) | Represents consolidated basis. |
| |
| (e) | Includes build-to-suit transactions, which are reflected as the total commitment for the build-to-suit funding. |
| |
| (f) | The amount for the year ended December 31, 2014 includes acquisition-related costs and fees, which are included in Acquisition expenses in the consolidated financial statements. |
| |
| (g) | Includes refinancings of $24.9 million, $16.5 million, and $7.9 million obtained during the years ended December 31, 2014, 2013, and 2012, respectively. |
| |
| (h) | Financing on a pro rata basis during the year ended December 31, 2014 includes our share of the non-recourse mortgage financings related to Agrokor d.d., referred to as Agrokor 5, Bank Pekao S.A., and Apply Sørco AS (Note 7). |
| |
| (i) | Our follow-on offering closed on January 31, 2013. |
| |
| (j) | The average conversion rate for the U.S. dollar in relation to the euro increased during the year ended December 31, 2014 as compared to 2013 and also increased during the year ended December 31, 2013 as compared to 2012, resulting in a positive impact on earnings in 2014 and 2013 for our euro-denominated investments. |
| |
| (k) | Many of our lease agreements include contractual increases indexed to changes in the CPI or similar indices. |
Net-Leased Portfolio
The tables below represent information about our net-leased portfolio on a consolidated and pro rata basis and, accordingly, exclude all operating properties at December 31, 2014. See Terms and Definitions below for a description of pro rata amounts.
Top Ten Tenants by ABR
(in thousands, except percentages)
|
| | | | | | | | | | | | | | |
| | | Consolidated | | Pro Rata |
| Tenant/Lease Guarantor | | ABR | | Percent | | ABR | | Percent |
Metro Cash & Carry Italia S.p.A. (a) | | $ | 29,671 |
| | 10 | % | | $ | 29,671 |
| | 9 | % |
| The New York Times Company | | 26,057 |
| | 9 | % | | 14,331 |
| | 5 | % |
Agrokor d.d. (a) | | 23,146 |
| | 8 | % | | 24,514 |
| | 8 | % |
| General Parts Inc., Golden State Supply LLC, Straus-Frank Enterprises LLC, General Parts Distribution LLC, and Worldpac Inc. | | 17,653 |
| | 6 | % | | 17,653 |
| | 5 | % |
| KBR, Inc. | | 13,956 |
| | 5 | % | | 13,956 |
| | 4 | % |
| Blue Cross and Blue Shield of Minnesota, Inc. | | 11,732 |
| | 4 | % | | 11,732 |
| | 4 | % |
Eroski Sociedad Cooperativa (a) | | 9,964 |
| | 4 | % | | 10,684 |
| | 3 | % |
| Terminal Freezers, LLC | | 9,041 |
| | 3 | % | | 9,041 |
| | 3 | % |
DTS Distribuidora de Television Digital SA (a) | | 8,604 |
| | 3 | % | | 8,604 |
| | 3 | % |
| RLJ-McLarty-Landers Automotive Holdings, LLC | | 6,658 |
| | 2 | % | | 6,656 |
| | 2 | % |
| Total | | $ | 156,482 |
| | 54 | % | | $ | 146,842 |
| | 46 | % |
__________
| |
| (a) | ABR amounts are subject to fluctuations in foreign currency exchange rates. |
CPA®:17 – Global 2014 10-K — 30
Portfolio Diversification by Geography and Property Type
(in thousands, except percentages)
|
| | | | | | | | | | | | | | |
| | | Consolidated | | Pro Rata |
| Region | | ABR | | Percent | | ABR | | Percent |
| United States | | | | | | | | |
| East | | $ | 54,607 |
| | 19 | % | | $ | 42,266 |
| | 13 | % |
| South | | 51,710 |
| | 18 | % | | 57,199 |
| | 18 | % |
| Midwest | | 50,998 |
| | 18 | % | | 55,935 |
| | 17 | % |
| West | | 27,916 |
| | 9 | % | | 28,885 |
| | 9 | % |
| United States Total | | 185,231 |
| | 64 | % | | 184,285 |
| | 57 | % |
| | | | | | | | | |
| International | | | | | | | | |
| Italy | | 27,933 |
| | 10 | % | | 27,933 |
| | 9 | % |
| Croatia | | 23,146 |
| | 8 | % | | 24,514 |
| | 8 | % |
| Spain | | 18,568 |
| | 6 | % | | 19,287 |
| | 6 | % |
| Germany | | 11,449 |
| | 4 | % | | 20,339 |
| | 6 | % |
| Poland | | 11,117 |
| | 4 | % | | 15,739 |
| | 5 | % |
| United Kingdom | | 5,608 |
| | 2 | % | | 5,608 |
| | 2 | % |
Other (a) | | 5,210 |
| | 2 | % | | 23,739 |
| | 7 | % |
| International Total | | 103,031 |
| | 36 | % | | 137,159 |
| | 43 | % |
| | | | | | | | | |
| Total | | $ | 288,262 |
| | 100 | % | | $ | 321,444 |
| | 100 | % |
|
| | | | | | | | | | | | | | |
| | | Consolidated | | Pro Rata |
| Property Type | | ABR | | Percent | | ABR | | Percent |
| Office | | $ | 96,034 |
| | 33 | % | | $ | 94,627 |
| | 29 | % |
| Warehouse/Distribution | | 66,380 |
| | 23 | % | | 83,746 |
| | 26 | % |
| Retail | | 56,913 |
| | 20 | % | | 69,498 |
| | 22 | % |
| Industrial | | 46,393 |
| | 16 | % | | 46,878 |
| | 15 | % |
Other (b) | | 22,542 |
| | 8 | % | | 26,695 |
| | 8 | % |
| | | $ | 288,262 |
| | 100 | % | | $ | 321,444 |
| | 100 | % |
| |
| (a) | Consolidated includes ABR from tenants in the Netherlands and Japan. Pro rata includes ABR from the aforementioned countries in addition to Hungary and Norway. |
| |
| (b) | Consolidated includes ABR from tenants with the following property types: learning center, automotive dealership, and sports facility. Pro rata includes ABR from the aforementioned property types in addition to self-storage. |
CPA®:17 – Global 2014 10-K — 31
Portfolio Diversification by Tenant Industry
(in thousands, except percentages)
|
| | | | | | | | | | | | | | |
| | | Consolidated | | Pro Rata |
| Industry Type | | ABR | | Percent | | ABR | | Percent |
| Retail Stores | | $ | 65,694 |
| | 23 | % | | $ | 78,423 |
| | 24 | % |
| Business and Commercial Services | | 40,781 |
| | 14 | % | | 40,707 |
| | 12 | % |
| Grocery | | 33,110 |
| | 12 | % | | 50,956 |
| | 16 | % |
| Media: Printing and Publishing | | 29,684 |
| | 10 | % | | 17,959 |
| | 5 | % |
| Automobile | | 16,433 |
| | 6 | % | | 15,290 |
| | 5 | % |
| Healthcare, Education, and Childcare | | 12,649 |
| | 4 | % | | 12,649 |
| | 4 | % |
| Insurance | | 11,732 |
| | 4 | % | | 15,280 |
| | 5 | % |
| Machinery | | 10,637 |
| | 4 | % | | 10,637 |
| | 3 | % |
| Leisure, Amusement, and Entertainment | | 8,697 |
| | 3 | % | | 8,740 |
| | 3 | % |
| Broadcasting and Entertainment | | 8,604 |
| | 3 | % | | 8,604 |
| | 3 | % |
| Beverages, Food, and Tobacco | | 8,398 |
| | 3 | % | | 8,398 |
| | 3 | % |
| Telecommunications | | 6,831 |
| | 2 | % | | 6,858 |
| | 2 | % |
| Transportation – Cargo | | 5,608 |
| | 2 | % | | 5,608 |
| | 2 | % |
| Consumer Non-Durable Goods | | 5,342 |
| | 2 | % | | 5,342 |
| | 2 | % |
| Textiles, Leather, and Apparel | | 5,065 |
| | 2 | % | | 3,039 |
| | 1 | % |
| Banking | | 4,605 |
| | 2 | % | | 9,157 |
| | 3 | % |
| Electronics | | 4,122 |
| | 1 | % | | 2,936 |
| | 1 | % |
| Chemicals, Plastics, Rubber, and Glass | | 3,933 |
| | 1 | % | | 7,524 |
| | 2 | % |
Other (a) | | 6,337 |
| | 2 | % | | 13,337 |
| | 4 | % |
| | | $ | 288,262 |
| | 100 | % | | $ | 321,444 |
| | 100 | % |
__________
| |
| (a) | Consolidated includes ABR from tenants in the following industries: aerospace and defense; mining, metals, and primary metal industries; buildings and real estate; construction and building; finance; consumer and durable goods; and consumer services. Pro rata includes ABR from the aforementioned tenant industries in addition to transportation – personal and oil and gas. |
CPA®:17 – Global 2014 10-K — 32
Lease Expirations
(in thousands, except number of leases and percentages)
|
| | | | | | | | | | | | | | | | | | | | |
| | | Consolidated (a) | | Pro Rata (a) |
| Year of Lease Expiration | | Number of Leases Expiring | | ABR | | Percent | | Number of Leases Expiring | | ABR | | Percent |
2015 (b) | | 9 |
| | $ | 1,090 |
| | — | % | | 10 |
| | $ | 1,092 |
| | — | % |
| 2016 | | 10 |
| | 3,670 |
| | 1 | % | | 11 |
| | 3,714 |
| | 1 | % |
| 2017 | | 4 |
| | 574 |
| | — | % | | 4 |
| | 574 |
| | — | % |
| 2018 | | 2 |
| | 124 |
| | — | % | | 5 |
| | 149 |
| | — | % |
| 2019 | | 3 |
| | 342 |
| | — | % | | 3 |
| | 342 |
| | — | % |
| 2020 | | 2 |
| | 120 |
| | — | % | | 2 |
| | 120 |
| | — | % |
| 2021 | | 3 |
| | 1,497 |
| | 1 | % | | 3 |
| | 1,052 |
| | — | % |
| 2022 | | 1 |
| | 2,472 |
| | 1 | % | | 2 |
| | 3,909 |
| | 1 | % |
| 2023 | | 1 |
| | 76 |
| | — | % | | 2 |
| | 4,628 |
| | 2 | % |
| 2024 | | 7 |
| | 38,773 |
| | 13 | % | | 11 |
| | 32,642 |
| | 10 | % |
| 2025 | | 11 |
| | 10,741 |
| | 4 | % | | 11 |
| | 10,741 |
| | 3 | % |
| 2026 | | 10 |
| | 12,152 |
| | 4 | % | | 16 |
| | 24,590 |
| | 8 | % |
| 2027 | | 23 |
| | 30,400 |
| | 11 | % | | 23 |
| | 30,400 |
| | 10 | % |
| 2028 | | 26 |
| | 38,782 |
| | 14 | % | | 28 |
| | 43,147 |
| | 14 | % |
| Thereafter | | 54 |
| | 147,449 |
| | 51 | % | | 58 |
| | 164,344 |
| | 51 | % |
| | | 166 |
| | $ | 288,262 |
| | 100 | % | | 189 |
| | $ | 321,444 |
| | 100 | % |
__________
| |
| (a) | Assumes tenant does not exercise renewal option. |
| |
| (b) | Month-to-month leases are included in 2015 ABR. |
Self-Storage Summary
Our self-storage properties had an average occupancy rate of 86% at December 31, 2014. As of December 31, 2014, our self-storage portfolio was comprised as follows (square footage in thousands):
|
| | | | | | |
| State | | Number of Properties | | Square Footage |
| California | | 29 |
| | 2,079 |
|
| Illinois | | 13 |
| | 900 |
|
| Florida | | 7 |
| | 486 |
|
| Texas | | 5 |
| | 437 |
|
| Hawaii | | 4 |
| | 259 |
|
| Louisiana | | 3 |
| | 196 |
|
| Georgia | | 2 |
| | 79 |
|
| Alabama | | 1 |
| | 130 |
|
| North Carolina | | 1 |
| | 80 |
|
| Mississippi | | 1 |
| | 61 |
|
| Consolidated Total | | 66 |
| | 4,707 |
|
| New York (45% ownership interest) | | 5 |
| | 272 |
|
| Pro Rata Total | | 71 |
| | 4,979 |
|
Terms and Definitions
Pro Rata Metrics — The portfolio information above contains certain metrics prepared under the pro rata consolidation method. We refer to these metrics as pro rata metrics. We have a number of investments, usually with our affiliates, in which our
CPA®:17 – Global 2014 10-K — 33
economic ownership is less than 100%. Under the full consolidation method, we report 100% of the assets, liabilities, revenues, and expenses of those investments that are deemed to be under our control or for which we are deemed to be the primary beneficiary, even if our ownership is less than 100%. Also, for all other jointly-owned investments, we report our net investment and our net income or loss from that investment. Under the pro rata consolidation method, we generally present our proportionate share, based on our economic ownership of these jointly-owned investments, of the assets, liabilities, revenues, and expenses of those investments.
ABR — ABR represents contractual minimum annualized base rent for our net-leased properties. ABR is not applicable to operating properties.
Financial Highlights
In the course of preparing our 2014 consolidated financial statements, we discovered an error related to our accounting for a subsidiary’s functional currency. We corrected this error, and other errors previously recorded as out-of-period adjustments, and revised our consolidated financial statements for all prior periods impacted. Accordingly, our financial results for all prior periods presented herein have been revised for the correction of such errors (Note 2).
(in thousands)
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| Total revenues | $ | 396,706 |
| | $ | 362,772 |
| | $ | 289,977 |
|
Net income attributable to CPA®:17 – Global | 74,151 |
| | 38,714 |
| | 43,596 |
|
| | | | | | |
| Cash distributions paid | 209,054 |
| | 198,440 |
| | 147,649 |
|
| | | | | | |
| Net cash provided by operating activities | 210,055 |
| | 182,598 |
| | 158,004 |
|
| Net cash used in investing activities | (214,927 | ) | | (533,189 | ) | | (838,787 | ) |
| Net cash (used in) provided by financing activities | (126,182 | ) | | 109,239 |
| | 1,150,361 |
|
| | | | | | |
| Supplemental financial measures: | | | | | |
Funds from operations (a) | 195,883 |
| | 144,232 |
| | 125,459 |
|
Modified funds from operations (a) | 194,636 |
| | 146,452 |
| | 126,596 |
|
__________
| |
| (a) | We consider the performance metrics listed above, including FFO and Modified funds from operations, or MFFO, which are supplemental measures that are not defined by GAAP, both referred to as non-GAAP measures, 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 objective of funding distributions to stockholders. See Supplemental Financial Measures below for our definitions of these non-GAAP measures and reconciliations to their most directly comparable GAAP measures. |
Total revenues, Net income attributable to CPA®:17 – Global, Net cash provided by operating activities, FFO, and MFFO all increased during 2014 as compared to 2013, primarily reflecting the increase in the number of our investments during 2014 and 2013 (Note 5), a decrease in acquisition expenses recorded during 2014 (Note 5), and a transfer tax charge recognized during 2013 in connection with the restructuring of one of our jointly-owned investments (Note 7).
Results of Operations
We evaluate our results of operations with a primary focus on our ability to generate cash flow necessary to meet our objectives of funding distributions to stockholders and increasing our equity in our real estate. As a result, our assessment of operating results gives less emphasis to the effect of unrealized gains and losses, which may cause fluctuations in net income for comparable periods but have no impact on cash flows, and to other non-cash charges, such as depreciation and impairment charges.
CPA®:17 – Global 2014 10-K — 34
The following table presents the comparative results of operations (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2014 | | 2013 | | Change | | 2013 | | 2012 | | Change |
| Revenues | | | | | | | | | | | |
| Lease revenues | $ | 309,175 |
| | $ | 285,388 |
| | $ | 23,787 |
| | $ | 285,388 |
| | $ | 230,898 |
| | $ | 54,490 |
|
| Operating property revenues | 54,780 |
| | 53,029 |
| | 1,751 |
| | 53,029 |
| | 45,406 |
| | 7,623 |
|
| Reimbursable tenant costs | 26,863 |
| | 17,690 |
| | 9,173 |
| | 17,690 |
| | 4,435 |
| | 13,255 |
|
| Interest income and other | 5,888 |
| | 6,665 |
| | (777 | ) | | 6,665 |
| | 9,238 |
| | (2,573 | ) |
| | 396,706 |
| | 362,772 |
| | 33,934 |
| | 362,772 |
| | 289,977 |
| | 72,795 |
|
| Operating Expenses | | | | | | | | | | | |
| Depreciation and amortization: | | | | | | | | | | | |
| Net-leased properties | 87,796 |
| | 77,366 |
| | 10,430 |
| | 77,366 |
| | 58,503 |
| | 18,863 |
|
| Operating properties | 14,371 |
| | 16,376 |
| | (2,005 | ) | | 16,376 |
| | 11,542 |
| | 4,834 |
|
| | 102,167 |
| | 93,742 |
| | 8,425 |
| | 93,742 |
| | 70,045 |
| | 23,697 |
|
| Property expenses: | | | | | | | | | | | |
| Asset management fees | 27,546 |
| | 23,016 |
| | 4,530 |
| | 23,016 |
| | 18,932 |
| | 4,084 |
|
| Reimbursable tenant costs | 26,863 |
| | 17,690 |
| | 9,173 |
| | 17,690 |
| | 4,435 |
| | 13,255 |
|
| Operating properties | 25,584 |
| | 34,440 |
| | (8,856 | ) | | 34,440 |
| | 32,673 |
| | 1,767 |
|
| Net-leased properties | 11,074 |
| | 10,644 |
| | 430 |
| | 10,644 |
| | 6,729 |
| | 3,915 |
|
| | 91,067 |
| | 85,790 |
| | 5,277 |
| | 85,790 |
| | 62,769 |
| | 23,021 |
|
| General and administrative | 22,253 |
| | 20,416 |
| | 1,837 |
| | 20,416 |
| | 14,879 |
| | 5,537 |
|
| Acquisition expenses | 5,169 |
| | 16,884 |
| | (11,715 | ) | | 16,884 |
| | 14,834 |
| | 2,050 |
|
| Impairment charges | 570 |
| | — |
| | 570 |
| | — |
| | 2,019 |
| | (2,019 | ) |
| | 221,226 |
| | 216,832 |
| | 4,394 |
| | 216,832 |
| | 164,546 |
| | 52,286 |
|
| Operating Income | 175,480 |
| | 145,940 |
| | 29,540 |
| | 145,940 |
| | 125,431 |
| | 20,509 |
|
| | | | | | | | | | | | |
| Other Income and Expenses | | | | | | | | | | | |
| Equity in earnings (losses) of equity method investments in real estate | 24,073 |
| | (9,500 | ) | | 33,573 |
| | (9,500 | ) | | 9,757 |
| | (19,257 | ) |
| Other income and (expenses) | (2,172 | ) | | 13,186 |
| | (15,358 | ) | | 13,186 |
| | 5,375 |
| | 7,811 |
|
| Interest expense | (93,001 | ) | | (88,656 | ) | | (4,345 | ) | | (88,656 | ) | | (72,271 | ) | | (16,385 | ) |
| | (71,100 | ) | | (84,970 | ) | | 13,870 |
| | (84,970 | ) | | (57,139 | ) | | (27,831 | ) |
| Income from continuing operations before income taxes and gain on sale of real estate | 104,380 |
| | 60,970 |
| | 43,410 |
| | 60,970 |
| | 68,292 |
| | (7,322 | ) |
| Provision for income taxes | (10,725 | ) | | (1,467 | ) | | (9,258 | ) | | (1,467 | ) | | (1,213 | ) | | (254 | ) |
| Income from continuing operations before gain on sale of real estate | 93,655 |
| | 59,503 |
| | 34,152 |
| | 59,503 |
| | 67,079 |
| | (7,576 | ) |
| Income from discontinued operations, net of tax | — |
| | 7,487 |
| | (7,487 | ) | | 7,487 |
| | 1,923 |
| | 5,564 |
|
| Gain on sale of real estate, net of tax | 13,338 |
| | 659 |
| | 12,679 |
| | 659 |
| | 1,092 |
| | (433 | ) |
| Net Income | 106,993 |
| | 67,649 |
| | 39,344 |
| | 67,649 |
| | 70,094 |
| | (2,445 | ) |
| Net income attributable to noncontrolling interests | (32,842 | ) | | (28,935 | ) | | (3,907 | ) | | (28,935 | ) | | (26,498 | ) | | (2,437 | ) |
Net Income Attributable to CPA®:17 – Global | $ | 74,151 |
| | $ | 38,714 |
| | $ | 35,437 |
| | $ | 38,714 |
| | $ | 43,596 |
| | $ | (4,882 | ) |
| MFFO | $ | 194,636 |
| | $ | 146,452 |
| | $ | 48,184 |
| | $ | 146,452 |
| | $ | 126,596 |
| | $ | 19,856 |
|
CPA®:17 – Global 2014 10-K — 35
Lease Composition and Leasing Activities
As of December 31, 2014, approximately 52.5% of our net leases, based on consolidated ABR, provide for adjustments based on formulas indexed to changes in the CPI or similar indices for the jurisdiction in which the property is located, some of which have caps and/or floors. In addition, 46.9% of our net leases on that same basis have fixed rent adjustments, for which consolidated ABR is scheduled to increase by an average of 1.5% in the next 12 months. We own international investments and, therefore, lease revenues from these investments are subject to fluctuations in exchange rate movements in foreign currencies, primarily the euro.
The following discussion presents a summary of rents on existing properties arising from leases with new tenants, or second generation leases, and renewed leases with existing tenants for the periods presented and, therefore, does not include new acquisitions for our portfolio during the periods presented.
2014 — During 2014, we entered into three leases totaling 4,673 square feet of leased space. Of these leases, one was with a new tenant and two were lease extensions with existing tenants. The average new rent for these leases is $19.91 per square foot and the average former rent was $18.14 per square foot. We provided tenant improvement allowances totaling less than $0.1 million on two of these leases.
2013 — During 2013, we restructured one existing lease of 10,136 square feet of leased space to provide for a tenant improvement allowance of $0.3 million. As a result of this restructuring, the average new rent for this leased space is $23.14 per square foot and the average former rent was $17.60 per square foot.
2012 — During 2012, we restructured five leases totaling approximately 2.2 million square feet of leased space with existing tenants. The average new rent for these leases is $4.86 per square foot and the average former rent was $4.33 per square foot. There were no tenant improvement allowances or concessions related to any of these leases.
CPA®:17 – Global 2014 10-K — 36
Property Level Contribution
Property level contribution includes lease and operating property revenues, less property expenses and depreciation and amortization. When a property is leased on a net-lease basis, reimbursable tenant costs are recorded as both income and property expense and, therefore, have no impact on the property level contribution. The following table presents the property level contribution for our consolidated leased and operating properties as well as a reconciliation to our net operating income (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2014 | | 2013 | | Change | | 2013 | | 2012 | | Change |
| Same Store Net-Leased Properties | | | | | | | | | | | | |
| Lease revenues | | $ | 218,778 |
| | $ | 216,284 |
| | $ | 2,494 |
| | $ | 216,284 |
| | $ | 209,611 |
| | $ | 6,673 |
|
| Depreciation and amortization | | (47,368 | ) | | (47,733 | ) | | 365 |
| | (47,733 | ) | | (47,768 | ) | | 35 |
|
| Property expenses | | (5,797 | ) | | (6,962 | ) | | 1,165 |
| | (6,962 | ) | | (6,275 | ) | | (687 | ) |
| Property level contribution | | 165,613 |
| | 161,589 |
| | 4,024 |
| | 161,589 |
| | 155,568 |
| | 6,021 |
|
| Recently Acquired Net-Leased Properties | | | | | | | | | | | | |
| Lease revenues | | 90,397 |
| | 69,104 |
| | 21,293 |
| | 69,104 |
| | 21,287 |
| | 47,817 |
|
| Depreciation and amortization | | (40,428 | ) | | (29,633 | ) | | (10,795 | ) | | (29,633 | ) | | (10,735 | ) | | (18,898 | ) |
| Property expenses | | (5,277 | ) | | (3,682 | ) | | (1,595 | ) | | (3,682 | ) | | (454 | ) | | (3,228 | ) |
| Property level contribution | | 44,692 |
| | 35,789 |
| | 8,903 |
| | 35,789 |
| | 10,098 |
| | 25,691 |
|
| Operating Properties | | | | | | | | | | | | |
| Revenues | | 46,865 |
| | 39,946 |
| | 6,919 |
| | 39,946 |
| | 25,178 |
| | 14,768 |
|
| Property expenses | | (18,973 | ) | | (17,542 | ) | | (1,431 | ) | | (17,542 | ) | | (12,851 | ) | | (4,691 | ) |
| Depreciation and amortization | | (13,635 | ) | | (15,311 | ) | | 1,676 |
| | (15,311 | ) | | (11,542 | ) | | (3,769 | ) |
| Property level contribution | | 14,257 |
| | 7,093 |
| | 7,164 |
| | 7,093 |
| | 785 |
| | 6,308 |
|
| Properties Sold | | | | | | | | | | | | |
| Revenues | | 7,915 |
| | 13,083 |
| | (5,168 | ) | | 13,083 |
| | 20,228 |
| | (7,145 | ) |
| Property expenses | | (6,611 | ) | | (16,898 | ) | | 10,287 |
| | (16,898 | ) | | (19,822 | ) | | 2,924 |
|
| Depreciation and amortization | | (736 | ) | | (1,065 | ) | | 329 |
| | (1,065 | ) | | — |
| | (1,065 | ) |
| Property level contribution | | 568 |
| | (4,880 | ) | | 5,448 |
| | (4,880 | ) | | 406 |
| | (5,286 | ) |
| Total Property Level Contribution | | | | | | | | | | | | |
| Lease revenues | | 309,175 |
| | 285,388 |
| | 23,787 |
| | 285,388 |
| | 230,898 |
| | 54,490 |
|
| Operating property revenues | | 54,780 |
| | 53,029 |
| | 1,751 |
| | 53,029 |
| | 45,406 |
| | 7,623 |
|
| Operating property expenses | | (25,584 | ) | | (34,440 | ) | | 8,856 |
| | (34,440 | ) | | (32,673 | ) | | (1,767 | ) |
| Property expenses | | (11,074 | ) | | (10,644 | ) | | (430 | ) | | (10,644 | ) | | (6,729 | ) | | (3,915 | ) |
| Depreciation and amortization | | (102,167 | ) | | (93,742 | ) | | (8,425 | ) | | (93,742 | ) | | (70,045 | ) | | (23,697 | ) |
| Property Level Contribution | | 225,130 |
| | 199,591 |
| | 25,539 |
| | 199,591 |
| | 166,857 |
| | 32,734 |
|
| Add other income: | | | | | | | | | | | | |
| Non-rent related revenue and other | | 5,888 |
| | 6,665 |
| | (777 | ) | | 6,665 |
| | 9,238 |
| | (2,573 | ) |
| Less other expenses: | | | | | | | | | | | | |
| Asset management fees | | (27,546 | ) | | (23,016 | ) | | (4,530 | ) | | (23,016 | ) | | (18,932 | ) | | (4,084 | ) |
| General and administrative | | (22,253 | ) | | (20,416 | ) | | (1,837 | ) | | (20,416 | ) | | (14,879 | ) | | (5,537 | ) |
| Acquisition expenses | | (5,169 | ) | | (16,884 | ) | | 11,715 |
| | (16,884 | ) | | (14,834 | ) | | (2,050 | ) |
| Impairment charges | | (570 | ) | | — |
| | (570 | ) | | — |
| | (2,019 | ) | | 2,019 |
|
| Operating Income | | $ | 175,480 |
| | $ | 145,940 |
| | $ | 29,540 |
| | $ | 145,940 |
| | $ | 125,431 |
| | $ | 20,509 |
|
CPA®:17 – Global 2014 10-K — 37
Same Store Net-Leased Properties
Same store net-leased properties are those we acquired or placed into service prior to January 1, 2012. At December 31, 2014, there were 175 same store net-leased properties.
2014 vs. 2013 — For the year ended December 31, 2014 as compared to 2013, property level contribution for same store net-leased properties increased by $4.0 million, primarily due to an increase of lease revenues of $2.5 million and a decrease in property expenses of $1.2 million. Lease revenues increased by $2.1 million as a result of CPI-related rent increases at several properties. Property expenses decreased primarily due to a decrease in legal and professional fees incurred on several properties.
2013 vs. 2012 — For the year ended December 31, 2013 as compared to 2012, property level contribution for same store net-leased properties increased by $6.0 million, primarily due to an increase of lease revenues of $6.7 million, which was partially offset by an increase in property expenses of $0.7 million. Lease revenues increased by $5.6 million as a result of CPI-related rent increases at several properties.
Recently Acquired Net-Leased Properties
Recently acquired net-leased properties are those that we acquired or placed into service subsequent to December 31, 2011.
2014 vs. 2013 — For the year ended December 31, 2014 as compared to 2013, property level contribution from recently acquired net-leased properties increased by $8.9 million, primarily as a result of the six properties that we acquired during the year ended December 31, 2014, which contributed an increase in lease revenues of $3.4 million, and the 18 properties that we acquired or placed into service during the year ended December 31, 2013, which contributed an increase in lease revenues of $19.4 million. This increase was partially offset by increases in depreciation and amortization and property expenses of $10.8 million and $1.6 million, respectively, related to our property acquisitions during the years ended December 31, 2014 and 2013.
2013 vs. 2012 — For the year ended December 31, 2013 as compared to 2012, property level contribution from recently acquired net-leased properties increased by $25.7 million, primarily as a result of the 18 properties that we acquired or placed into service during the year ended December 31, 2013, which contributed an increase in lease revenues of $22.9 million, and 37 properties we acquired during the year ended December 31, 2012, which contributed an increase in lease revenues of $24.9 million. This increase was partially offset by increases in depreciation and amortization and property expenses of $18.9 million and $3.2 million, respectively, related to our property acquisitions during the years ended December 31, 2013 and 2012.
Operating Properties
Other real estate operations represent primarily the results of operations (revenues and operating expenses) of our 66 consolidated self-storage properties. Eight self-storage properties were acquired during 2013, 14 self-storage properties were acquired during 2012, and the remaining 44 self-storage properties were acquired during 2011.
2014 vs. 2013 — For the year ended December 31, 2014 as compared to 2013, property level contribution from operating properties increased by $7.2 million, primarily due to an increase in operating income of $6.9 million and a decrease in depreciation and amortization of $1.7 million, partially offset by an increase in property expenses of $1.4 million. The increases in operating income and property expenses were primarily due to the results of operations of the eight self-storage properties that we acquired during the year ended December 31, 2013. The decrease in depreciation and amortization was primarily due to the in-place lease intangible assets recorded in connection with our self-storage acquisitions during 2011 becoming fully amortized during 2014, resulting in a partial year of amortization during 2014 as compared to a full year of amortization during 2013 for such properties.
2013 vs. 2012 — For the year ended December 31, 2013 as compared to 2012, property level contribution from operating properties increased by $6.3 million, primarily as a result of the eight self-storage properties that we acquired during the year ended December 31, 2013, which contributed an increase in operating revenues of $1.8 million, the 14 self-storage properties that we acquired during the year ended December 31, 2012, which contributed an increase in operating revenues of $8.1 million, and an increase of $4.0 million in non-rent related income recognized from a parking garage adjacent to a multi-tenant facility that we acquired during the fourth quarter of 2012. These increases were partially offset by increases in property expenses and depreciation and amortization of $4.7 million and $3.8 million, respectively, related to our self-storage property acquisitions during the years ended December 31, 2013 and 2012.
CPA®:17 – Global 2014 10-K — 38
Properties Sold
Properties sold represent only those properties that did not qualify for classification as discontinued operations. The results of operations for properties that were sold prior to January 1, 2014 are included within discontinued operations in the consolidated financial statements.
During the year ended December 31, 2014, we sold a hotel that had been classified as an operating property in the consolidated financial statements (Note 15). For the years ended December 31, 2014, 2013, and 2012, property level contribution from the sold hotel was income of $0.6 million, a loss of $4.9 million, and income of $0.4 million, respectively. Losses incurred by the hotel during 2013 were a result of a significant renovation-related disruption, during which a portion of total rooms were unavailable, which negatively impacted our operating income. The related gain is included in Gain on sale of real estate, net of tax, which is disclosed below.
Other Revenues and Expenses
Non-Rent Related Revenue and Other
Non-rent related revenue and other primarily consists of interest earned on our note receivable and CMBS investments.
2014 vs. 2013 — For the year ended December 31, 2014 as compared to 2013, non-rent related revenue and other decreased by $0.8 million because we no longer accrue interest on two non-performing CMBS on which we incurred impairment charges during 2014 (Note 9).
2013 vs. 2012 — For the year ended December 31, 2013 as compared to 2012, non-rent related revenue and other decreased by $2.6 million, primarily due to a decrease of $3.0 million related to the conversion of a note receivable during the fourth quarter of 2012, partially offset by an increase of $0.7 million related to accretion in the carrying value of our CMBS.
Property Expenses — Asset Management Fees
2014 vs. 2013 — For the year ended December 31, 2014 as compared to 2013, asset management fees increased by $4.5 million as a result of 2014 and 2013 investment volume, which increased the asset base from which the advisor earns a fee.
2013 vs. 2012 — For the year ended December 31, 2013 as compared to 2012, asset management fees increased by $4.1 million as a result of 2013 and 2012 investment volume, which increased the asset base from which the advisor earns a fee.
General and Administrative
2014 vs. 2013 — For the year ended December 31, 2014 as compared to 2013, general and administrative expenses increased by $1.8 million, primarily due to an increase in management expenses of $1.5 million, which was due to an increase in our revenue base from which the advisor allocates personnel expenses as a result of our 2014 and 2013 investment volume. Management expenses include our reimbursements to the advisor for the allocated costs of personnel and overhead in providing management of our day-to-day operations, including accounting, legal, treasury, and stockholder services, corporate management, and property management and operations.
2013 vs. 2012 — For the year ended December 31, 2013 as compared to 2012, general and administrative expenses increased by $5.5 million, primarily due to an increase in management expenses of $4.0 million. Management expenses increased primarily due to an amendment to our advisory agreement in the fourth quarter of 2012 related to the basis of allocating advisor personnel expenses amongst us, WPC, CPA®:16 – Global, and CPA®:18 – Global based on each entity’s revenues, and to CWI based on time incurred by its personnel (Note 4). In addition, management expenses increased due to an increase in our revenue base from which the advisor allocates personnel expenses as a result of our 2013 and 2012 investment volume.
Acquisition Expenses
Acquisition expenses represent direct costs incurred to acquire properties in transactions that are accounted for as business combinations, whereby such costs are required to be expensed as incurred (Note 5).
2014 vs. 2013 — For the year ended December 31, 2014 as compared to 2013, acquisition expenses decreased by $11.7 million, primarily due to a decrease in the number of investments we entered into during the year ended December 31, 2014 as compared to 2013.
CPA®:17 – Global 2014 10-K — 39
2013 vs. 2012 — For the year ended December 31, 2013 as compared to 2012, acquisition expenses increased by $2.1 million, primarily as a result of eight investments we entered into during the year ended December 31, 2013 that were accounted for as business combinations.
Impairment Charges
During the year ended December 31, 2014, we incurred other-than-temporary impairment charges totaling $0.6 million on two of our CMBS tranches to reduce their carrying values to their estimated fair values as a result of non-performance (Note 9). At December 31, 2014, the carrying value of our CMBS was $3.1 million.
During the year ended December 31, 2012, we incurred other-than-temporary impairment charges of $2.0 million to reduce the carrying values of three of our CMBS tranches to zero as a result of non-performance and the advisor’s assessment that the likelihood of receiving further interest payments or return of principal was remote (Note 9).
Equity in Earnings (Losses) of Equity Method Investments in Real Estate
Equity in earnings (losses) of equity method investments in real estate is recognized in accordance with each respective investment agreement and, where applicable, based upon an allocation of the investment’s net assets at book value as if the investment were hypothetically liquidated at the end of each reporting period. The table below presents the details of our equity in earnings (losses) of equity investments in real estate (in thousands). Same store equity investments represent investments we accounted for under the equity method and acquired prior to January 1, 2012. Recently acquired equity investments are those that we acquired subsequent to December 31, 2011.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| Type | | 2014 | | 2013 | | Change | | 2013 | | 2012 | | Change |
| Same store equity investments | | $ | 20,743 |
| | $ | (3,062 | ) | | $ | 23,805 |
| | $ | (3,062 | ) | | $ | 7,417 |
| | $ | (10,479 | ) |
| Recently acquired equity investments | | 3,330 |
| | (6,438 | ) | | 9,768 |
| | (6,438 | ) | | 2,340 |
| | (8,778 | ) |
| Total equity in earnings (losses) of equity method investments in real estate | | $ | 24,073 |
| | $ | (9,500 | ) | | $ | 33,573 |
| | $ | (9,500 | ) | | $ | 9,757 |
| | $ | (19,257 | ) |
Equity income of $21.5 million was recognized in 2014 from our eight same store equity method investments in real estate, including $11.5 million from our BG LLH, LLC investment, which was primarily comprised of our share of a bargain purchase gain recorded by the investment during the year. We follow the hypothetical liquidation at book value method in determining our share of the investment’s earnings. Equity income recognized in 2014 was partially offset by an other-than-temporary impairment charge of $0.8 million incurred on one of our jointly-owned investments (Note 9). Equity income of $5.0 million recognized in 2013 was more than offset by our share of the transfer tax charge of $8.1 million related to the restructuring of our Hellweg Die Profi-Baumärkte GmbH & Co. KG, or Hellweg 2, investment (Note 7). Equity income of $7.4 million was recognized in 2012.
We recognized equity income of $7.5 million in 2014 from our ten recently acquired equity method investments in real estate, which was partially offset by our share of acquisition expenses of $4.2 million incurred by the entity that leases its property to Bank Pekao S.A. (Note 7). We recognized equity income of $1.0 million in 2013 from our seven recently acquired equity method investments in real estate, which was more than offset by an other-than-temporary impairment charge of $3.8 million incurred on one of our jointly-owned investments (Note 9) and our share of losses incurred by our Shelborne Property Associates, LLC investment of $3.6 million, which was primarily due to a renovation-related disruption, during which a portion of the hotel owned by the investment was closed. We recognized equity income of $2.3 million in 2012 from our Hellweg 2 B-Note investment and our Shelborne Property Associates, LLC investment.
Other Income and (Expenses)
Other income and (expenses) primarily consists of gains and losses on foreign currency transactions and derivative instruments. We and certain of our foreign consolidated subsidiaries have intercompany debt or advances that are not denominated in the investment’s functional currency. For intercompany transactions that are of a long-term investment nature, the gain or loss is recognized as a cumulative translation adjustment in Other comprehensive income or loss. We also recognize gains or losses on foreign currency transactions when we repatriate cash from our foreign investments. In addition, we have certain derivative instruments, including common stock warrants and foreign currency contracts that are not designated as hedges for accounting
CPA®:17 – Global 2014 10-K — 40
purposes, for which realized and unrealized gains and losses are included in earnings. The timing and amount of such gains or losses cannot always be estimated and are subject to fluctuation.
During the year ended December 31, 2014, we recognized net other expenses of $2.2 million, which was primarily comprised of realized and unrealized foreign currency transaction losses related to our international investments of $7.4 million, partially offset by gains recognized on derivatives of $3.0 million and interest income of $2.4 million.
During the year ended December 31, 2013, we recognized net other income of $13.2 million, which was primarily comprised of realized and unrealized foreign currency transaction gains related to our international investments of $5.3 million, gains recognized on derivatives of $5.2 million, and interest income of $3.0 million.
During the year ended December 31, 2012, we recognized net other income of $5.4 million, which was primarily comprised of interest income of $2.9 million, realized and unrealized foreign currency transaction gains related to our international investments of $1.7 million, and gains recognized on derivatives of $1.5 million.
Interest Expense
2014 vs. 2013 — For the year ended December 31, 2014 as compared to 2013, interest expense increased by $4.3 million, primarily as a result of mortgage financing obtained or assumed in connection with our investment activity during 2014 and 2013.
2013 vs. 2012 — For the year ended December 31, 2013 as compared to 2012, interest expense increased by $16.4 million, primarily as a result of mortgage financing obtained or assumed in connection with our investment activity during 2013 and 2012.
Provision for Income Taxes
Our provision for income taxes is primarily related to our international properties.
During the year ended December 31, 2014, we recorded a provision for income taxes of $10.7 million, due to deferred income taxes of $7.7 million and income taxes of $3.0 million.
During the year ended December 31, 2013, we recorded a provision for income taxes of $1.5 million, due to income taxes of $3.3 million, partially offset by a deferred income tax benefit of $1.8 million.
During the year ended December 31, 2012, we recorded a provision for income taxes of $1.2 million, due to income taxes of $0.9 million and deferred income taxes of $0.3 million.
Income from Discontinued Operations, Net of Tax
Income from discontinued operations, net of tax represents the net income (revenue less expenses) from the operations of properties that were sold or classified as held-for-sale prior to January 1, 2014 (Note 15).
2014 — We did not recognize any property dispositions in discontinued operations during 2014.
2013 — During the year ended December 31, 2013, we recognized income from discontinued operations, net of tax of $7.5 million, primarily due to a gain on the sale of a hotel property of $8.0 million, partially offset by a loss on extinguishment of the related debt of $1.0 million.
2012 — During the year ended December 31, 2012, we recognized income from discontinued operations, net of tax of $1.9 million, primarily due to a net gain on the sale of several properties of $0.7 million and income generated from their operations of $1.2 million.
Gain on Sale of Real Estate, Net of Tax
2014 — During the year ended December 31, 2014, we recognized a $12.5 million gain on sale of real estate, net of tax as a result of the partial sale related to I Shops LLC, or the I Shops Partial Sale (Note 5).
CPA®:17 – Global 2014 10-K — 41
Net Income Attributable to Noncontrolling Interests
2014 vs. 2013 — For the year ended December 31, 2014 as compared to 2013, net income attributable to noncontrolling interests increased by $3.9 million, primarily due to an increase of $3.5 million in the distribution of available cash of the Operating Partnership, which we refer to as the Available Cash Distribution, paid to the advisor as a result of our 2014 and 2013 investment activity. As discussed in Note 4, the advisor owns a special general partner interest in our Operating Partnership entitling it to up to 10% of the available cash of our Operating Partnership, as defined.
2013 vs. 2012 — For the year ended December 31, 2013 as compared to 2012, net income attributable to noncontrolling interests increased by $2.4 million, primarily due to an increase of $2.3 million in the Available Cash Distribution paid to the advisor as a result of our 2013 and 2012 investment activity.
Net Income Attributable to CPA®:17 – Global
2014 vs. 2013 — For the year ended December 31, 2014 as compared to 2013, the resulting net income attributable to CPA®:17 – Global increased by $35.4 million.
2013 vs. 2012 — For the year ended December 31, 2013 as compared to 2012, the resulting net income attributable to CPA®:17 – Global decreased by $4.9 million.
Modified Funds from Operations
MFFO is a non-GAAP measure that we use to evaluate our business. For a definition of MFFO and reconciliation to net income attributable to CPA®:17 – Global, see Supplemental Financial Measures below.
2014 vs. 2013 — For the year ended December 31, 2014 as compared to 2013, MFFO increased by $48.2 million, primarily as a result of the increase in the number of our investments during 2014 and 2013.
2013 vs. 2012 — For the year ended December 31, 2013 as compared to 2012, MFFO increased by $19.9 million, primarily as a result of the increase in the number of our investments during 2013 and 2012.
Financial Condition
Sources and Uses of Cash During the Year
We expect to continue to invest in a diversified portfolio of income-producing commercial properties and other real estate-related assets. We use the cash flow generated from our investments primarily to meet our operating expenses, service debt, and fund distributions to our stockholders. Our cash flows fluctuate from period to period due to a number of factors, which may include, among other things, the timing of purchases and sales of real estate, the timing of the receipt of the proceeds from and the repayment of non-recourse mortgage loans and receipt of lease revenues, the advisor’s annual election to receive fees in shares of our common stock or cash, which our board of directors must approve, the timing and characterization of distributions received from equity investments in real estate, the timing of payments of the Available Cash Distribution to the advisor, and changes in foreign currency exchange rates. Despite these fluctuations, we believe our net leases and other real estate-related assets will generate sufficient cash from operations and from equity distributions in excess of equity income in real estate to meet our normal recurring short-term and long-term liquidity needs. We may also use existing cash resources, the proceeds of non-recourse mortgage loans, and the issuance of additional equity securities to meet these needs. We assess our ability to access capital on an ongoing basis. Our sources and uses of cash during the period are described below.
2014
Operating Activities — Net cash provided by operating activities increased by $27.5 million during the year ended December 31, 2014 as compared to the same period in 2013, primarily reflecting the increase in the number of our investments during 2014 and 2013.
Investing Activities — Our investing activities are generally comprised of real estate-related transactions (purchases and sales), payments of deferred acquisition fees to the advisor, and capitalized property-related costs.
During the year ended December 31, 2014, we used $79.3 million to acquire five investments and $68.9 million to fund construction costs on build-to-suit projects (Note 5). We contributed $199.5 million to jointly-owned investments, including
CPA®:17 – Global 2014 10-K — 42
$135.5 million to acquire equity interests in three new investments; $40.9 million to fund existing acquisition, development, and construction loans, or ADC Arrangements; and $20.4 million to acquire an additional interest in an existing investment (Note 7). We used $7.8 million to acquire an interest in a foreign debenture (Note 9). We received $83.9 million as a return of capital from our equity investments in real estate, primarily due to distributions totaling $62.6 million made to us as a result of new financings obtained by two of our investments (Note 7), and we received net proceeds of $68.8 million, primarily from the sale of real estate as a result of the I Shops Partial Sale (Note 5). Net funds used totaling $4.7 million were deposited in and released from escrow accounts. Payments of deferred acquisition fees to the advisor totaled $6.8 million. We paid value added taxes totaling $5.5 million in connection with several international investments and recovered $4.9 million of value added taxes during the year ended December 31, 2014, including amounts paid in prior years.
Financing Activities — During the year ended December 31, 2014, we paid distributions related to the fourth quarter of 2013 and the first, second, and third quarters of 2014 totaling $209.1 million to our stockholders, which were comprised of cash distributions of $107.1 million and distributions that were reinvested in shares of our common stock by stockholders through our distribution reinvestment and stock purchase plan of $102.0 million. We paid distributions of $30.8 million to affiliates that hold noncontrolling interests in various investments jointly owned with us. We received $92.8 million in proceeds from mortgage financings related to new and existing investments. We made scheduled and unscheduled mortgage principal installments totaling $51.3 million. Funds totaling $3.6 million were released from escrow accounts.
2013
Operating Activities — Net cash provided by operating activities increased by $24.6 million during the year ended December 31, 2013 as compared to the same period in 2012, primarily reflecting the increase in the number of our investments during 2013 and 2012.
Investing Activities — During the year ended December 31, 2013, we used $313.5 million to acquire 19 investments and $91.4 million to fund construction costs on build-to-suit projects (Note 5). We contributed $156.2 million to jointly-owned investments, including $73.1 million to fund ADC Arrangements, $65.6 million to acquire equity interests in three new investments, and $17.0 million to an investment for the investee to repurchase its outstanding mortgage loan (Note 7). We received $9.1 million in distributions from our equity investments in real estate in excess of cumulative equity in net income. Net proceeds totaling $3.0 million were deposited in and released from escrow accounts. We paid value added taxes totaling $29.1 million in connection with several international investments and recovered $40.9 million of value added taxes during the year ended December 31, 2013, including amounts paid in prior years. We received $20.0 million in proceeds from the sale of one hotel property. Payments of deferred acquisition fees to the advisor totaled $14.4 million.
Financing Activities — During the year ended December 31, 2013, we paid distributions related to the fourth quarter of 2012 and the first, second, and third quarters of 2013 totaling $198.4 million to our stockholders, which were comprised of cash distributions of $101.8 million and distributions that were reinvested in shares of our common stock by stockholders through our distribution reinvestment and stock purchase plan of $96.6 million. We paid distributions of $26.8 million to affiliates that hold noncontrolling interests in various investments owned jointly with us. We received $98.0 million in net proceeds from investors, primarily through our distribution reinvestment and stock purchase plan, and $308.9 million in proceeds from mortgage financings related to 2013 and 2012 investment activity. We paid financing costs totaling $4.0 million and we made scheduled and unscheduled mortgage principal installments totaling $44.8 million. Funds totaling $5.4 million were released from escrow accounts.
Distributions
Our objectives are to generate sufficient cash flow over time to provide our stockholders with distributions and to seek investments with potential for capital appreciation throughout varying economic cycles. During the year ended December 31, 2014, we declared distributions to our stockholders totaling $210.9 million, which were comprised of cash distributions of $109.4 million and $101.5 million of distributions reinvested by stockholders through our distribution reinvestment and stock purchase plan. We funded nearly 100% of these distributions from Net cash provided by operating activities. Since inception, we have funded 95% of our cumulative distributions from Net cash provided by operating activities, with the remainder being funded primarily from proceeds of our public offerings. In determining our distribution policy during the periods in which we are raising funds or investing capital, we place primary emphasis on projections of cash flow from operations, together with cash distributions from our unconsolidated investments, rather than on historical results of operations (though these and other factors may be a part of our consideration). In setting a distribution rate, we thus focus primarily on expected returns from those investments we have already made, as well as our anticipated rate of return from future investments, to assess the sustainability of a particular distribution rate over time.
CPA®:17 – Global 2014 10-K — 43
Redemptions
We maintain a quarterly redemption program pursuant to which we may, at the discretion of our board of directors, redeem shares of our common stock from stockholders seeking liquidity. During the year ended December 31, 2014, we received requests to redeem 2,798,365 shares of our common stock pursuant to our redemption plan, all of which were redeemed in the same period, at a weighted-average price of $9.07 per share, which is net of redemption fees, totaling $25.4 million.
Summary of Financing
The table below summarizes our non-recourse debt (dollars in thousands):
|
| | | | | | | |
| | December 31, |
| | 2014 | | 2013 |
| Carrying Value | |
| | |
|
| Fixed rate | $ | 1,259,320 |
| | $ | 1,319,340 |
|
| Variable rate: | | | |
Amount subject to interest rate swaps and cap (a) | 434,202 |
| | 557,341 |
|
Floating interest rate mortgage loans (a) | 166,932 |
| | 4,927 |
|
| Amount of fixed-rate debt subject to interest rate reset features | 36,035 |
| | 33,993 |
|
| | 637,169 |
| | 596,261 |
|
| | $ | 1,896,489 |
| | $ | 1,915,601 |
|
| Percent of Total Debt | |
| | |
|
| Fixed rate | 66 | % | | 69 | % |
| Variable rate | 34 | % | | 31 | % |
| | 100 | % | | 100 | % |
| Weighted-Average Interest Rate at End of Year | |
| | |
|
| Fixed rate | 5.3 | % | | 5.3 | % |
| Variable rate | 4.0 | % | | 4.0 | % |
___________
| |
| (a) | The interest rate cap, which was in effect at December 31, 2013, expired on August 31, 2014. However, we still own the non-recourse debt that had been hedged with this derivative, which is subject to interest rate reset features. |
CPA®:17 – Global 2014 10-K — 44
Cash Resources
At December 31, 2014, our cash resources consisted of cash and cash equivalents totaling $275.7 million. Of this amount, $76.6 million, at then-current exchange rates, was held in foreign subsidiaries, but we could be subject to restrictions or significant costs should we decide to repatriate these amounts. We also had unleveraged properties that had an aggregate carrying value of $202.2 million at December 31, 2014, although there can be no assurance that we would be able to obtain financing for these properties. Our cash resources may be used for future investments and can be used for working capital needs, other commitments, and distributions to our stockholders.
Cash Requirements
During the next 12 months, we expect that our cash requirements will include acquiring new investments, funding capital commitments such as build-to-suit projects and ADC Arrangements, paying distributions to our stockholders and to our affiliates that hold noncontrolling interests in entities we control and making scheduled and unscheduled mortgage loan principal payments, as well as other normal recurring operating expenses. Balloon payments totaling $39.7 million on our consolidated mortgage loan obligations and $12.4 million on our unconsolidated mortgage loan obligations are also due during the next 12 months. The advisor is actively seeking to refinance certain of these loans, although there can be no assurance that it will be able to do so on favorable terms, if at all. Capital and other lease commitments totaling $40.4 million are expected to be funded during the next 12 months. We expect to fund future investments, capital commitments, any capital expenditures on existing properties, and scheduled and unscheduled debt maturities on our mortgage loans through the use of our cash reserves, cash generated from operations, and proceeds from our distribution reinvestment and stock purchase plan.
Off-Balance Sheet Arrangements and Contractual Obligations
The table below summarizes our debt, off-balance sheet arrangements, and other contractual obligations (primarily our capital commitments and lease obligations) at December 31, 2014 and the effect that these arrangements and obligations are expected to have on our liquidity and cash flow in the specified future periods (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
Non-recourse debt — principal (a) | $ | 1,899,633 |
| | $ | 67,858 |
| | $ | 623,382 |
| | $ | 194,080 |
| | $ | 1,014,313 |
|
| Deferred acquisition fees — principal | 10,507 |
| | 7,461 |
| | 3,046 |
| | — |
| | — |
|
| Interest on borrowings and deferred acquisition fees | 882,774 |
| | 152,862 |
| | 109,615 |
| | 133,988 |
| | 486,309 |
|
Subordinated disposition fees (b) | 202 |
| | — |
| | — |
| | 202 |
| | — |
|
Capital commitments (c) | 37,479 |
| | 37,149 |
| | — |
| | 330 |
| | — |
|
Operating and other lease commitments (d) | 77,085 |
| | 3,258 |
| | 6,712 |
| | 6,947 |
| | 60,168 |
|
Asset retirement obligations, net (e)
| 23,271 |
| | — |
| | — |
| | — |
| | 23,271 |
|
| | $ | 2,930,951 |
| | $ | 268,588 |
| | $ | 742,755 |
| | $ | 335,547 |
| | $ | 1,584,061 |
|
___________
| |
| (a) | Excludes $3.1 million of unamortized discount, net, on two notes, which was included in Non-recourse debt at December 31, 2014. |
| |
| (b) | Represents amounts that may be payable to the advisor in connection with sales of assets if minimum stockholder returns are satisfied (Note 4). There can be no assurance as to whether or when these fees will be paid. |
| |
| (c) | Capital commitments include (i) capital commitments related to the ADC Arrangements of $22.9 million (Note 7), (ii) current build-to-suit projects of $12.5 million (Note 5), and (iii) $2.1 million related to other construction commitments. |
| |
| (d) | Operating commitments consist of rental obligations under ground leases. Other lease commitments consist of our share of future rents payable for the purpose of leasing office space pursuant to the advisory agreement. Amounts are allocated among WPC, the CPA® REITs, and CWI (Note 4). |
| |
| (e) | Represents the future amount of obligations estimated for the removal of asbestos and environmental waste in connection with several of our acquisitions, payable upon the retirement or sale of the assets (Note 5). |
Amounts in the table above that relate to our foreign operations are based on the exchange rate of the local currencies at December 31, 2014, which consisted primarily of the euro. At December 31, 2014, we had no material capital lease obligations for which we were the lessee, either individually or in the aggregate.
CPA®:17 – Global 2014 10-K — 45
Equity Method Investments
We have interests in unconsolidated investments that primarily own single-tenant properties net leased to companies. Generally, the underlying investments are jointly-owned with our affiliates. Summarized financial information for these investments and our ownership interest in the investments at December 31, 2014 is presented below. Cash requirements with respect to our share of these debt obligations are discussed above under Cash Requirements. Summarized financial information provided represents the total amounts recorded by the investees and does not represent our proportionate share (dollars in thousands):
|
| | | | | | | | | | | | |
| Lessee | | Ownership Interest at December 31, 2014 | | Total Assets | | Total Third-Party Debt | | Maturity Date |
Tesco plc (a) | | 49% | | $ | 70,294 |
| | $ | 38,173 |
| | 6/2016 |
Hellweg 2 (a) | | 37% | | 353,565 |
| | 290,484 |
| | 1/2017 |
| Madison Storage NYC, LLC and Veritas Group IX-NYC, LLC | | 45% | | 95,842 |
| | 71,366 |
| | 12/1/2016; 6/1/2017 |
C1000 Logistiek Vastgoed B.V. (a) | | 85% | | 167,006 |
| | 82,700 |
| | 3/2020 |
| Berry Plastics Corporation | | 50% | | 67,976 |
| | 25,881 |
| | 6/2020 |
Agrokor 5 (a) | | 20% | | 87,631 |
| | 37,038 |
| | 12/2020 |
Bank Pekao S.A. (a) | | 50% | | 133,366 |
| | 64,852 |
| | 3/2021 |
Apply Sørco AS (a) | | 49% | | 98,810 |
| | 48,151 |
| | 10/2021 |
| Dick’s Sporting Goods, Inc. | | 45% | | 24,384 |
| | 20,346 |
| | 1/2022 |
| BPS Nevada, LLC | | 15% | | 189,723 |
| | 106,619 |
| | 2/2023 |
| State Farm | | 50% | | 113,661 |
| | 72,800 |
| | 9/2023 |
| U-Haul Moving Partners, Inc. and Mercury Partners, LP | | 12% | | 242,017 |
| | — |
| | N/A |
Eroski Sociedad Cooperativa — Mallorca (a) | | 30% | | 29,118 |
| | — |
| | N/A |
| Shelborne Property Associates, LLC | | 33% | | 147,302 |
| | — |
| | N/A |
| IDL Wheel Tenant, LLC | | N/A | | 29,709 |
| | — |
| | N/A |
| | | | | $ | 1,850,404 |
| | $ | 858,410 |
| | |
___________
| |
| (a) | Dollar amounts shown are based on the exchange rate of the applicable foreign currency at December 31, 2014. |
Environmental Obligations
In connection with the purchase of many of our properties, we required the sellers to perform environmental reviews. We believe, based on the results of these reviews, that our properties were in substantial compliance with federal, state, and foreign environmental statutes at the time the properties were acquired. However, portions of certain properties have been subject to some degree of contamination, principally in connection with leakage from underground storage tanks, surface spills, or other on-site activities. In most instances where contamination has been identified, tenants are actively engaged in the remediation process and addressing identified conditions. Sellers are generally subject to environmental statutes and regulations regarding the discharge of hazardous materials and any related remediation obligations, and we frequently require sellers to address them before closing or obtain contractual protections (e.g. indemnities, cash reserves, letters of credit, or other instruments) from sellers when we acquire a property. In addition, our leases generally require tenants to indemnify us from all liabilities and losses related to the leased properties and the provisions of such indemnifications specifically address environmental matters. The leases generally include provisions that allow for periodic environmental assessments, paid for by the tenant, and allow us to extend leases until such time as a tenant has satisfied its environmental obligations. Certain of our leases allow us to require financial assurances from tenants, such as performance bonds or letters of credit, if the costs of remediating environmental conditions are, in our estimation, in excess of specified amounts. With respect to our operating properties, which are not subject to net-lease arrangements, there is no tenant to provide for indemnification, so we may be liable for costs associated with environmental contamination in the event any such circumstances arise. However, we believe that the ultimate resolution of environmental matters should not have a material adverse effect on our financial condition, liquidity, or results of operations.
We have recorded asset retirement obligations of $23.3 million as of December 31, 2014 for the removal of asbestos and environmental waste in connection with several of our acquisitions.
CPA®:17 – Global 2014 10-K — 46
Critical Accounting Estimates
Our significant accounting policies are described in Note 3. Many of these accounting policies require judgment and the use of estimates and assumptions when applying these policies in the preparation of our consolidated financial statements. On a quarterly basis, we evaluate these estimates and judgments based on historical experience as well as other factors that we believe to be reasonable under the circumstances. These estimates are subject to change in the future if underlying assumptions or factors change. Certain accounting policies, while significant, may not require the use of estimates. Those accounting policies that require significant estimation and/or judgment are listed below.
Accounting for Acquisitions
In connection with our acquisition of properties, we allocate the purchase price to the tangible and intangible assets and liabilities acquired based on their respective estimated fair values. We determine the value of tangible assets, consisting of land, buildings, and site improvements, and record intangible assets, including the above- and below-market value of leases and the value of in-place leases, which includes the value of tenant relationships, at their estimated fair values.
Tangible Assets
Land is typically valued utilizing the sales comparison (or market) approach. Buildings are valued, as if vacant, using the cost and/or income approach. Site improvements are valued using the cost approach. The fair value of real estate is determined by reference to portfolio appraisals which determines their values, on a property level, by applying a discounted cash flow analysis to the estimated cash net operating income, for each property in the portfolio during the remaining anticipated lease term, and the estimated residual value. The estimated residual value of each property is based on a hypothetical sale of the property upon expiration of a lease factoring in the re-tenanting of such property at estimated current market rental rates, applying a selected capitalization rate.
Assumptions used in the model are property-specific where this information is available; however, when certain necessary information is not available, we use available regional and property-type information. Assumptions and estimates include the following:
| |
| • | a discount rate or internal rate of return; |
| |
| • | the marketing period necessary to put a lease in place; |
| |
| • | carrying costs during the marketing period; |
| |
| • | leasing commissions and tenant improvement allowances; |
| |
| • | market rents and growth factors of these rents; and |
| |
| • | a market lease term and a capitalization rate to be applied to an estimate of market rent at the end of the market lease term. |
The discount rates and residual capitalization rates used to value the properties are selected based on several factors, including:
| |
| • | the creditworthiness of the lessees; |
| |
| • | property location and age; |
| |
| • | current lease rates relative to market lease rates; and |
| |
| • | anticipated lease duration. |
In the case where a tenant has a purchase option deemed to be favorable to the tenant, or the tenant has long-term renewal options at rental rates below estimated market rental rates, we include the value of the exercise of such purchase option or long-term renewal options in the determination of residual value.
Where a property is deemed to have excess land, the discounted cash flow analysis includes the estimated excess land value at the assumed expiration of the lease, based upon an analysis of comparable land sales or listings in the general market area of the property grown at estimated market growth rates through the year of lease expiration.
The remaining economic life of leased assets is estimated by relying in part upon third-party appraisals of the leased assets, industry standards, and based on our experience. Different estimates of remaining economic life will affect the depreciation expense that is recorded.
CPA®:17 – Global 2014 10-K — 47
Intangible Assets
We record above- and below-market lease intangible values for acquired properties based on the present value (using a discount rate reflecting the risks associated with the leases acquired including consideration of the credit of the lessee) of the difference between (i) the contractual rents to be paid pursuant to the leases negotiated and in place at the time of acquisition of the properties and (ii) our estimate of fair market lease rates for the property or an equivalent property, both of which are measured over a period equal to the estimated lease term, which includes any renewal options that have rental rates below estimated market rental rates. Estimates of market rent are generally determined by us relying in part upon a third-party appraisal obtained in connection with the property acquisition and can include estimates of market rent increase factors, which are generally provided in the appraisal or by local real estate brokers.
We evaluate the specific characteristics of each tenant’s lease and any pre-existing relationship with each tenant in determining the value of in-place lease intangibles. To determine the value of in-place lease intangibles, we consider the following:
| |
| • | estimated lease term including renewal options at rental rates below estimated market rental rates; |
| |
| • | estimated carrying costs of the property during a hypothetical expected lease-up period; and |
| |
| • | current market conditions and costs to execute similar leases including tenant improvement allowances and rent concessions. |
Estimated carrying costs of the property include real estate taxes, insurance, other property operating costs, and estimates of lost rentals at market rates during the market participants’ expected lease-up periods, based on assessments of specific market conditions.
We determine these values using our estimates or by relying in part upon third-party appraisals conducted by independent appraisal firms.
Debt
When we acquire leveraged properties, the fair value of the related debt instruments is determined using a discounted cash flow model with rates that take into account the credit of the tenants, where applicable, and interest rate risk. Such resulting premium or discount is amortized over the remaining term of the obligation. We also consider the value of the underlying collateral taking into account the quality of the collateral, the credit quality of the tenant, the time until maturity, and the current interest rate.
Impairments
We periodically assess whether there are any indicators that the value of our long-lived real estate and related intangibles may be impaired or that their carrying value may not be recoverable. These impairment indicators include, but are not limited to, the vacancy of a property that is not subject to a lease, an upcoming lease expiration, a tenant with credit difficulty, or a likely disposition of the property. We may incur impairment charges on long-lived assets, including real estate, direct financing leases, assets held for sale, and equity investments in real estate. We may also incur impairment charges on marketable securities investments. Estimates and judgments used when evaluating whether these assets are impaired are presented below.
Real Estate
For real estate assets held for investment, which include finite-lived intangibles, in which an impairment indicator is identified, we follow a two-step process to determine whether an asset is impaired and to determine the amount of the charge. First, we compare the carrying value of the property’s asset group to the estimated future net undiscounted cash flow that we expect the property’s asset group will generate, including any estimated proceeds from the eventual sale of the property’s asset group. The undiscounted cash flow analysis requires us to make our best estimate of market rents, residual values, and holding periods. We estimate market rents and residual values using market information from outside sources such as broker quotes or recent comparable sales. As our investment objective is to hold properties on a long-term basis, holding periods used in the undiscounted cash flow analysis are generally ten years, but may be less if our intent is to hold a property for less than ten years. Depending on the assumptions made and estimates used, the future cash flow projected in the evaluation of long-lived assets and associated intangible assets can vary within a range of outcomes. We consider the likelihood of possible outcomes in determining our estimate of future cash flows and, if warranted, we apply a probability-weighted method to the different possible scenarios. If the future net undiscounted cash flow of the property’s asset group is less than the carrying value, the carrying value of the property’s asset group is considered not recoverable. We then measure the impairment loss as the excess
CPA®:17 – Global 2014 10-K — 48
of the carrying value of the property’s asset group over its estimated fair value. In cases where the available market information is not deemed appropriate, we perform a future net cash flow analysis discounted for inherent risk associated with each asset to determine an estimated fair value.
Assets Held for Sale
We classify real estate assets that are accounted for as operating leases as held for sale when we have entered into a contract to sell the property, all material due diligence requirements have been satisfied, and we believe it is probable that the disposition will occur within one year. When we classify an asset as held for sale, we carry the investment at the lower of its current carrying value or the fair value (less estimated cost to sell). We base the fair value on the contract and the estimated cost to sell on information provided by brokers and legal counsel. We then compare the asset’s fair value (less estimated cost to sell) to its carrying value, and if the fair value (less estimated cost to sell) is less than the property’s carrying value, we reduce the carrying value to the fair value (less estimated cost to sell). We will continue to review the initial impairment for subsequent changes in the fair value and may recognize an additional impairment charge if warranted.
Direct Financing Leases
We review our direct financing leases at least annually to determine whether there has been an other-than-temporary decline in the current estimate of residual value of the property. The residual value is our estimate of what we could realize upon the sale of the property at the end of the lease term, based on market information. If this review indicates that a decline in residual value has occurred that is other-than-temporary, we recognize an impairment charge equal to the difference between the fair value and the carrying amount of the residual value.
When we enter into a contract to sell the real estate assets that are recorded as direct financing leases, we evaluate whether we believe it is probable that the disposition will occur. If we determine that the disposition is probable, we assess the carrying amount for recoverability and if as a result of the decreased expected cash flows, we determine that our carrying value is not fully recoverable, we record an allowance for credit losses to reflect the change in the estimate of the undiscounted future rents. Accordingly, the net investment balance is written down to fair value.
Equity Investments in Real Estate
We evaluate our equity investments in real estate on a periodic basis to determine if there are any indicators that the value of our equity investments may be impaired and whether or not that impairment is other-than-temporary. For our equity investments in real estate, we calculate the estimated fair value of the underlying investment’s real estate or net investment in direct financing lease as described in Real Estate and Direct Financing Leases above. The fair value of the underlying investment’s debt, if any, is calculated based on market interest rates and other market information. The fair value of the underlying investment’s other financial assets and liabilities (excluding net investment in direct financing leases) have fair values that generally approximate their carrying values.
Debt Securities
We have investments in debt securities that are designated as securities held to maturity. On a quarterly basis, we evaluate our debt securities to determine if they have experienced an other-than temporary decline in value. In our evaluation, we consider, among other items, the significance of the decline in value compared to the cost basis; underlying factors contributing to the decline in value, such as delinquencies and expectations of credit losses; the length of time the market value of the security has been less than its cost basis; expected market volatility and market and economic conditions; advice from dealers; and our own experience in the market.
Under current authoritative accounting guidance, if the debt security’s market value is below its amortized cost and we either intend to sell the security or it is more likely than not that we will be required to sell the security before its anticipated recovery, we record the entire amount of the other-than-temporary impairment charge in earnings.
We do not intend to sell our debt securities and we do not expect that it is more likely than not that we will be required to sell these investments before their anticipated recovery. However, if we have determined that an other-than-temporary impairment has occurred, we calculate the impairment charge as the difference between the debt securities’ carrying value and their estimated fair value. We then separate the other-than-temporary impairment charge into the non-credit loss portion and the credit loss portion. We determine the non-credit loss portion by analyzing the changes in spreads on high credit quality debt securities as compared with the changes in spreads on the debt securities being analyzed for other-than-temporary impairment. We generally perform this analysis over a time period from the date of acquisition of the debt securities through the date of the
CPA®:17 – Global 2014 10-K — 49
analysis. Any resulting loss is deemed to represent losses due to the illiquidity of the debt securities and is recorded as a separate component of Other comprehensive income or loss in equity. We then measure the credit loss portion of the other-than-temporary impairment as the residual amount of the other-than-temporary impairment. We record the credit loss portion in earnings.
Following recognition of the other-than-temporary impairment, the difference between the new cost basis of the debt securities and cash flows expected to be collected is accreted to Other interest income over the remaining expected lives of the securities.
Proposed Accounting Change
The following proposed accounting change may potentially impact our business if the outcome has a significant influence on sale-leaseback demand in the marketplace:
The Financial Accounting Standards Board and the International Accounting Standards Board have issued an Exposure Draft on a joint proposal that would dramatically transform lease accounting from the existing model. These changes would impact most companies but are particularly applicable to those that are significant users of real estate. The proposal outlines a new model for accounting by lessees, whereby their rights and obligations under substantially all leases, existing and new, would be capitalized and recorded on the balance sheet. For some companies, the new accounting guidance may influence whether or not, or the extent to which, they may enter into the type of sale-leaseback transactions in which we specialize. In May 2013, the Financial Accounting Standards Board and the International Accounting Standards Board issued a revised exposure draft for public comment and the comment period ended in September 2013. As of the date of this Report, the Financial Accounting Standards Board and the International Accounting Standards Board continue their redeliberations of the proposals included in the May 2013 Exposure Draft based on the comments received, and the proposed guidance has not yet been finalized, and as such we are unable to determine whether this proposal will have a material impact on our business.
Supplemental Financial Measures
In the real estate industry, analysts and investors employ certain non-GAAP supplemental financial measures in order to facilitate meaningful comparisons between periods and among peer companies. Additionally, in the formulation of our goals and in the evaluation of the effectiveness of our strategies, we use FFO and MFFO, which are supplemental non-GAAP measures. We believe that these non-GAAP measures are useful to investors to consider because it may assist them to better understand and measure the performance of our business over time and against similar companies. A description of FFO and MFFO and reconciliations of FFO and MFFO to the most directly comparable GAAP measures are provided below.
Funds from Operations, or FFO, and Modified Funds from Operations, or MFFO
Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts, Inc., or NAREIT, an industry trade group, has promulgated a non-GAAP measure known as FFO, which we believe to be an appropriate supplemental measure, when used in addition to and in conjunction with results presented in accordance with GAAP, to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental non-GAAP measure. FFO is not equivalent to nor a substitute for net income or loss as determined under GAAP.
We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004. The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property, impairment charges on real estate, and depreciation and amortization; and after adjustments for unconsolidated partnerships and jointly-owned investments. Adjustments for unconsolidated partnerships and jointly-owned investments are calculated to reflect FFO.
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or is requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment, and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate-related depreciation and amortization as well as impairment charges of real estate-related assets, provides a more complete
CPA®:17 – Global 2014 10-K — 50
understanding of our performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. In particular, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time. An asset will only be evaluated for impairment if certain impairment indicators exist. Then a two-step process is performed, of which first is to determine whether an asset is impaired by comparing the carrying value, or book value, to the total estimated undiscounted future cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset, then measure the impairment loss as the excess of the carrying value over its estimated fair value. It should be noted, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property (including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows) are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO described above, due to the fact that impairments are based on estimated future undiscounted cash flows, it could be difficult to recover any impairment charges. However, FFO and MFFO, as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating the operating performance of the company. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.
Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) were put into effect in 2009. These other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT’s definition of FFO have prompted an increase in cash-settled expenses, such as acquisition fees, that are typically accounted for as operating expenses. Management believes these fees and expenses do not affect our overall long-term operating performance. Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start-up entities may also experience significant acquisition activity during their initial years, we believe that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after acquisition activity ceases. As disclosed in the prospectus for our follow-on offering dated April 7, 2011, we intend to begin the process of achieving a liquidity event (i.e., listing of our common stock on a national exchange, a merger or sale of our assets or another similar transaction) within eight to 12 years following the investment of substantially all of the net proceeds from our initial offering, which occurred in April 2011. Thus, we do not intend to continuously purchase assets and intend to have a limited life. Due to the above factors and other unique features of publicly registered, non-listed REITs, the Investment Program Association, an industry trade group, has standardized a measure known as MFFO, which the Investment Program Association has recommended as a supplemental measure for publicly registered non-listed REITs and which we believe to be another appropriate supplemental non-GAAP measure to reflect the operating performance of a non-listed REIT having the characteristics described above. MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended. We believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO, and also excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring properties and once our portfolio is in place. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance now that our offering has been completed and once all of our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry. Further, we believe that MFFO is useful in comparing the sustainability of our operating performance since our offering and most of our acquisitions are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. MFFO should only be used to assess the sustainability of a company’s operating performance after a company’s offering has been completed and properties have been acquired, as it excludes acquisition costs that have a negative effect on a company’s operating performance during the periods in which properties are acquired.
We define MFFO consistent with the Investment Program Association’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations, or the Practice Guideline, issued by the Investment Program Association in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income: acquisition fees and expenses; amounts relating to deferred rent receivables and amortization of above- and below-market leases and liabilities (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments); accretion of discounts and amortization of premiums on debt investments; nonrecurring impairments of real estate-related investments
CPA®:17 – Global 2014 10-K — 51
(i.e., infrequent or unusual, not reasonably likely to recur in the ordinary course of business); mark-to-market adjustments included in net income; nonrecurring gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives, or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and jointly-owned investments, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, nonrecurring unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized. While we are responsible for managing interest rate, hedge, and foreign exchange risk, we retain an outside consultant to review all our hedging agreements. Inasmuch as interest rate hedges are not a fundamental part of our operations, we believe it is appropriate to exclude such infrequent gains and losses in calculating MFFO, as such gains and losses are not reflective of on-going operations.
In calculating MFFO, we exclude acquisition-related expenses, restructuring expenses, amortization of above- and below-market leases, fair value adjustments of derivative financial instruments, deferred rent receivables, and the adjustments of such items related to noncontrolling interests. Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income. These expenses are paid in cash by a company. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by the company, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses, and other costs related to such property. Restructuring expenses are related to the restructuring of Hellweg 2 and we consider this expense not to be part of our normal business operation. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income in determining cash flow from operating activities. In addition, we view fair value adjustments of derivatives and gains and losses from dispositions of assets as infrequent items or items which are unrealized and may not ultimately be realized, and which are not reflective of on-going operations and are therefore typically adjusted for assessing operating performance.
Our management uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other non-listed REITs, which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to non-listed REITs, such as their limited life, limited and defined acquisition period, and targeted exit strategy, and hence that the use of such measures is useful to investors. For example, acquisition costs are generally funded from the proceeds of our offering and other financing sources and not from operations. By excluding expensed acquisition costs, the use of MFFO provides information consistent with management’s analysis of the operating performance of the properties. By excluding restructuring expenses we facilitate the evaluation of operating performance of a recurring nature. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such changes that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.
Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income or income from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs, including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance.
Neither the SEC, NAREIT, nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT, or another regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO accordingly.
CPA®:17 – Global 2014 10-K — 52
FFO and MFFO were as follows (in thousands):
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2014 | | 2013 (a) | | 2012 (a) |
Net income attributable to CPA®:17 – Global | $ | 74,151 |
| | $ | 38,714 |
| | $ | 43,596 |
|
| Adjustments: | | | | | |
| Depreciation and amortization of real property | 99,210 |
| | 91,313 |
| | 68,061 |
|
| Gain on sale of real estate | (4,251 | ) | | (8,065 | ) | | (1,832 | ) |
| Proportionate share of adjustments to equity in net income of partially-owned entities to arrive at FFO: | | | | | |
| Depreciation and amortization of real property | 26,656 |
| | 19,143 |
| | 16,211 |
|
| Impairment charges | 766 |
| | 3,778 |
| | — |
|
| Loss on sale of real estate | — |
| | — |
| | 1 |
|
| Proportionate share of adjustments for noncontrolling interests to arrive at FFO | (649 | ) | | (651 | ) | | (578 | ) |
| Total adjustments | 121,732 |
| | 105,518 |
| | 81,863 |
|
| FFO — as defined by NAREIT | 195,883 |
| | 144,232 |
| | 125,459 |
|
| Adjustments: | | | | | |
Straight-line and other rent adjustments (b) | (19,041 | ) | | (19,777 | ) | | (15,516 | ) |
Acquisition expenses (c) | 7,877 |
| | 19,481 |
| | 17,215 |
|
| Realized losses (gains) on foreign currency, derivatives, and other | 2,709 |
| | (4,868 | ) | | (4,070 | ) |
| Unrealized losses (gains) on foreign currency, derivatives, and other | 2,045 |
| | (5,119 | ) | | 1,344 |
|
Impairment charges (d) | 570 |
| | — |
| | 2,019 |
|
| Accretion of discounts on debt investments, net | (533 | ) | | (336 | ) | | (142 | ) |
Above- and below-market rent intangible lease amortization, net (e) | (404 | ) | | 109 |
| | 882 |
|
| Unrealized gains on mark-to-market adjustments | (291 | ) | | — |
| | — |
|
| Loss on extinguishment of debt | 263 |
| | 1,578 |
| | — |
|
| Proportionate share of adjustments to equity in net income of partially-owned entities to arrive at MFFO: | | | | | |
Acquisition expenses (c) | 4,337 |
| | 1,504 |
| | 273 |
|
Above- and below-market rent intangible lease amortization, net (e) | 1,249 |
| | 1,224 |
| | 2 |
|
Straight-line and other rent adjustments (b) | (515 | ) | | (226 | ) | | (45 | ) |
| Unrealized losses on mark-to-market adjustments | 213 |
| | 234 |
| | — |
|
| Realized losses on foreign currency, derivatives, and other | 23 |
| | 13 |
| | — |
|
| Unrealized losses on foreign currency, derivatives, and other | 17 |
| | 73 |
| | 28 |
|
Restructuring charges (f) | — |
| | 8,095 |
| | — |
|
| Gain on extinguishment of debt | — |
| | — |
| | (1,914 | ) |
| Proportionate share of adjustments for noncontrolling interests to arrive at MFFO | 234 |
| | 235 |
| | 1,061 |
|
| Total adjustments | (1,247 | ) | | 2,220 |
| | 1,137 |
|
| MFFO | $ | 194,636 |
| | $ | 146,452 |
| | $ | 126,596 |
|
___________
| |
| (a) | In the course of preparing our 2014 consolidated financial statements, we discovered an error related to our accounting for a subsidiary’s functional currency. We corrected this error, and other errors previously recorded as out-of-period adjustments, and revised our consolidated financial statements for all prior periods impacted. Accordingly, our financial results for all prior periods presented herein have been revised for the correction of such errors (Note 2). Additionally, during 2014 we changed the accounting for one of our equity investments in real estate (Note 3). The correction of errors and change in accounting resulted in a (decrease) increase to Net income attributable to CPA®:17 – Global of $(1.2) million and $2.0 million, FFO of $(1.3) million and $2.7 million, and MFFO of $(2.9) million and $1.4 million for the years ended December 31, 2013 and 2012, respectively. |
CPA®:17 – Global 2014 10-K — 53
| |
| (b) | Under GAAP, rental receipts are allocated to periods using an accrual basis. This may result in income recognition that is significantly different than underlying contract terms. By adjusting for these items (to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), management believes that MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments, provides insight on the contractual cash flows of such lease terms and debt investments, and aligns results with management’s analysis of operating performance. |
| |
| (c) | Includes Acquisition expenses and amortization of deferred acquisition fees. In evaluating investments in real estate, management differentiates the costs to acquire the investment from the operations derived from the investment. Such information would be comparable only for non-listed REITs that have completed their acquisition activity and have other similar operating characteristics. By excluding expensed acquisition costs and amortization of deferred acquisition fees, management believes MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties. Acquisition fees and expenses include payments to the advisor or third parties. Acquisition fees and expenses under GAAP are considered operating expenses and as expenses included in the determination of net income and income from continuing operations, both of which are performance measures under GAAP. All paid and accrued acquisition fees and expenses will have negative effects on returns to stockholders, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of properties are generated to cover the purchase price of the property, these fees and expenses, and other costs related to the property. |
| |
| (d) | Impairment charges were incurred on our CMBS portfolio and are considered non-real estate impairments. As such, these impairment charges were not included in our computation of FFO as defined by NAREIT but are included as an adjustment in arriving at MFFO as these charges are not directly related or attributable to our operations. |
| |
| (e) | Under GAAP, certain intangibles are accounted for at cost and reviewed at least annually for impairment, and certain intangibles are assumed to diminish predictably in value over time and amortized, similar to depreciation and amortization of other real estate-related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, management believes that by excluding charges relating to amortization of these intangibles, MFFO provides useful supplemental information on the performance of the real estate. |
| |
| (f) | In connection with the Hellweg 2 restructuring in October 2013, our share of the German real estate transfer tax incurred by Hellweg 2 was $8.1 million (Note 7). |
CPA®:17 – Global 2014 10-K — 54
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, and equity prices. The primary risks to which we are exposed are interest rate risk and foreign currency exchange risk; we are also exposed to further market risk as a result of concentrations of tenants in certain industries and/or geographic regions. Adverse market factors can affect the ability of tenants in a particular industry/region to meet their respective lease obligations. In order to manage this risk, we view our collective tenant roster as a portfolio, and the advisor attempts to diversify our portfolio through its investment decisions so that we are not overexposed to a particular industry or geographic region.
Generally, we do not use derivative instruments to hedge credit/market risks or for speculative purposes. However, from time to time, we may enter into foreign currency forward contracts to hedge our foreign currency cash flow exposures.
Interest Rate Risk
The values of our real estate, related fixed-rate debt obligations, and our note receivable investments are subject to fluctuations based on changes in interest rates. The value of our real estate is also subject to fluctuations based on local and regional economic conditions and changes in the creditworthiness of lessees, all of which may affect our ability to refinance property-level mortgage debt when balloon payments are scheduled, if we do not choose to repay the debt when due. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political conditions, and other factors beyond our control. An increase in interest rates would likely cause the fair value of our owned assets to decrease. Increases in interest rates may also have an impact on the credit profile of certain tenants.
We are exposed to the impact of interest rate changes primarily through our borrowing activities. To limit this exposure, we have historically attempted to obtain non-recourse mortgage financing on a long-term, fixed-rate basis. However, from time to time, we or our joint investment partners have obtained, and may in the future obtain, variable-rate, non-recourse mortgage loans, and as a result, we have entered into, and may continue to enter into, interest rate swap agreements or interest rate cap agreements with lenders. Interest rate swap agreements effectively convert the variable-rate debt service obligations of the loan to a fixed rate, while interest rate cap agreements limit the underlying interest rate from exceeding a specified strike rate. Interest rate swaps are agreements in which one party exchanges a stream of interest payments for a counterparty’s stream of cash flows over a specific period, and interest rate caps limit the effective borrowing rate of variable-rate debt obligations while allowing participants to share in downward shifts in interest rates. These interest rate swaps and caps (where applicable) are derivative instruments designated as cash flow hedges on the forecasted interest payments on the debt obligation. The face amount on which the swaps or caps are based is not exchanged. Our objective in using these derivatives is to limit our exposure to interest rate movements. At December 31, 2014, we estimated that the total fair value of our interest rate swaps, which are included in Other assets, net and Accounts payable, accrued expenses and other liabilities in the consolidated financial statements, was in a net liability position of $14.5 million (Note 10).
At December 31, 2014, all of our debt either bore interest at fixed rates, bore interest at floating rates, was swapped to a fixed rate, or bore interest at fixed rates that were scheduled to convert to then-prevailing market fixed rates at certain future points during their term. The annual interest rates on our fixed-rate debt at December 31, 2014 ranged from 2.0% to 8.0%. The contractual interest rates on our variable-rate debt at December 31, 2014 ranged from 2.6% to 6.1%. Our debt obligations are more fully described under Financial Condition in Item 7 above. The following table presents principal cash flows based upon expected maturity dates of our debt obligations outstanding at December 31, 2014 (in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | Thereafter | | Total | | Fair value |
Fixed-rate debt (a) | $ | 60,832 |
| | $ | 68,254 |
| | $ | 187,862 |
| | $ | 26,518 |
| | $ | 37,131 |
| | $ | 877,725 |
| | $ | 1,258,322 |
| | $ | 1,320,380 |
|
Variable-rate debt (a) | $ | 7,026 |
| | $ | 203,890 |
| | $ | 163,376 |
| | $ | 128,366 |
| | $ | 2,065 |
| | $ | 136,588 |
| | $ | 641,311 |
| | $ | 641,525 |
|
| |
| (a) | Amounts are based on the exchange rate at December 31, 2014, as applicable. |
At December 31, 2014, the estimated fair value of our fixed-rate debt and our variable-rate debt that currently bears interest at fixed rates or has effectively been converted to a fixed rate through the use of interest rate swaps was $1.7 billion. A decrease or increase in interest rates of 1% would change the estimated fair value of this debt at December 31, 2014 by an aggregate increase of $66.9 million or an aggregate decrease of $82.6 million, respectively.
CPA®:17 – Global 2014 10-K — 55
As more fully described under Financial Condition – Summary of Financing in Item 7 above, our variable-rate debt in the table above bore interest at fixed rates at December 31, 2014, but has interest rate reset features that will change the fixed interest rates to then-prevailing market fixed rates at certain points during their term. This debt is generally not subject to short-term fluctuations in interest rates.
Foreign Currency Exchange Rate Risk
We own investments in Europe and in Asia, and as a result are subject to risk from the effects of exchange rate movements primarily in the euro and, to a lesser extent, the British pound sterling, the Japanese yen, the Indian rupee, and the Norwegian krone, which may affect future costs and cash flows. Although all of our foreign investments through the fourth quarter of 2014 were conducted in these currencies, we may conduct business in other currencies in the future. We manage foreign currency exchange rate movements by generally placing both our debt service obligation to the lender and the tenant’s rental obligation to us in the same currency. This reduces our overall exposure to the actual equity that we have invested and the equity portion of our cash flow. In addition, we may use currency hedging to further reduce the exposure to our equity cash flow. We are generally a net receiver of these currencies (we receive more cash than we pay out), therefore our foreign operations benefit from a weaker U.S. dollar and are adversely affected by a stronger U.S. dollar, relative to the foreign currency.
We obtain mortgage financing in local currencies. To the extent that currency fluctuations increase or decrease rental revenues as translated to U.S. dollars, the change in debt service, as translated to U.S. dollars, will partially offset the effect of fluctuations in revenue and mitigate the risk from changes in foreign currency exchange rates.
Scheduled future minimum rents, exclusive of renewals, under non-cancelable operating leases, for our consolidated foreign operations as of December 31, 2014, during each of the next five calendar years and thereafter, are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Lease Revenues (a) | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | Thereafter | | Total |
Euro (c) | | $ | 95,019 |
| | $ | 95,021 |
| | $ | 95,020 |
| | $ | 95,020 |
| | $ | 95,019 |
| | $ | 881,687 |
| | $ | 1,356,786 |
|
British pound sterling (d) | | 5,608 |
| | 5,609 |
| | 5,608 |
| | 5,608 |
| | 5,608 |
| | 62,547 |
| | 90,588 |
|
Japanese yen (e) | | 2,472 |
| | 2,525 |
| | 2,544 |
| | 2,544 |
| | 2,544 |
| | 5,709 |
| | 18,338 |
|
| | | $ | 103,099 |
| | $ | 103,155 |
| | $ | 103,172 |
| | $ | 103,172 |
| | $ | 103,171 |
| | $ | 949,943 |
| | $ | 1,465,712 |
|
Scheduled debt service payments (principal and interest) for mortgage notes payable for our consolidated foreign operations as of December 31, 2014, during each of the next five calendar years and thereafter, are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Debt Service (a) (b) | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | Thereafter | | Total |
Euro (c) | | $ | 70,896 |
| | $ | 235,994 |
| | $ | 138,158 |
| | $ | 19,050 |
| | $ | 5,632 |
| | $ | 89,339 |
| | $ | 559,069 |
|
British pound sterling (d) | | 1,772 |
| | 14,906 |
| | 1,554 |
| | 1,515 |
| | 14,061 |
| | — |
| | 33,808 |
|
Japanese yen (e) | | 433 |
| | 435 |
| | 22,155 |
| | — |
| | — |
| | — |
| | 23,023 |
|
| | | $ | 73,101 |
| | $ | 251,335 |
| | $ | 161,867 |
| | $ | 20,565 |
| | $ | 19,693 |
| | $ | 89,339 |
| | $ | 615,900 |
|
___________
| |
| (a) | Amounts are based on the applicable exchange rates at December 31, 2014. Contractual rents and debt obligations are denominated in the functional currency of the country of each property. |
| |
| (b) | Interest on unhedged variable-rate debt obligations was calculated using the applicable annual interest rates and balances outstanding at December 31, 2014. |
| |
| (c) | We estimate that, for a 1% increase or decrease in the exchange rate between the euro and the U.S. dollar, there would be a corresponding change in the projected estimated property-level cash flow at December 31, 2014 of $8.0 million. |
| |
| (d) | We estimate that, for a 1% increase or decrease in the exchange rate between the British pound sterling and the U.S. dollar, there would be a corresponding change in the projected estimated property-level cash flow at December 31, 2014 of $0.6 million. |
| |
| (e) | We estimate that, for a 1% increase or decrease in the exchange rate between the Japanese yen and the U.S. dollar, there would be a corresponding change in the projected estimated property-level cash flow at December 31, 2014 of less than $0.1 million. |
As a result of scheduled balloon payments on international non-recourse mortgage loans, projected debt service obligations exceed projected lease revenues in 2016 and 2017. In 2016 and 2017, balloon payments totaling $222.3 million and $145.0 million, respectively, are due on three and eight non-recourse mortgage loans, respectively, that are collateralized by properties that we own with affiliates. We currently anticipate that, by their respective due dates, we will have refinanced certain of these
CPA®:17 – Global 2014 10-K — 56
loans, but there can be no assurance that we will be able to do so on favorable terms, if at all. If that has not occurred, we would expect to use our cash resources to make these payments, if necessary.
Concentration of Credit Risk
Concentrations of credit risk arise when a number of tenants are engaged in similar business activities or have 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 consolidated ABR as of December 31, 2014, in certain areas. At December 31, 2014, our net-lease portfolio, which excludes our self-storage facilities, had the following significant property and lease characteristics in excess of 10% in certain areas, based on the percentage of our consolidated ABR as of December 31, 2014:
| |
| • | 64% related to domestic properties; |
| |
| • | 36% related to international properties, which included a concentration in Italy of 10% related solely to our tenant, Metro Cash & Carry Italia S.p.A.; |
| |
| • | 33% related to office facilities, 23% related to warehouse/distribution facilities, 20% related to retail facilities, and 16% related to industrial facilities; |
| |
| • | 23% related to the retail stores industry, 14% related to the business and commercial services industry, 12% related to the grocery industry, and 10% related to the media: printing and publishing industry. |
CPA®:17 – Global 2014 10-K — 57
Item 8. Financial Statements and Supplementary Data.
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Financial statement schedules other than those listed above are omitted because the required information is given in the financial statements, including the notes thereto, or because the conditions requiring their filing do not exist.
In the course of preparing our 2014 consolidated financial statements, we discovered an error related to our accounting for a subsidiary’s functional currency. We corrected this error, and other errors previously recorded as out-of-period adjustments, and revised our consolidated financial statements for all prior periods impacted. Accordingly, our financial results for all prior periods presented herein have been revised for the correction of such errors (Note 2).
CPA®:17 – Global 2014 10-K — 58
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Corporate Property Associates 17 – Global Incorporated:
In our opinion, the accompanying consolidated financial statements listed in the index appearing under Item 8 present fairly, in all material respects, the financial position of Corporate Property Associates 17 – Global Incorporated and its subsidiaries (the “Company”) at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 8 present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, the Company adopted accounting standards update (“ASU”) No. 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity", which changed the criteria for reporting discontinued operations in 2014.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 31, 2015
CPA®:17 – Global 2014 10-K — 59
CORPORATE PROPERTY ASSOCIATES 17 – GLOBAL INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
|
| | | | | | | |
| | December 31, |
| | 2014 | | 2013 |
| Assets | | | |
| Investments in real estate: | | | |
| Real estate, at cost (inclusive of $144,753 and $150,378, respectively, attributable to variable interest entities, or VIEs) | $ | 2,396,715 |
| | $ | 2,402,315 |
|
| Operating real estate, at cost (inclusive of $0 and $12,557, respectively, attributable to VIEs) | 272,859 |
| | 283,370 |
|
| Accumulated depreciation (inclusive of $9,984 and $8,235, respectively, attributable to VIEs) | (197,695 | ) | | (144,405 | ) |
| Net investments in properties | 2,471,879 |
| | 2,541,280 |
|
| Real estate under construction (inclusive of $0 and $25,268, respectively, attributable to VIEs) | 110,983 |
| | 127,935 |
|
| Net investments in direct financing leases (inclusive of $245,815 and $244,084, respectively, attributable to VIEs) | 479,425 |
| | 479,916 |
|
| Net investments in real estate | 3,062,287 |
| | 3,149,131 |
|
| Equity investments in real estate | 531,000 |
| | 415,851 |
|
| Cash and cash equivalents (inclusive of $27 and $339, respectively, attributable to VIEs) | 275,719 |
| | 418,108 |
|
| In-place lease and tenant relationship intangible assets, net (inclusive of $16,348 and $17,277, respectively, attributable to VIEs) | 432,444 |
| | 466,497 |
|
| Other intangible assets, net | 83,238 |
| | 92,086 |
|
| Other assets, net (inclusive of $16,536 and $17,118, respectively, attributable to VIEs) | 221,209 |
| | 170,866 |
|
| Total assets | $ | 4,605,897 |
| | $ | 4,712,539 |
|
| Liabilities and Equity | | | |
| Liabilities: | | | |
| Non-recourse debt (inclusive of $193,437 and $199,315, respectively, attributable to VIEs) | $ | 1,896,489 |
| | $ | 1,915,601 |
|
| Accounts payable, accrued expenses and other liabilities (inclusive of $10,109 and $8,833, respectively, attributable to VIEs) | 141,043 |
| | 132,254 |
|
| Deferred income taxes (inclusive of $60 and $0, respectively, attributable to VIEs) | 12,234 |
| | 4,582 |
|
| Below-market rent and other intangible liabilities, net (inclusive of $365 and $387, respectively, attributable to VIEs) | 104,722 |
| | 102,597 |
|
| Due to affiliates | 12,634 |
| | 20,211 |
|
| Distributions payable | 53,378 |
| | 51,570 |
|
| Total liabilities | 2,220,500 |
| | 2,226,815 |
|
Commitments and contingencies (Note 12) |
|
| |
|
|
| Equity: | | | |
CPA®:17 – Global stockholders’ equity: | | | |
| Preferred stock, $0.001 par value; 50,000,000 shares authorized; none issued | — |
| | — |
|
| Common stock, $0.001 par value; 900,000,000 shares authorized; 336,843,388 and 322,918,083 shares issued, respectively; and 328,480,839 and 317,353,899 shares outstanding, respectively | 337 |
| | 323 |
|
| Additional paid-in capital | 3,033,283 |
| | 2,904,927 |
|
| Distributions in excess of accumulated earnings | (567,806 | ) | | (431,095 | ) |
| Accumulated other comprehensive loss | (81,007 | ) | | (13,442 | ) |
| Less: treasury stock at cost, 8,362,549 and 5,564,184 shares, respectively | (77,852 | ) | | (52,477 | ) |
Total CPA®:17 – Global stockholders’ equity | 2,306,955 |
| | 2,408,236 |
|
| Noncontrolling interests | 78,442 |
| | 77,488 |
|
| Total equity | 2,385,397 |
| | 2,485,724 |
|
| Total liabilities and equity | $ | 4,605,897 |
| | $ | 4,712,539 |
|
See Notes to Consolidated Financial Statements.
CPA®:17 – Global 2014 10-K — 60
CORPORATE PROPERTY ASSOCIATES 17 – GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share amounts)
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| Revenues | | | | | |
| Lease revenues: | | | | | |
| Rental income | $ | 254,658 |
| | $ | 231,652 |
| | $ | 178,290 |
|
| Interest income from direct financing leases | 54,517 |
| | 53,736 |
| | 52,608 |
|
| Total lease revenues | 309,175 |
| | 285,388 |
| | 230,898 |
|
| Other real estate income | 50,008 |
| | 49,076 |
| | 44,613 |
|
| Other operating income | 31,635 |
| | 21,872 |
| | 5,188 |
|
| Other interest income | 5,888 |
| | 6,436 |
| | 9,278 |
|
| | 396,706 |
| | 362,772 |
| | 289,977 |
|
| Operating Expenses | |
| | |
| | |
|
| Depreciation and amortization | 102,167 |
| | 93,742 |
| | 70,045 |
|
| Property expenses | 66,402 |
| | 52,242 |
| | 31,343 |
|
| Other real estate expenses | 24,665 |
| | 33,548 |
| | 31,426 |
|
| General and administrative | 22,253 |
| | 20,416 |
| | 14,879 |
|
| Acquisition expenses | 5,169 |
| | 16,884 |
| | 14,834 |
|
| Impairment charges | 570 |
| | — |
| | 2,019 |
|
| | 221,226 |
| | 216,832 |
| | 164,546 |
|
| Other Income and Expenses | |
| | |
| | |
|
| Equity in earnings (losses) of equity method investments in real estate | 24,073 |
| | (9,500 | ) | | 9,757 |
|
| Other income and (expenses) | (2,172 | ) | | 13,186 |
| | 5,375 |
|
| Interest expense | (93,001 | ) | | (88,656 | ) | | (72,271 | ) |
| | (71,100 | ) | | (84,970 | ) | | (57,139 | ) |
| Income from continuing operations before income taxes and gain on sale of real estate | 104,380 |
| | 60,970 |
| | 68,292 |
|
| Provision for income taxes | (10,725 | ) | | (1,467 | ) | | (1,213 | ) |
| Income from continuing operations before gain on sale of real estate, net of tax | 93,655 |
| | 59,503 |
| | 67,079 |
|
| Discontinued Operations | |
| | |
| | |
|
| Income from operations of discontinued properties, net of tax | — |
| | 483 |
| | 1,183 |
|
| Gain on sale of real estate, net of tax | — |
| | 7,987 |
| | 740 |
|
| Loss on extinguishment of debt, net of tax | — |
| | (983 | ) | | — |
|
| Income from discontinued operations, net of tax | — |
| | 7,487 |
| | 1,923 |
|
| Gain on sale of real estate, net of tax | 13,338 |
| | 659 |
| | 1,092 |
|
| Net Income | 106,993 |
| | 67,649 |
| | 70,094 |
|
| Net income attributable to noncontrolling interests (inclusive of Available Cash Distributions to a related party of $20,427, $16,899, and $14,620, respectively) | (32,842 | ) | | (28,935 | ) | | (26,498 | ) |
Net Income Attributable to CPA®:17 – Global | $ | 74,151 |
| | $ | 38,714 |
| | $ | 43,596 |
|
| Earnings Per Share | |
| | |
| | |
|
Income from continuing operations attributable to CPA®:17 – Global | $ | 0.23 |
| | $ | 0.10 |
| | $ | 0.16 |
|
Income from discontinued operations attributable to CPA®:17 – Global | — |
| | 0.02 |
| | 0.01 |
|
Net income attributable to CPA®:17 – Global | $ | 0.23 |
| | $ | 0.12 |
| | $ | 0.17 |
|
| Weighted-Average Shares Outstanding | 324,117,508 |
| | 313,010,828 |
| | 249,283,354 |
|
Amounts Attributable to CPA®:17 – Global | |
| | |
| | |
|
| Income from continuing operations, net of tax | $ | 74,151 |
| | $ | 31,227 |
| | $ | 41,673 |
|
| Income from discontinued operations, net of tax | — |
| | 7,487 |
| | 1,923 |
|
Net income attributable to CPA®:17 – Global | $ | 74,151 |
| | $ | 38,714 |
| | $ | 43,596 |
|
See Notes to Consolidated Financial Statements.
CPA®:17 – Global 2014 10-K — 61
CORPORATE PROPERTY ASSOCIATES 17 – GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| Net Income | $ | 106,993 |
| | $ | 67,649 |
| | $ | 70,094 |
|
| Other Comprehensive (Loss) Income | |
| | |
| | |
|
| Foreign currency translation adjustments | (93,401 | ) | | 25,742 |
| | 11,816 |
|
| Change in net unrealized gain (loss) on derivative instruments | 24,439 |
| | 3,068 |
| | (15,744 | ) |
| Change in unrealized gain on marketable securities | 285 |
| | 94 |
| | 1,035 |
|
| | (68,677 | ) | | 28,904 |
| | (2,893 | ) |
| Comprehensive Income | 38,316 |
| | 96,553 |
| | 67,201 |
|
| | | | | | |
| Amounts Attributable to Noncontrolling Interests | |
| | |
| | |
|
| Net income | (32,842 | ) | | (28,935 | ) | | (26,498 | ) |
| Foreign currency translation adjustments | 1,523 |
| | (212 | ) | | (191 | ) |
| Change in net unrealized gain on derivative instruments | (411 | ) | | (535 | ) | | (365 | ) |
| Comprehensive income attributable to noncontrolling interests | (31,730 | ) | | (29,682 | ) | | (27,054 | ) |
Comprehensive Income Attributable to CPA®:17 – Global | $ | 6,586 |
| | $ | 66,871 |
| | $ | 40,147 |
|
See Notes to Consolidated Financial Statements.
CPA®:17 – Global 2014 10-K — 62
CORPORATE PROPERTY ASSOCIATES 17 – GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF EQUITY
Years Ended December 31, 2014, 2013, and 2012
(in thousands, except share and per share amounts)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | CPA®:17 – Global | | | | |
| | Total Outstanding Shares | | Common Stock | | Additional Paid-In Capital | | Distributions in Excess of Accumulated Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total CPA®:17 – Global Stockholders | | Noncontrolling Interests | | Total |
| Balance at January 1, 2012 | 206,148,818 |
| | $ | 208 |
| | $ | 1,863,227 |
| | $ | (148,034 | ) | | $ | (38,150 | ) | | $ | (17,104 | ) | | $ | 1,660,147 |
| | $ | 71,177 |
|
| $ | 1,731,324 |
|
| Shares issued, net of offering costs | 100,529,436 |
| | 100 |
| | 903,129 |
| | | | | | | | 903,229 |
| | | | 903,229 |
|
| Shares issued to affiliates | 2,043,451 |
| | 2 |
| | 20,499 |
| | | | | | | | 20,501 |
| | | | 20,501 |
|
| Contributions from noncontrolling interests | | | | | | | | | | | | | — |
| | 762 |
| | 762 |
|
| Distributions declared ($0.6500 per share) | | | | | | | (161,773 | ) | | | | | | (161,773 | ) | | | | (161,773 | ) |
| Distributions to noncontrolling interests | | | | | | | | | | | | | — |
| | (24,427 | ) | | (24,427 | ) |
| Net income | | | | | | | 43,596 |
| | | | | | 43,596 |
| | 26,498 |
| | 70,094 |
|
| Other comprehensive loss: | | | | | | | | | | | | |
| | | | |
| Foreign currency translation adjustments | | | | | | | | | 11,625 |
| | | | 11,625 |
| | 191 |
| | 11,816 |
|
| Change in net unrealized loss on derivative instruments | | | | | | | | | (16,109 | ) | | | | (16,109 | ) | | 365 |
| | (15,744 | ) |
| Change in unrealized gain on marketable securities | | | | | | | | | 1,035 |
| | | | 1,035 |
| | | | 1,035 |
|
| Repurchase of shares | (1,818,685 | ) | | | | | | | | | | (17,189 | ) | | (17,189 | ) | | | | (17,189 | ) |
| Balance at December 31, 2012 | 306,903,020 |
| | 310 |
| | 2,786,855 |
| | (266,211 | ) | | (41,599 | ) | | (34,293 | ) | | 2,445,062 |
| | 74,566 |
| | 2,519,628 |
|
| Shares issued, net of offering costs | 10,252,652 |
| | 11 |
| | 96,842 |
| | | | | | | | 96,853 |
| | | | 96,853 |
|
| Shares issued to affiliates | 2,116,767 |
| | 2 |
| | 21,230 |
| | | | | | | | 21,232 |
| | | | 21,232 |
|
| Contributions from noncontrolling interests | | | | | | | | | | | | | — |
| | | | — |
|
| Distributions declared ($0.6500 per share) | | | | | | | (203,598 | ) | | | | | | (203,598 | ) | | | | (203,598 | ) |
| Distributions to noncontrolling interests | | | | | | | | | | | | | — |
| | (26,760 | ) | | (26,760 | ) |
| Net income | | | | | | | 38,714 |
| | | | | | 38,714 |
| | 28,935 |
| | 67,649 |
|
| Other comprehensive income: | | | | | | | | | | | | |
| | | | |
| Foreign currency translation adjustments | | | | | | | | | 25,530 |
| | | | 25,530 |
| | 212 |
| | 25,742 |
|
| Change in net unrealized gain on derivative instruments | | | | | | | | | 2,533 |
| | | | 2,533 |
| | 535 |
| | 3,068 |
|
| Change in unrealized gain on marketable securities | | | | | | | | | 94 |
| | | | 94 |
| | | | 94 |
|
| Repurchase of shares | (1,918,540 | ) | | | | | | | | | | (18,184 | ) | | (18,184 | ) | | | | (18,184 | ) |
| Balance at December 31, 2013 | 317,353,899 |
| | 323 |
| | 2,904,927 |
| | (431,095 | ) | | (13,442 | ) | | (52,477 | ) | | 2,408,236 |
| | 77,488 |
| | 2,485,724 |
|
| Shares issued, net of offering costs | 11,168,340 |
| | 11 |
| | 101,972 |
| | | | | | | | 101,983 |
| | | | 101,983 |
|
| Shares issued to affiliates | 2,756,965 |
| | 3 |
| | 26,384 |
| | | | | | | | 26,387 |
| | | | 26,387 |
|
| Contributions from noncontrolling interests | | | | | | | | | | | | | — |
| | | | — |
|
| Distributions declared ($0.6500 per share) | | | | | | | (210,862 | ) | | | | | | (210,862 | ) | | | | (210,862 | ) |
| Distributions to noncontrolling interests | | | | | | | | | | | | | — |
| | (30,776 | ) | | (30,776 | ) |
| Net income | | | | | | | 74,151 |
| | | | | | 74,151 |
| | 32,842 |
| | 106,993 |
|
| Other comprehensive loss: | | | | | | | | | | | | |
| | | | |
| Foreign currency translation adjustments | | | | | | | | | (91,878 | ) | | | | (91,878 | ) | | (1,523 | ) | | (93,401 | ) |
| Change in net unrealized gain on derivative instruments | | | | | | | | | 24,028 |
| | | | 24,028 |
| | 411 |
| | 24,439 |
|
| Change in unrealized gain on marketable securities | | | | | | | | | 285 |
| | | | 285 |
| | | | 285 |
|
| Repurchase of shares | (2,798,365 | ) | | | | | | | | | | (25,375 | ) | | (25,375 | ) | | | | (25,375 | ) |
| Balance at December 31, 2014 | 328,480,839 |
| | $ | 337 |
| | $ | 3,033,283 |
| | $ | (567,806 | ) | | $ | (81,007 | ) | | $ | (77,852 | ) | | $ | 2,306,955 |
| | $ | 78,442 |
| | $ | 2,385,397 |
|
See Notes to Consolidated Financial Statements.
CPA®:17 – Global 2014 10-K — 63
CORPORATE PROPERTY ASSOCIATES 17 – GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| Cash Flows — Operating Activities | |
| | |
| | |
|
| Net income | $ | 106,993 |
| | $ | 67,649 |
| | $ | 70,094 |
|
| Adjustments to net income: | |
| | |
| | |
|
| Depreciation and amortization, including intangible assets and deferred financing costs | 104,894 |
| | 96,700 |
| | 73,430 |
|
| Non-cash asset management fee expense and directors’ compensation | 26,387 |
| | 21,953 |
| | 18,935 |
|
| Straight-line rent adjustment and amortization of rent-related intangibles | (19,101 | ) | | (19,517 | ) | | (14,372 | ) |
| Equity in (earnings) losses of equity method investments in real estate in excess of distributions received | (13,974 | ) | | 18,521 |
| | (801 | ) |
| Gain on sale of real estate | (13,338 | ) | | (8,059 | ) | | (1,832 | ) |
| Deferred income tax expense (benefit) | 7,599 |
| | (1,961 | ) | | 313 |
|
| Unrealized loss (gain) on foreign currency transactions and other | 3,456 |
| | (3,742 | ) | | 1,739 |
|
| Realized loss (gain) on foreign currency transactions and other | 1,952 |
| | (4,187 | ) | | (1,474 | ) |
| Impairment charges | 570 |
| | — |
| | 2,019 |
|
| Accretion of commercial mortgage-backed securities and other | (554 | ) | | (395 | ) | | (237 | ) |
| Loss on extinguishment of debt | — |
| | 538 |
| | — |
|
| Settlement of derivative asset | — |
| | 2,964 |
| | — |
|
| Net changes in other operating assets and liabilities | 5,171 |
| | 12,134 |
| | 10,190 |
|
| Net Cash Provided by Operating Activities | 210,055 |
| | 182,598 |
| | 158,004 |
|
| Cash Flows — Investing Activities | | | | | |
| Capital contributions to equity investments in real estate | (199,470 | ) | | (156,228 | ) | | (73,656 | ) |
| Return of capital from equity investments in real estate | 83,882 |
| | 9,050 |
| | 22,887 |
|
| Acquisitions of real estate and direct financing leases | (79,345 | ) | | (313,512 | ) | | (759,747 | ) |
| Funding for build-to-suit projects | (68,901 | ) | | (91,402 | ) | | (39,428 | ) |
| Proceeds from sale of real estate | 68,789 |
| | 19,973 |
| | 59,323 |
|
| Investment in securities | (7,789 | ) | | (1,614 | ) | | (7,071 | ) |
| Payment of deferred acquisition fees to an affiliate | (6,755 | ) | | (14,354 | ) | | (15,708 | ) |
| Value added taxes paid in connection with acquisitions of real estate | (5,499 | ) | | (29,071 | ) | | (15,594 | ) |
| Value added taxes refunded in connection with acquisitions of real estate | 4,852 |
| | 40,933 |
| | 7,314 |
|
| Changes in investing restricted cash | (4,691 | ) | | 3,036 |
| | (17,107 | ) |
| Net Cash Used in Investing Activities | (214,927 | ) | | (533,189 | ) | | (838,787 | ) |
| Cash Flows — Financing Activities | |
| | |
| | |
|
| Distributions paid | (209,054 | ) | | (198,440 | ) | | (147,649 | ) |
| Proceeds from issuance of shares, net of issuance costs | 101,983 |
| | 97,975 |
| | 897,660 |
|
| Proceeds from mortgage financing | 92,791 |
| | 308,873 |
| | 469,709 |
|
| Scheduled payments and prepayments of mortgage principal | (51,309 | ) | | (44,830 | ) | | (28,749 | ) |
| Distributions to noncontrolling interests | (30,776 | ) | | (26,760 | ) | | (24,427 | ) |
| Purchase of treasury stock | (25,375 | ) | | (18,184 | ) | | (17,189 | ) |
| Changes in financing restricted cash | (3,564 | ) | | (5,389 | ) | | 1,911 |
|
| Payment of financing costs and mortgage deposits, net of deposits refunded | (878 | ) | | (4,006 | ) | | (1,667 | ) |
| Contributions from noncontrolling interests | — |
| | — |
| | 762 |
|
| Net Cash (Used in) Provided by Financing Activities | (126,182 | ) | | 109,239 |
| | 1,150,361 |
|
| Change in Cash and Cash Equivalents During the Year | |
| | |
| | |
|
| Effect of exchange rate changes on cash | (11,335 | ) | | 7,130 |
| | 2,026 |
|
| Net (decrease) increase in cash and cash equivalents | (142,389 | ) | | (234,222 | ) | | 471,604 |
|
| Cash and cash equivalents, beginning of year | 418,108 |
| | 652,330 |
| | 180,726 |
|
| Cash and cash equivalents, end of year | $ | 275,719 |
| | $ | 418,108 |
| | $ | 652,330 |
|
See Notes to Consolidated Financial Statements.
CPA®:17 – Global 2014 10-K — 64
CORPORATE PROPERTY ASSOCIATES 17 – GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Supplemental Cash Flow Information
(In thousands)
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| Interest paid, net of amounts capitalized | $ | 90,477 |
| | $ | 84,003 |
| | $ | 68,972 |
|
| Interest capitalized | $ | 4,852 |
| | $ | 2,481 |
| | $ | 1,719 |
|
| Income taxes paid | $ | 4,467 |
| | $ | 2,920 |
| | $ | 1,502 |
|
See Notes to Consolidated Financial Statements.
CPA®:17 – Global 2014 10-K — 65
CORPORATE PROPERTY ASSOCIATES 17 – GLOBAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization
Organization
CPA®:17 – Global is a publicly-owned, non-listed REIT that invests primarily in commercial real estate 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, sales of properties, and changes in foreign currency exchange rates.
Substantially all of our assets and liabilities are held by the Operating Partnership and at December 31, 2014, we owned 99.99% of general and limited partnership interests in the Operating Partnership. The remaining interest in the Operating Partnership is held by a subsidiary of WPC.
At December 31, 2014, our portfolio was comprised of our full or partial ownership interests in 365 fully-occupied properties, substantially all of which were triple-net leased to 115 tenants, and totaled approximately 36 million square feet (unaudited). In addition, our portfolio was comprised of our full or partial ownership interests in 72 operating properties, including 71 self-storage properties and one hotel, for an aggregate of approximately 5 million square feet (unaudited). As opportunities arise, we may also make other types of commercial real estate-related investments. We were formed in 2007 and are managed by the advisor.
Note 2. Revisions of Previously-Issued Financial Statements
In the course of preparing our 2014 consolidated financial statements, we discovered an error related to our accounting for a subsidiary’s functional currency. We corrected this error, and other errors previously recorded as out-of-period adjustments, and revised our consolidated financial statements for all prior periods impacted. Accordingly, our financial results for all prior periods presented herein have been revised for the correction of such errors as follows (in thousands, except share and per share amounts):
CPA®:17 – Global 2014 10-K — 66
Notes to Consolidated Financial Statements
Consolidated Balance Sheet
|
| | | | | | | | | | | |
| | December 31, 2013 |
| | As Reported | | Revisions | | As Revised |
| Assets | | | | | |
| Investments in real estate: | | | | | |
| Real estate, at cost | $ | 2,402,315 |
| | $ | — |
| | $ | 2,402,315 |
|
| Operating real estate, at cost | 283,370 |
| | — |
| | 283,370 |
|
| Accumulated depreciation | (144,405 | ) | | — |
| | (144,405 | ) |
| Net investments in properties | 2,541,280 |
| | — |
| | 2,541,280 |
|
| Real estate under construction | 127,935 |
| | — |
| | 127,935 |
|
| Net investments in direct financing leases | 479,916 |
| | — |
| | 479,916 |
|
| Net investments in real estate | 3,149,131 |
| | — |
| | 3,149,131 |
|
Equity investments in real estate (a) | 415,374 |
| | 477 |
| | 415,851 |
|
| Cash and cash equivalents | 418,108 |
| | — |
| | 418,108 |
|
| In-place lease and tenant relationship intangible assets, net | 466,497 |
| | — |
| | 466,497 |
|
| Other intangible assets, net | 95,803 |
| | (3,717 | ) | | 92,086 |
|
| Other assets, net | 170,866 |
| | — |
| | 170,866 |
|
| Total assets | $ | 4,715,779 |
| | $ | (3,240 | ) | | $ | 4,712,539 |
|
| Liabilities and Equity | | | | | |
| Liabilities: | | | | | |
| Non-recourse debt | $ | 1,915,601 |
| | $ | — |
| | $ | 1,915,601 |
|
| Accounts payable, accrued expenses and other liabilities | 132,254 |
| | — |
| | 132,254 |
|
Deferred income taxes (a) | 8,248 |
| | (3,666 | ) | | 4,582 |
|
| Below-market rent and other intangible liabilities, net | 102,597 |
| | — |
| | 102,597 |
|
| Due to affiliates | 20,211 |
| | — |
| | 20,211 |
|
| Distributions payable | 51,570 |
| | — |
| | 51,570 |
|
| Total liabilities | 2,230,481 |
| | (3,666 | ) | | 2,226,815 |
|
| Commitments and contingencies | | | | | |
| Equity: | | | | | |
CPA®:17 – Global stockholders’ equity: | | | | | |
| Preferred stock | — |
| | — |
| | — |
|
| Common stock | 323 |
| | — |
| | 323 |
|
| Additional paid-in capital | 2,904,927 |
| | — |
| | 2,904,927 |
|
Distributions in excess of accumulated earnings (a) | (439,688 | ) | | 8,593 |
| | (431,095 | ) |
| Accumulated other comprehensive loss | (5,275 | ) | | (8,167 | ) | | (13,442 | ) |
| Less: treasury stock at cost | (52,477 | ) | | — |
| | (52,477 | ) |
Total CPA®:17 – Global stockholders’ equity | 2,407,810 |
| | 426 |
| | 2,408,236 |
|
| Noncontrolling interests | 77,488 |
| | — |
| | 77,488 |
|
| Total equity | 2,485,298 |
| | 426 |
| | 2,485,724 |
|
| Total liabilities and equity | $ | 4,715,779 |
| | $ | (3,240 | ) | | $ | 4,712,539 |
|
CPA®:17 – Global 2014 10-K — 67
Notes to Consolidated Financial Statements
Consolidated Statements of Income
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2013 | | Year Ended December 31, 2012 |
| | As Reported | | Revisions | | As Revised | | As Reported | | Revisions | | As Revised |
| Revenues | | | | | | | | | | | |
| Lease revenues: | | | | | | | | | | | |
| Rental income | $ | 231,577 |
| | $ | 75 |
| | $ | 231,652 |
| | $ | 177,161 |
| | $ | 1,129 |
| | $ | 178,290 |
|
| Interest income from direct financing leases | 53,757 |
| | (21 | ) | | 53,736 |
| | 53,549 |
| | (941 | ) | | 52,608 |
|
| Total lease revenues | 285,334 |
| | 54 |
| | 285,388 |
| | 230,710 |
| | 188 |
| | 230,898 |
|
| Other real estate income | 49,076 |
| | — |
| | 49,076 |
| | 44,613 |
| | — |
| | 44,613 |
|
| Other operating income | 21,872 |
| | — |
| | 21,872 |
| | 5,188 |
| | — |
| | 5,188 |
|
| Other interest income | 6,672 |
| | (236 | ) | | 6,436 |
| | 9,042 |
| | 236 |
| | 9,278 |
|
| | 362,954 |
| | (182 | ) | | 362,772 |
| | 289,553 |
| | 424 |
| | 289,977 |
|
| Operating Expenses | | | | | | | | | | | |
| Depreciation and amortization | 93,947 |
| | (205 | ) | | 93,742 |
| | 69,104 |
| | 941 |
| | 70,045 |
|
| Property expenses | 52,244 |
| | (2 | ) | | 52,242 |
| | 31,342 |
| | 1 |
| | 31,343 |
|
| Other real estate expenses | 33,548 |
| | — |
| | 33,548 |
| | 31,426 |
| | — |
| | 31,426 |
|
| General and administrative | 20,416 |
| | — |
| | 20,416 |
| | 14,879 |
| | — |
| | 14,879 |
|
| Acquisition expenses | 16,884 |
| | — |
| | 16,884 |
| | 14,834 |
| | — |
| | 14,834 |
|
| Impairment charges | — |
| | — |
| | — |
| | 2,019 |
| | — |
| | 2,019 |
|
| | 217,039 |
| | (207 | ) | | 216,832 |
| | 163,604 |
| | 942 |
| | 164,546 |
|
| Other Income and Expenses | | | | | | | | | | | |
Equity in (losses) earnings of equity method investments in real estate (a) | (7,917 | ) | | (1,583 | ) | | (9,500 | ) | | 9,196 |
| | 561 |
| | 9,757 |
|
| Other income and (expenses) | 11,418 |
| | 1,768 |
| | 13,186 |
| | 4,546 |
| | 829 |
| | 5,375 |
|
| Interest expense | (88,656 | ) | | — |
| | (88,656 | ) | | (72,271 | ) | | — |
| | (72,271 | ) |
| | (85,155 | ) | | 185 |
| | (84,970 | ) | | (58,529 | ) | | 1,390 |
| | (57,139 | ) |
| Income from continuing operations before income taxes and gain on sale of real estate | 60,760 |
| | 210 |
| | 60,970 |
| | 67,420 |
| | 872 |
| | 68,292 |
|
Benefit from (provision for) income taxes (a) | 263 |
| | (1,730 | ) | | (1,467 | ) | | (1,526 | ) | | 313 |
| | (1,213 | ) |
| Income from continuing operations before gain on sale of real estate, net of tax | 61,023 |
| | (1,520 | ) | | 59,503 |
| | 65,894 |
| | 1,185 |
| | 67,079 |
|
| Discontinued Operations | | | | | | | | | | | |
| Income from operations of discontinued properties, net of tax | 483 |
| | — |
| | 483 |
| | 1,183 |
| | — |
| | 1,183 |
|
| Gain on sale of real estate, net of tax | 7,987 |
| | — |
| | 7,987 |
| | 740 |
| | — |
| | 740 |
|
| Loss on extinguishment of debt, net of tax | (983 | ) | | — |
| | (983 | ) | | — |
| | — |
| | — |
|
| Income from discontinued operations, net of tax | 7,487 |
| | — |
| | 7,487 |
| | 1,923 |
| | — |
| | 1,923 |
|
| Gain on sale of real estate, net of tax | 659 |
| | — |
| | 659 |
| | 1,092 |
| | — |
| | 1,092 |
|
| Net Income | 69,169 |
| | (1,520 | ) | | 67,649 |
| | 68,909 |
| | 1,185 |
| | 70,094 |
|
| Net income attributable to noncontrolling interests | (29,305 | ) | | 370 |
| | (28,935 | ) | | (26,542 | ) | | 44 |
| | (26,498 | ) |
Net Income Attributable to CPA®:17 – Global | $ | 39,864 |
| | $ | (1,150 | ) | | $ | 38,714 |
| | $ | 42,367 |
| | $ | 1,229 |
| | $ | 43,596 |
|
| Earnings Per Share | | | | | | | | | | | |
Income from continuing operations attributable to CPA®:17 – Global | $ | 0.11 |
| | $ | (0.01 | ) | | $ | 0.10 |
| | $ | 0.16 |
| | $ | — |
| | $ | 0.16 |
|
Income from discontinued operations attributable to CPA®:17 – Global | 0.02 |
| | — |
| | 0.02 |
| | 0.01 |
| | — |
| | 0.01 |
|
Net income attributable to CPA®:17 – Global | $ | 0.13 |
| | $ | (0.01 | ) | | $ | 0.12 |
| | $ | 0.17 |
| | $ | — |
| | $ | 0.17 |
|
| Weighted-Average Shares Outstanding | 313,010,828 |
| | | | 313,010,828 |
| | 249,283,354 |
| | | | 249,283,354 |
|
Amounts Attributable to CPA®:17 – Global | | | | | | | | | | | |
| Income from continuing operations, net of tax | $ | 32,377 |
| | $ | (1,150 | ) | | $ | 31,227 |
| | $ | 40,444 |
| | $ | 1,229 |
| | $ | 41,673 |
|
| Income from discontinued operations, net of tax | 7,487 |
| | — |
| | 7,487 |
| | 1,923 |
| | — |
| | 1,923 |
|
Net income attributable to CPA®:17 – Global | $ | 39,864 |
| | $ | (1,150 | ) | | $ | 38,714 |
| | $ | 42,367 |
| | $ | 1,229 |
| | $ | 43,596 |
|
CPA®:17 – Global 2014 10-K — 68
Notes to Consolidated Financial Statements
Consolidated Statements of Comprehensive Income
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2013 | | Year Ended December 31, 2012 |
| | As Reported | | Revisions | | As Revised | | As Reported | | Revisions | | As Revised |
Net Income (a) | $ | 69,169 |
| | $ | (1,520 | ) | | $ | 67,649 |
| | $ | 68,909 |
| | $ | 1,185 |
| | $ | 70,094 |
|
| Other Comprehensive Income (Loss) | | | | | | | |
| | |
| | |
|
| Foreign currency translation adjustments | 29,884 |
| | (4,142 | ) | | 25,742 |
| | 13,515 |
| | (1,699 | ) | | 11,816 |
|
| Change in net unrealized gain (loss) on derivative instruments | 831 |
| | 2,237 |
| | 3,068 |
| | (16,758 | ) | | 1,014 |
| | (15,744 | ) |
| Change in unrealized gain on marketable securities | 94 |
| | — |
| | 94 |
| | 1,035 |
| | — |
| | 1,035 |
|
| | 30,809 |
| | (1,905 | ) | | 28,904 |
| | (2,208 | ) | | (685 | ) | | (2,893 | ) |
| Comprehensive Income | 99,978 |
| | (3,425 | ) | | 96,553 |
| | 66,701 |
| | 500 |
| | 67,201 |
|
| | | | | | | | | | | | |
| Amounts Attributable to Noncontrolling Interests | | | | | | | |
| | |
| | |
|
| Net income | (29,305 | ) | | 370 |
| | (28,935 | ) | | (26,542 | ) | | 44 |
| | (26,498 | ) |
| Foreign currency translation adjustments | (183 | ) | | (29 | ) | | (212 | ) | | (192 | ) | | 1 |
| | (191 | ) |
| Change in net unrealized gain on derivative instruments | (535 | ) | | — |
| | (535 | ) | | (365 | ) | | — |
| | (365 | ) |
| Comprehensive income attributable to noncontrolling interests | (30,023 | ) | | 341 |
| | (29,682 | ) | | (27,099 | ) | | 45 |
| | (27,054 | ) |
Comprehensive Income Attributable to CPA®:17 – Global | $ | 69,955 |
| | $ | (3,084 | ) | | $ | 66,871 |
| | $ | 39,602 |
| | $ | 545 |
| | $ | 40,147 |
|
Consolidated Statement of Equity
|
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| | CPA®:17 – Global | | | | |
| Balance at January 1, 2012 | Total Outstanding Shares | | Common Stock | | Additional Paid-In Capital | | Distributions in Excess of Accumulated Earnings (a) | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total CPA®:17 – Global Stockholders | | Noncontrolling Interests | | Total |
| As Reported | 206,148,818 |
| | $ | 208 |
| | $ | 1,863,227 |
| | $ | (156,549 | ) | | $ | (32,601 | ) | | $ | (17,104 | ) | | $ | 1,657,181 |
| | $ | 70,791 |
| | $ | 1,727,972 |
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| Revisions | — |
| | — |
| | — |
| | 8,515 |
| | (5,549 | ) | | — |
| | 2,966 |
| | 386 |
| | 3,352 |
|
| As Revised | 206,148,818 |
| | $ | 208 |
| | $ | 1,863,227 |
| | $ | (148,034 | ) | | $ | (38,150 | ) | | $ | (17,104 | ) | | $ | 1,660,147 |
| | $ | 71,177 |
| | $ | 1,731,324 |
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__________
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| (a) | Certain amounts previously reported also reflect changes to prior period amounts related to the change in accounting for our investment in BG LLH, LLC, as more fully described in Note 3. |
Description of the Errors and Revisions
In the fourth quarter of 2014, we identified an error in the consolidated financial statements related to the accounting for foreign currency matters (Note 17). We identified that one of our consolidated subsidiary’s functional currency had been incorrectly designated as the euro instead of the U.S. dollar since the subsidiary was formed in 2009. As a result, the applicable financial results of this entity were being translated when they should have been remeasured. The correction of this error resulted in the recognition of foreign currency gains within the consolidated statements of income, specifically within Other income and (expenses), instead of as foreign currency translation adjustments within the consolidated statements of comprehensive income. We concluded that these revision adjustments, summarized in the tables below, were not material to our financial position or results of operations for the current period or any of the prior periods and revised the prior periods presented herein to reflect the correction of this error.
CPA®:17 – Global 2014 10-K — 69
Notes to Consolidated Financial Statements
In connection with the error identified above, we also made adjustments to reflect the correction of other out-of-period adjustments identified during 2014, 2013, 2013, 2012, and 2011 to record these adjustments in the applicable prior periods. We concluded that none of the following revision adjustments were material to our financial position or results of operations for any of the periods presented (in thousands):
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| | Increase (Decrease) in: |
| | Total Assets at December 31, 2013 | | Total Liabilities at December 31, 2013 | | Total Equity at December 31, 2013 |
Foreign currency matters (a) | $ | — |
| | $ | — |
| | $ | — |
|
Derivative instrument reclassification (b) | — |
| | — |
| | — |
|
Deferred income taxes (c) | (3,240 | ) | | (3,666 | ) | | 426 |
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Other (d) | — |
| | — |
| | — |
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| | | | | | | | | | | | | | | |
| | Increase (Decrease) in: |
| | Net Income | | Other Comprehensive (Loss) Income |
| | Years Ended December 31, | | Years Ended December 31, |
| | 2013 | | 2012 | | 2013 | | 2012 |
Foreign currency matters (a) | $ | 1,919 |
| | $ | 678 |
| | $ | (1,919 | ) | | $ | (678 | ) |
Derivative instrument reclassification (b) | — |
| | — |
| | — |
| | — |
|
Deferred income taxes (c) | (3,052 | ) | | 918 |
| | 48 |
| | 27 |
|
Other (d) | (387 | ) | | (411 | ) | | (34 | ) | | (34 | ) |
___________
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| (a) | Foreign currency matters are discussed above. |
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| (b) | In 2014, we identified a classification error on one of our derivative instruments. Accordingly, we reclassified its associated mark-to-market adjustments during 2013 and 2012, respectively, from Change in net unrealized gain (loss) on derivative instruments to Foreign currency translation adjustments within the consolidated statements of equity and comprehensive income. |
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| (c) | These combined adjustments relate to the following matters involving deferred income taxes: In the first quarter of 2014, we changed the accounting related to deferred foreign income taxes for one of our equity investments in real estate and we identified an additional tax-paying entity related to another of our equity investments in real estate. In the fourth quarter of 2013, we identified an error in the consolidated financial statements related to accounting for deferred foreign income taxes in connection with the acquisition of 15 properties acquired during 2008 through 2012. Certain related deferred tax assets with corresponding full valuation allowances were part of this revision adjustment. These revisions also resulted in a (decrease)/increase of net cash provided by operating activities and a corresponding (increase) decrease of net cash used in investing activities of $(1.6) million and $0.7 million for the years ended December 31, 2013 and 2012, respectively. |
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| (d) | These combined adjustments relate to various other matters: In 2012, we identified errors in the consolidated financial statements primarily attributable to the misapplication of guidance in accounting for and clerical errors related to one of our equity investments in real estate and we identified an error in the consolidated financial statements related to accounting for Net investments in real estate for one of our investments. In 2011, we identified several errors in the consolidated financial statements related to 2008 through 2010, primarily attributable to the misapplication of guidance in accounting for and clerical errors related to amendments and adjustments to direct financing leases and the capitalization of maintenance costs. |
Note 3. Summary of Significant Accounting Policies
Basis of Consolidation
Our consolidated financial statements reflect all of our accounts, including those of our controlled subsidiaries. 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.
When we obtain an economic interest in an entity, we evaluate the entity to determine if it is deemed a VIE, and, if so, whether we are deemed to be the primary beneficiary and are therefore required to consolidate the entity. 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
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Notes to Consolidated Financial Statements
rights within a loan can cause us to consider an entity a VIE. Significant judgment is required to determine whether a VIE should be consolidated.
We review the contractual arrangements provided for in the partnership agreement or other related contracts to determine whether the entity is considered a VIE, and to establish whether we have any variable interests in the VIE. We then compare our variable interests, if any, to those of the other variable interest holders to determine which party is the primary beneficiary of a VIE based on whether the entity (i) has the power to direct the activities that most significantly impact the economic performance of the VIE, and (ii) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE.
For an entity that is not considered to be a VIE but rather a voting interest entity, the general partners in a limited partnership (or similar entity) are presumed to control the entity regardless of the level of their ownership and, accordingly, may be required to consolidate the entity. We evaluate the partnership agreements or other relevant contracts to determine whether there are provisions in the agreements that would overcome this presumption. If the agreements provide the limited partners with either (i) the substantive ability to dissolve or liquidate the limited partnership or otherwise remove the general partners without cause or (ii) substantive participating rights, the limited partners’ rights overcome the presumption of control by a general partner of the limited partnership, and, therefore, the general partner must account for its investment in the limited partnership using the equity method of accounting.
We have an investment in a tenancy-in-common interest in various underlying international properties. Consolidation of this investment is not required as such interest does not qualify as a VIE and does not meet the control requirement required for consolidation. Accordingly, we account for this investment using the equity method of accounting. We use the equity method of accounting 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 this investment.
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. At December 31, 2014, none of our equity investments had carrying values below zero.
We previously determined that the I Shops LLC investment was a VIE and that we were its primary beneficiary. In April 2014, we deconsolidated a portion of the investment (Note 5).
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
Changes to Prior Period Amounts
In accordance with the accounting guidance for equity method investments under Accounting Standards Codification 323-10-35-33, Increase in Level of Ownership or Degree of Influence, during 2014 we assessed our accounting for our investment in BG LLH, LLC, one of our cost method investments, because we acquired additional voting stock in the investment during 2014. Our investment in BG LLH, LLC then qualified for use of the equity method and, accordingly, we adopted the equity method of accounting. In accordance with Accounting Standards Codification 323-10-35-33, we have adjusted our financial statements retrospectively as if the equity method of accounting had been in effect during all previous periods in which the investment was held. The impact of this change was an increase to Equity in earnings of equity method investments in real estate for the years ended December 31, 2012 and 2011 of $1.4 million and $1.0 million, respectively, and an increase to Provision for income taxes for the years ended December 31, 2012 and 2011 of $0.6 million and $0.5 million, respectively, for which the cumulative effect on retained earnings at January 1, 2012 was $0.5 million. The impact of this change on the results of operations for 2013 was inconsequential.
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Notes to Consolidated Financial Statements
Accounting for Acquisitions
In accordance with the guidance for business combinations, we determine whether a transaction or other event is a business combination, which requires that the assets acquired and liabilities assumed constitute a business. Each business combination is then accounted for by applying the acquisition method. If the assets acquired are not a business, we account for the transaction or other event as an asset acquisition. Under both methods, we recognize the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity. In addition, for transactions that are business combinations, we evaluate the existence of goodwill or a gain from a bargain purchase. We capitalize acquisition-related costs and fees associated with asset acquisitions. We immediately expense acquisition-related costs and fees associated with business combinations.
Purchase Price Allocation
When we acquire properties with leases classified as operating leases, we allocate the purchase price to the tangible and intangible assets and liabilities acquired based on their estimated fair values. The tangible assets consist of land, buildings, and site improvements. The intangible assets include the above- and below-market value of leases and the value of in-place leases, which includes the value of tenant relationships. Land is typically valued utilizing the sales comparison, or market, approach. Buildings are valued, as if vacant, using the cost and/or income approach. Site improvements are valued using the cost approach. The fair value of real estate is determined by reference to portfolio appraisals, which determines their values, on a property level, by applying a discounted cash flow analysis to the estimated net operating income for each property in the portfolio during the remaining anticipated lease term, and the estimated residual value. The estimated residual value of each property is based on a hypothetical sale of the property upon expiration of a lease factoring in the re-tenanting of such property at estimated current market rental rates, applying a selected capitalization rate and deducting estimated costs of sale. The discount rates and residual capitalization rates used to value the properties are selected based on several factors, including the creditworthiness of the lessees, industry surveys, property type, location, and age, current lease rates relative to market lease rates, and anticipated lease duration. In the case where a tenant has a purchase option deemed to be materially favorable to the tenant, or the tenant has long-term renewal options at rental rates below estimated market rental rates, we include the value of the exercise of such purchase option or long-term renewal options in its determination of residual value.
For self-storage assets, the hypothetical sales price is derived by capitalizing the estimated net operating income at the end of the expected holding period. Estimated net operating income factors in the gross potential revenue of the business less economic vacancy rates and expected operational expenses. Where a property is deemed to have excess land, the discounted cash flow analysis includes the estimated excess land value at the assumed expiration of the lease, based upon an analysis of comparable land sales or listings in the general market area of the property grown at estimated market growth rates through the year of lease expiration. See Revenue Recognition and Depreciation below for a discussion of our significant accounting policies related to tangible assets.
We record above- and below-market lease intangible values for acquired properties based on the present value (using a discount rate reflecting the risks associated with the leases acquired, including consideration of the credit of the lessee) of the difference between (i) the contractual rents to be paid pursuant to the leases negotiated or in place at the time of acquisition of the properties and (ii) our estimate of fair market lease rates for the property or equivalent property, both of which are measured over a period that includes renewal options that have rental rates below estimated market rental rates. We amortize the above-market lease intangible value as a reduction of rental income over the estimated market lease term. We amortize the below-market lease intangible value as an increase to rental income over the initial term and any below-market renewal periods in the respective leases. We include the value of below-market leases in Below-market rent and other intangible liabilities, net in the consolidated financial statements. We include the amortization of below-market ground lease intangibles in Property expenses in the consolidated financial statements. We include the amortization of above-market ground lease intangibles in Depreciation and amortization in the consolidated financial statements.
The value of any in-place lease is estimated to be equal to the acquirer’s avoidance of costs, as a result of having tenants in place, that would be necessary to lease the property for a lease term equal to the remaining primary in-place lease term and the value of investment grade tenancy. The cost avoidance is derived first by determining the in-place lease term on the subject lease. Then, based on our review of the market, the cost to be borne by a property owner to replicate a market lease to the remaining in-place term is estimated. These costs consist of: (i) rent lost during downtime (i.e. assumed periods of vacancy), (ii) estimated expenses that would be incurred by the property owner during periods of vacancy, (iii) rent concessions (i.e. free rent), (iv) leasing commissions, and (v) tenant improvement allowances given to tenants. We determine these values using our estimates or by relying in part upon third-party appraisals. We amortize the value of in-place lease intangibles to expense over the remaining initial term of each lease. The amortization period for intangibles does not exceed the remaining depreciable life of the building.
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Notes to Consolidated Financial Statements
If a lease is terminated, we charge the unamortized portion of above- and below-market lease values to lease revenues, and in-place lease values to amortization expense.
When we acquire leveraged properties, the fair value of the related debt instruments is determined using a discounted cash flow model with rates that take into account the credit of the tenants, where applicable, and interest rate risk. Such resulting premium or discount is amortized over the remaining term of the obligation. We also consider the value of the underlying collateral, taking into account the quality of the collateral, the credit quality of the tenant, the time until maturity, and the current interest rate.
Goodwill
In the case of a business combination, after identifying all tangible and intangible assets and liabilities, the excess consideration paid over the fair value of the assets and liabilities acquired and assumed, respectively, represents goodwill. We allocated goodwill to our sole Real Estate reporting unit. In the event we dispose of a property that constitutes a business under GAAP, we allocate a portion of the reporting unit’s goodwill to that business in determining the gain or loss on the disposal of the business. The amount of goodwill allocated to the business is based on the relative fair value of the business to the fair value of the reporting unit. All or a portion of the goodwill may be attributed to foreign deferred tax liabilities assumed in the business combination. The deferred tax liability results from the excess of basis under GAAP over the tax basis of the asset in the taxing jurisdiction.
Real Estate and Operating Real Estate
We carry land, buildings, and personal property at cost less accumulated depreciation. We capitalize improvements and significant renovations that increase the useful life of the properties, while we expense replacements, maintenance, and repairs that do not improve or extend the lives of the respective assets as incurred.
Real Estate Under Construction
For properties under construction, operating expenses, including interest charges and other property expenses (e.g. real estate taxes), are capitalized rather than expensed. We capitalize interest by applying the interest rate applicable to outstanding borrowings to the average amount of accumulated qualifying expenditures for properties under construction during the period.
Acquisition, Development, and Construction Loans
We provide funding to developers for the acquisition, development, and construction of real estate. Under the ADC Arrangement, we may participate in the residual profits of the project through the sale or refinancing of the property. We evaluate these arrangements to determine if they have characteristics similar to a loan or if the characteristics are more similar to a joint venture or partnership, such as participating in the risks and rewards of the project as an owner or an investment partner. For those arrangements with characteristics of a loan, we follow the accounting guidance for loans and disclose within our Finance Receivables footnote (Note 6). When we determine that the characteristics are more similar to a jointly-owned investment or partnership, we account for those arrangements under the equity method of accounting (Note 7). Once the investment or partnership begins operations, we use the hypothetical liquidation at book value method to calculate income or loss (which considers the principal and interest under the loan to be a preferential return).
Assets Held for Sale
We classify those assets that are associated with operating leases as held for sale when we have entered into a contract to sell the property, all material due diligence requirements have been satisfied, and we believe it is probable that the disposition will occur within one year. Assets held for sale are recorded at the lower of carrying value or estimated fair value (less estimated cost to sell). On January 1, 2014 we adopted Accounting Standards Update, or ASU, 2014-08 and, other than the properties classified as held for sale prior to adoption, no other sales qualify as discontinued operations.
If circumstances arise that we previously considered unlikely and, as a result, we decide not to sell a property previously classified as held for sale, we reclassify the property as held and used. We measure and record a property that is reclassified as held and used at the lower of (i) its carrying amount before the property was classified as held for sale, adjusted for any depreciation expense that would have been recognized had the property been continuously classified as held and used or (ii) the estimated fair value at the date of the subsequent decision not to sell.
CPA®:17 – Global 2014 10-K — 73
Notes to Consolidated Financial Statements
We recognize gains and losses on the sale of properties when, among other criteria, we no longer have continuing involvement, the parties are bound by the terms of the contract, all consideration has been exchanged, and all conditions precedent to closing have been performed. At the time the sale is consummated, a gain or loss is recognized as the difference between the sale price, less any selling costs, and the carrying value of the property.
Notes Receivable
For investments in mortgage notes and loan participations, the loans are initially reflected at acquisition cost, which consists of the outstanding balance, net of the acquisition discount or premium. We amortize any discount or premium as an adjustment to increase or decrease, respectively, the yield realized on these loans over the life of the loan. As such, differences between carrying value and principal balances outstanding do not represent embedded losses or gains as we generally plan to hold such loans to maturity. Our note receivable is included in Other assets, net in the consolidated financial statements.
Allowance for Doubtful Accounts
We consider rents due under leases and payments under notes receivable to be past-due or delinquent when a contractually required rent, principal, or interest payment is not remitted in accordance with the provisions of the underlying agreement. We evaluate each account individually and set up an allowance when, based upon current information and events, it is probable that we will be unable to collect all amounts due according to the existing contractual terms and the amount can be reasonably estimated.
Cash and Cash Equivalents
We consider all short-term, highly-liquid investments that are both readily convertible to cash and have a maturity of three months or less at the time of purchase to be cash equivalents. Items classified as cash equivalents include commercial paper and money market funds. Our cash and cash equivalents are held in the custody of several financial institutions, and these balances, at times, exceed federally insurable limits. We seek to mitigate this risk by depositing funds only with major financial institutions.
Debt Securities
We have investments, such as CMBS and debentures, that were designated as securities held to maturity on the date of acquisition, in accordance with current accounting guidance. We carry these securities at cost, net of unamortized premiums and discounts, which are recognized in interest income using an effective yield or “interest” method, and assess them for other-than-temporary impairment on a quarterly basis.
Other Assets and Liabilities
We include prepaid expenses, deferred rental income, tenant receivables, deferred charges, escrow balances held by lenders, restricted cash balances, debt securities, derivative assets, and corporate fixed assets in Other assets, net in the consolidated financial statements. We include derivative instruments, amounts held on behalf of tenants, and deferred revenue in Accounts payable, accrued expenses and other liabilities in the consolidated financial statements. Deferred charges are costs incurred in connection with mortgage financings and refinancings that are amortized over the terms of the mortgages and included in Interest expense in the consolidated financial statements. Deferred rental income is generally the aggregate cumulative difference for operating leases between scheduled rents that vary during the lease term and rent recognized on a straight-line basis.
Deferred Acquisition Fees Payable to Affiliate
Fees payable to the advisor for structuring and negotiating investments and related mortgage financing on our behalf are included in Due to affiliates. A portion of these fees is payable in three equal annual installments following the quarter on which a property was purchased. The timing of the payment of such fees is impacted by certain performance criterion (Note 4).
Treasury Stock
Treasury stock is recorded at cost under our redemption plan, pursuant to which we may elect to redeem shares at the request of our stockholders, subject to certain exceptions, conditions, and limitations. The maximum amount of shares purchasable by us in any period depends on a number of factors and is at the discretion of our board of directors.
CPA®:17 – Global 2014 10-K — 74
Notes to Consolidated Financial Statements
Noncontrolling Interests
We accounted for the special general partner interest in our Operating Partnership as a noncontrolling interest (Note 4). The special general partner interest in our Operating Partnership entitles the Special General Partner to cash distributions and, in the event there is a termination or non-renewal of the advisory agreement, redemption rights. Cash distributions to the Special General Partner are accounted for as an allocation to net income attributable to noncontrolling interest.
Offering Costs
During our offering periods, we accrued costs incurred in connection with the raising of capital as deferred offering costs. Upon receipt of offering proceeds, we charged the deferred costs to equity and reimbursed the advisor for costs incurred (Note 4). Such reimbursements did not exceed regulatory cost limitations.
Revenue Recognition
Real Estate Leased to Others
We lease real estate to others primarily on a triple-net lease basis whereby the tenant is generally responsible for operating expenses relating to the property, including property taxes, insurance, maintenance, repairs, and improvements. We charge expenditures for maintenance and repairs, including routine betterments, to operations as incurred. For the years ended December 31, 2014, 2013, and 2012, our tenants, pursuant to their lease obligations, have made direct payment to the taxing authorities of real estate taxes of approximately $22.2 million, $23.2 million, and $14.1 million, respectively.
Substantially all of our leases provide for either scheduled rent increases, periodic rent adjustments based on formulas indexed to changes in the CPI or similar indices, or percentage rents. CPI-based adjustments are contingent on future events and are therefore not included as minimum rent in straight-line rent calculations. We recognize rents from percentage rents as reported by the lessees, which is after the level of sales requiring a rental payment to us is reached. Percentage rents were insignificant for the periods presented.
We account for leases as operating or direct financing leases as described below:
Operating leases — We record real estate at cost less accumulated depreciation; we recognize future minimum rental revenue on a straight-line basis over the non-cancelable lease term of the related leases and charge expenses to operations as incurred (Note 5).
Direct financing method — We record leases accounted for under the direct financing method as a net investment (Note 6). The net investment is equal to the cost of the leased assets. The difference between the cost and the gross investment, which includes the residual value of the leased asset and the future minimum rents, is unearned income. We defer and amortize unearned income to income over the lease term so as to produce a constant periodic rate of return on our net investment in the lease.
Asset Retirement Obligations
Asset retirement obligations relate to the legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or normal operation of a long-lived asset. The fair value of a liability for an asset retirement obligation is recorded in the period in which it is incurred and the cost of such liability is recorded as an increase in the carrying amount of the related long-lived asset by the same amount. The liability is accreted each period and the capitalized cost is depreciated over the estimated remaining life of the related long-lived asset. Revisions to estimated retirement obligations result in adjustments to the related capitalized asset and corresponding liability.
In order to determine the fair value of the asset retirement obligations, we make certain estimates and assumptions including, among other things, projected cash flows, the borrowing interest rate, and an assessment of market conditions that could significantly impact the estimated fair value. These estimates and assumptions are subjective.
Interest Capitalized in Connection with Real Estate Under Construction
Operating real estate is stated at cost less accumulated depreciation. Interest directly related to build-to-suit projects is capitalized. We consider a build-to-suit project as substantially completed upon the completion of improvements. If discrete portions of a project are substantially completed and occupied, and other portions have not yet reached that stage, the
CPA®:17 – Global 2014 10-K — 75
Notes to Consolidated Financial Statements
substantially completed portions are accounted for separately. We allocate costs incurred between the portions under construction and the portions substantially completed and only capitalize those costs associated with the portion under construction. We determine an interest rate to be applied for capitalizing interest based on the interest rate of any debt linked to the project or a blended rate of the mortgages outstanding in the company if there is no debt on the project.
Depreciation
We compute depreciation of building and related improvements using the straight-line method over the estimated remaining useful lives of the properties (not to exceed 40 years) and furniture, fixtures, and equipment (generally up to seven years). We compute depreciation of tenant improvements using the straight-line method over the estimated useful life.
Impairments
We periodically assess whether there are any indicators that the value of our long-lived real estate and related intangible assets may be impaired or that their carrying value may not be recoverable. These impairment indicators include, but are not limited to, the vacancy of a property that is not subject to a lease, a lease default by a tenant that is experiencing financial difficulty, the termination of a lease by a tenant, or the rejection of a lease in a bankruptcy proceeding. We may incur impairment charges on long-lived assets, including real estate, direct financing leases, assets held for sale, and equity investments in real estate. We may also incur impairment charges on debt securities and goodwill. Our policies for evaluating whether these assets are impaired are presented below.
Real Estate
For real estate assets held for investment, and related intangible assets in which an impairment indicator is identified, we follow a two-step process to determine whether an asset is impaired and to determine the amount of the charge. First, we compare the carrying value of the property’s asset group to the estimated future net undiscounted cash flow that we expect the property’s asset group will generate, including any estimated proceeds from the eventual sale of the property’s asset group. The undiscounted cash flow analysis requires us to make our best estimate of, among other things, market rents, residual values, and holding periods. We estimate market rents and residual values using market information from outside sources, such as broker quotes or recent comparable sales. As our investment objective is to hold properties on a long-term basis, holding periods used in the undiscounted cash flow analysis are generally ten years, but may be less if our intent is to hold a property for less than ten years. Depending on the assumptions made and estimates used, the future cash flow projected in the evaluation of long-lived assets and associated intangible assets can vary within a range of outcomes. We consider the likelihood of possible outcomes in determining our estimate of future cash flows and, if warranted, we apply a probability-weighted method to the different possible scenarios.
If the future net undiscounted cash flow of the property’s asset group is less than the carrying value, the property’s asset group is considered not recoverable. We then measure the impairment loss as the excess of the carrying value of the property’s asset group over its estimated fair value. The property’s asset group’s estimated fair value is primarily determined using market information from outside sources, such as broker quotes or recent comparable sales. In cases where the available market information is not deemed appropriate, we perform a future net cash flow analysis discounted for inherent risk associated with each asset to determine an estimated fair value.
Assets Held for Sale
We classify real estate assets that are accounted for as operating leases as held for sale when we have entered into a contract to sell the property, all material due diligence requirements have been satisfied, and we believe it is probable that the disposition will occur within one year.
When we classify an asset as held for sale, we compare the asset’s fair value (less estimated cost to sell) to its carrying value, and if the fair value (less estimated cost to sell) is less than the property’s carrying value, we reduce the carrying value to the fair value (less estimated cost to sell). We will continue to review the property for subsequent changes in the fair value and may recognize an additional impairment charge if warranted.
Direct Financing Leases
We review our direct financing leases at least annually to determine whether there has been an other-than-temporary decline in the current estimate of residual value of the property. The residual value is our estimate of what we could realize upon the sale of the property at the end of the lease term, based on market information. If this review indicates that a decline in residual value
CPA®:17 – Global 2014 10-K — 76
Notes to Consolidated Financial Statements
has occurred that is other-than-temporary, we recognize an impairment charge equal to the difference between the fair value and carrying amount of the residual value.
When we enter into a contract to sell the real estate assets that are recorded as direct financing leases, we evaluate whether it is probable that the disposition will occur. If we determine that the disposition is probable, we assess the carrying amount for recoverability and, if as a result of the decreased expected cash flows we determine that our carrying value is not fully recoverable, we record an allowance for credit losses to reflect the change in the estimate of the future cash flows that includes rent. Accordingly, the net investment balance is written down to fair value.
Equity Investments in Real Estate
We evaluate our equity investments in real estate on a periodic basis to determine if there are any indicators that the value of our equity investment may be impaired and whether or not that impairment is other-than-temporary. To the extent an impairment has occurred and is determined to be other-than-temporary, we measure the charge as the excess of the carrying value of our investment over its estimated fair value, which is determined by calculating our share of the estimated fair market value of the underlying net assets based on the terms of the applicable partnership or joint venture agreement. For our equity investments in real estate, we calculate the estimated fair value of the underlying investment’s real estate or net investment in direct financing lease as described in Real Estate and Direct Financing Leases above. The fair value of the underlying investment’s debt, if any, is calculated based on market interest rates and other market information. The fair value of the underlying investment’s other financial assets and liabilities (excluding net investments in direct financing leases) have fair values that generally approximate their carrying values.
Goodwill
We evaluate goodwill for possible impairment at least annually or upon the occurrence of a triggering event. A triggering event is an event or circumstance that would more likely than not reduce the fair value of a reporting unit below its carrying amount, including sales of properties defined as businesses for which the relative size of the sold property is significant to the reporting unit, which could impact our goodwill impairment calculations.
The goodwill impairment test is a three-step test. Step zero is a qualitative analysis whereas steps one and two are quantitative. If step zero is not considered, the first step is to identify whether the value of the recorded goodwill is impaired. If it is determined that goodwill is impaired, the second step seeks to measure the amount of impairment.
We applied step zero to our analysis. In this step, qualitative factors are assessed to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying value. In this step, the macroeconomic environment in which the reporting unit operates is analyzed for any significant changes, such as deterioration in a market in which we operate or deterioration in overall financial performance, such as declining cash flows. Also, entity-specific changes are analyzed, such as changes in management, strategy, or composition of reporting unit. If, after assessing the overall macroeconomic environment, it is unlikely that the fair value is less than the carrying value, steps one and two do not need to be performed.
Debt Securities
We have investments in debt securities that are designated as securities held to maturity. On a quarterly basis, we evaluate our debt securities to determine if they have experienced an other-than temporary decline in value. If the market value of the debt security is below its amortized cost, and we either intend to sell the security or it is more likely than not that we will be required to sell the security before its anticipated recovery, we record the entire amount of the other-than-temporary impairment charge in earnings. Additionally, we consider the significance of the decline and other factors contributing to the decline, such as delinquency, expected credit losses, the length of time that the fair market value has been below cost, and expected market conditions (including volatility), in our analysis of whether a decline is other than temporary.
We do not intend to sell our debt securities and we do not expect that it is more likely than not that we will be required to sell these investments before their anticipated recovery. However, if we determine that an other-than-temporary impairment has occurred, we calculate the total impairment charge as the difference between the carrying value of our debt securities and their estimated fair value. We then separate the other-than-temporary impairment charge into the non-credit loss portion and the credit loss portion. We determine the non-credit loss portion by analyzing the changes in spreads on high credit quality debt securities as compared with the changes in spreads on the debt securities being analyzed for other-than-temporary impairment. We generally perform this analysis over a time period from the date of acquisition of the debt securities through the date of the analysis. Any resulting loss is deemed to represent losses due to the illiquidity of the debt securities and is recorded as a
CPA®:17 – Global 2014 10-K — 77
Notes to Consolidated Financial Statements
separate component of other comprehensive loss in equity. We then measure the credit loss portion of the other-than-temporary impairment as the residual amount of the other-than-temporary impairment. We record the non-credit loss portion in earnings.
Following recognition of the other-than-temporary impairment, the difference between the new cost basis of the debt securities and cash flows expected to be collected is accreted to Other interest income over the remaining expected lives of the securities.
Foreign Currency
Translation
We have interests in real estate investments in Europe, for which the functional currency is the euro, the British pound sterling, or the Norwegian krone, and in Asia, for which the functional currency is the Japanese yen or the Indian rupee. We perform the translation from the euro, the British pound sterling, the Norwegian krone, the Japanese yen, or the Indian rupee to the U.S. dollar for assets and liabilities using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted-average exchange rate during the year. We report the gains and losses resulting from such translation as a component of other comprehensive income in equity. These translation gains and losses are released to net income when we have substantially exited from all investments in the related currency.
Transaction Gains or Losses
A transaction gain or loss (measured from the transaction date or the most recent intervening balance sheet date, whichever is later), realized upon settlement of a foreign currency transaction will generally be included in net income for the period in which the transaction is settled. Also, intercompany foreign currency transactions that are scheduled for settlement, consisting primarily of accrued interest and the translation to the reporting currency of subordinated intercompany debt with scheduled principal payments, are included in the determination of net income.
Intercompany foreign currency transactions of a long-term nature (that is, settlement is not planned or anticipated in the foreseeable future), in which the entities to the transactions are consolidated or accounted for by the equity method in our consolidated financial statements, are not included in net income but are reported as a component of other comprehensive income in equity.
Net realized gains or (losses) are recognized on foreign currency transactions in connection with the transfer of cash from foreign operations of subsidiaries to the parent company. For the years ended December 31, 2014, 2013, and 2012, we recognized net realized (losses) gains on such transactions of $(2.9) million, $3.5 million, and $1.5 million, respectively.
Derivative Instruments
We measure derivative instruments at fair value and record them as assets or liabilities, depending on our rights or obligations under the applicable derivative contract. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. 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. For a derivative designated and that qualified as a net investment hedge, the effective portion of the change in the fair value and/or the net settlement of the derivative are reported in Other comprehensive (loss) income as part of the cumulative foreign currency translation adjustment. The ineffective portion of the change in fair value of the derivative is recognized directly in earnings. Amounts are reclassified out of Other comprehensive (loss) income into earnings when the hedged investment is either sold or substantially liquidated.
We use the portfolio exception in Accounting Standards Codification 820-10-35-18D, Application to Financial Assets and Financial Liabilities with Offsetting Positions in Market Risk or Counterparty Credit Risk, with respect to measuring counterparty credit risk for all of our derivative transactions subject to master netting arrangements.
CPA®:17 – Global 2014 10-K — 78
Notes to Consolidated Financial Statements
Income Taxes
We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code. In order to maintain our qualification as a REIT, we are required, among other things, to distribute at least 90% of our REIT net taxable income to our stockholders and meet certain tests regarding the nature of our income and assets. As a REIT, we are not subject to federal income taxes on our income and gains that we distribute to our stockholders as long as we satisfy certain requirements, principally relating to the nature of our income and the level of our distributions, as well as other factors. We believe that we have operated, and we intend to continue to operate, in a manner that allows us to continue to qualify as a REIT.
We conduct business in various states and municipalities within the United States, Europe, and Asia and, as a result, we or one or more of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and certain foreign jurisdictions. As a result, we are subject to certain foreign, state, and local taxes and a provision for such taxes is included in the consolidated financial statements.
We elect to treat certain of our corporate subsidiaries as TRSs. In general, a TRS may perform additional services for our tenants and generally may engage in any real estate or non-real estate-related business (except for the operation or management of health care facilities or lodging facilities or providing to any person, under a franchise, license or otherwise, rights to any brand name under which any lodging facility or health care facility is operated). A TRS is subject to corporate federal income tax.
Deferred income taxes are recorded for the corporate subsidiary TRSs and for the foreign taxes in those respective jurisdictions based on earnings reported. The current provision for income taxes differs from the amounts currently payable because of temporary differences in the recognition of certain income and expense items for financial reporting and tax reporting purposes. Deferred income taxes are computed under the asset and liability method. The asset and liability method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between tax bases and financial bases of assets and liabilities (Note 14).
Significant judgment is required in determining our tax provision and in evaluating our tax positions. We establish tax reserves based on a benefit recognition model, which we believe could result in a greater amount of benefit (and a lower amount of reserve) being initially recognized in certain circumstances. Provided that the tax position is deemed more likely than not of being sustained, we recognize the largest amount of tax benefit that is greater than 50 percent likely of being ultimately realized upon settlement. We derecognize the tax position when it is no longer more likely than not of being sustained.
Our earnings and profits, which determine the taxability of distributions to stockholders, differ from net income reported for financial reporting purposes due primarily to differences in depreciation, including hotel properties, and timing differences of rent recognition and certain expense deductions, for federal income tax purposes. Deferred income taxes relate primarily to our TRSs and foreign properties, and are accounted for using the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial reporting bases of assets and liabilities of our TRSs and their respective tax bases, and for their operating loss and tax credit carryforwards based on enacted tax rates expected to be in effect when such amounts are realized or settled. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of available evidence, including tax planning strategies and other factors.
Deferred Income Taxes
We recognize deferred income taxes in certain of our subsidiaries taxable in the United States or in foreign jurisdictions. Deferred income taxes are generally the result of temporary differences (items that are treated differently for tax purposes than for GAAP purposes as described in Note 14). In addition, deferred tax assets arise from unutilized tax net operating losses generated in prior years. We provide a valuation allowance against our deferred income tax assets when we believe that it is more likely than not that all or some portion of the deferred income tax asset may not be realized. Whenever a change in circumstances causes a change in the estimated realizability of the related deferred income tax asset, the resulting increase or decrease in the valuation allowance is included in deferred income tax expense (benefit).
CPA®:17 – Global 2014 10-K — 79
Notes to Consolidated Financial Statements
Earnings Per Share
We have a simple equity capital structure with only common stock outstanding. As a result, earnings per share, as presented, represents both basic and dilutive per-share amounts for all periods presented in the consolidated financial statements. Income per basic share of common stock is calculated by dividing net income by the weighted-average number of shares of common stock issued and outstanding during such period.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.
Recent Accounting Requirements
The following ASUs promulgated by the Financial Accounting Standards Board are applicable to us:
ASU 2015-02, Consolidation (Topic 810). ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Specifically, ASU 2015-02 modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership, and affects the evaluation of fee arrangements in the primary beneficiary determination. ASU 2015-02 is effective for periods beginning after December 15, 2015 and early adoption is permitted. We are currently evaluating the impact of ASU 2015-02 on our consolidated financial statements.
ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 does not apply to our lease revenues, but will apply to sales of real estate, reimbursed tenant costs, and revenues generated from our operating properties. Additionally, this guidance modifies disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective beginning in 2017 and early adoption is not permitted. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. We are currently evaluating the impact of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2017.
ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360). ASU 2014-08 changes the requirements for reporting discontinued operations. A discontinued operation may include a component of an entity or a group of components of an entity, or a business. Under this new guidance, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a “strategic shift that has or will have a major effect on an entity’s operations and financial results.” The new guidance also requires disclosures including pre-tax profit or loss and significant gains or losses arising from dispositions that represent an “individually significant component of an entity,” but do not meet the criteria to be reported as discontinued operations under ASU 2014-08. In the ordinary course of business, we sell properties, which, under prior accounting guidance, we generally reported as discontinued operations; however, under ASU 2014-08 such property dispositions typically would not meet the criteria to be reported as discontinued operations. We elected to early adopt ASU 2014-08 prospectively for all dispositions after December 31, 2013. Consequently, individually-significant properties that were sold during 2014 were not reclassified to discontinued operations in the consolidated statements of income, but are disclosed in Note 15 to the consolidated financial statements. By contrast, and as required by the new guidance, the consolidated statements of income for the prior year periods reflect all dispositions through December 31, 2013 as discontinued operations, which were deemed discontinued operations under the prior accounting guidance.
ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 requires an entity to present an unrecognized tax benefit relating to a net operating loss carryforward, a similar tax loss, or a tax credit carryforward as a reduction to a deferred tax asset, except in certain situations. To the extent that the net operating loss carryforward, similar tax loss, or tax credit carryforward is not available as of the reporting date under the governing tax law to settle any additional income taxes that would result from the disallowance of the tax position, or the governing tax law does not require the entity to use and the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented as a liability and should not net with a deferred tax asset. ASU 2013-11 became effective for us at the beginning of 2014. The adoption of ASU 2013-11 did not have a material impact on our financial condition or results of operations.
CPA®:17 – Global 2014 10-K — 80
Notes to Consolidated Financial Statements
Note 4. 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. The current advisory agreement is scheduled to expire on December 31, 2015 unless otherwise extended. We also have certain agreements with affiliates regarding jointly-owned investments. In addition, we reimbursed the advisor for organization and offering costs incurred in connection with our follow-on offering through its closing on January 31, 2013, and for general and administrative duties performed on our behalf.
The following tables present a summary of fees we paid, expenses we reimbursed, and distributions we made to the advisor and other affiliates in accordance with the advisory agreement and the operating partnership agreement (in thousands):
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| Amounts Included in the Consolidated Statements of Income | |
| | |
| | |
|
| Asset management fees | $ | 26,694 |
| | $ | 21,953 |
| | $ | 18,932 |
|
| Available Cash Distribution | 20,427 |
| | 16,899 |
| | 14,620 |
|
| Personnel and overhead reimbursements | 10,741 |
| | 9,243 |
| | 5,205 |
|
| Acquisition expenses | 2,637 |
| | 11,448 |
| | 12,092 |
|
| Office rent reimbursements | 1,190 |
| | 1,293 |
| | 756 |
|
| Interest expense on deferred acquisition fees and loan from affiliate | 516 |
| | 827 |
| | 930 |
|
| | $ | 62,205 |
| | $ | 61,663 |
| | $ | 52,535 |
|
| Acquisition Fees Capitalized | | | | | |
| Current acquisition fees | $ | 3,979 |
| | $ | 4,777 |
| | $ | 17,448 |
|
| Deferred acquisition fees | 2,510 |
| | 3,063 |
| | 14,162 |
|
| | $ | 6,489 |
| | $ | 7,840 |
| | $ | 31,610 |
|
|
| | | | | | | |
| | December 31, |
| | 2014 | | 2013 |
| Due to Affiliates | | | |
| Deferred acquisition fees, including interest | $ | 9,394 |
| | $ | 15,573 |
|
| Asset management fees payable | 2,283 |
| | 1,972 |
|
| Accounts payable | 527 |
| | 2,200 |
|
| Reimbursable costs | 228 |
| | 264 |
|
| Subordinated disposition fees | 202 |
| | 202 |
|
| | $ | 12,634 |
| | $ | 20,211 |
|
Acquisition and Disposition Fees
We pay the advisor acquisition fees for structuring and negotiating investments and related mortgage financing on our behalf, a portion of which is payable upon acquisition of investments, with the remainder subordinated to the achievement of a preferred return, a non-compounded cumulative distribution of 5% per annum (based initially on our invested capital). Acquisition fees payable to the advisor with respect to our long-term, net-lease investments are 4.5% of the total cost of those investments and are comprised of a current portion of 2.5%, typically paid upon acquisition, and a portion of 2%, typically paid over three years and subject to the 5% preferred return described above. For certain types of investments that are not considered long-term net-lease investments, initial acquisition fees may range from 0% to 1.75% of the equity invested plus the related acquisition fees, with no portion of the payment being deferred. Unpaid installments of deferred acquisition fees are included in Due to affiliates in the consolidated financial statements. Unpaid installments of deferred acquisition fees bear interest at an annual rate of 5%.
The advisor may be entitled to receive a disposition fee in an amount equal to the lesser of (i) 50.0% of the competitive real estate commission (as defined in the advisory agreement) or (ii) 3.0% of the contract sales price of the investment being sold;
CPA®:17 – Global 2014 10-K — 81
Notes to Consolidated Financial Statements
however, payment of such fees is subordinated to the 5% preferred return. These fees, which are paid at the discretion of our board of directors, are deferred and are payable to the advisor only in connection with a liquidity event.
Asset Management Fees and Available Cash Distribution
As defined in the advisory agreement, we pay the advisor asset management fees that vary based on the nature of the underlying investment. We pay 0.5% per annum of average market value for long-term net leases and certain other types of real estate investments, and 1.5% to 1.75% per annum of average equity value for certain types of securities. For the periods presented, the asset management fees were payable in cash or shares of our common stock at the option of the advisor, after consultation with the advisor. Starting in 2015, the asset management fees are payable in cash or shares of our common stock at our option, upon the recommendation of the advisor. If the advisor receives 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, which was $9.72 as of December 31, 2014. For 2014, 2013, and 2012, the advisor received its asset management fees in shares of our common stock, which vest over a period of three years. At December 31, 2014, the advisor owned 8,791,517 shares (2.7%) of our common stock. We also distribute to the advisor, depending on the type of investments we own, up to 10% of available cash of the Operating Partnership, referred to as the Available Cash Distribution, which is defined as cash generated from operations, excluding capital proceeds, as reduced by operating expenses and debt service, excluding prepayments and balloon payments. Asset management fees and Available Cash Distributions are included in Property expenses and Net income attributable to noncontrolling interests, respectively, in the consolidated financial statements.
Personnel and Overhead Reimbursements
Under the terms of the advisory agreement, the advisor allocates a portion of its personnel and overhead expenses to us and the other Managed REITs. Effective as of October 1, 2012, the advisor allocates these expenses on the basis of our trailing four quarters of reported revenues and those of WPC, CPA®:16 – Global, and CPA®:18 – Global, and to CWI based on time incurred by its personnel. Prior to that date, these costs were allocated on the basis of time charges incurred by the advisor’s personnel on behalf of us, CPA®:15, CPA®:16 – Global, and CWI. CPA®:15 merged with WPC on September 28, 2012. CPA®:16 – Global merged with WPC on January 31, 2014.
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 and dispositions. Personnel and overhead 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 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.
Organization and Offering Expenses
Through the termination of our follow-on offering on January 31, 2013, we incurred expenses in connection with the offerings of our securities. These expenses were deducted from the gross proceeds of our offerings. Total organization and offering expenses, including underwriting compensation, did not exceed 15% of the gross proceeds of our offering and our distribution reinvestment and stock purchase plan, consistent with applicable regulatory requirements. Under the terms of a dealer manager agreement between Carey Financial, a wholly-owned subsidiary of the advisor, and us, Carey Financial received a selling commission of $0.65 per share sold and a dealer manager fee of $0.35 per share sold in our public offering. Carey Financial re-allowed all or a portion of selling commissions to selected dealers participating in the offering and re-allowed up to the full dealer manager fee to the selected dealers. Total underwriting compensation paid in connection with our offering, including selling commissions, the dealer manager fee, and reimbursements made by Carey Financial to selected dealers and investment advisors, did not exceed the limitations prescribed by the Financial Industry Regulatory Authority, Inc., the regulator for
CPA®:17 – Global 2014 10-K — 82
Notes to Consolidated Financial Statements
broker-dealers like Carey Financial, which limit underwriting compensation to 10% of gross offering proceeds. We also reimbursed Carey Financial up to an additional 0.5% of offering proceeds for bona fide due diligence expenses. We reimbursed the advisor or one of its affiliates for other organization and offering expenses (including, but not limited to, filing fees, legal, accounting, printing, and escrow costs). The advisor agreed to be responsible for the payment of organization and offering expenses (excluding selling commissions and dealer manager fees) that exceed 4% of the gross offering proceeds.
During the offering period, we accrued costs incurred in connection with the raising of capital as deferred offering costs. Upon receipt of offering proceeds and reimbursement to the advisor for costs incurred, we charged the deferred costs to equity. The total costs paid by the advisor and its affiliates in connection with the organization and offering of our securities were $20.9 million from inception through January 31, 2013 and were fully reimbursed upon termination of our follow-on offering on that date.
Jointly-Owned Investments and Other Transactions with Affiliates
At December 31, 2014, we owned interests ranging from 7% to 85% 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 owned interests in jointly-controlled tenancy-in-common interests in properties, which we account for under the equity method of accounting.
During 2014 and 2013, we entered into the following investments with our affiliate, CPA®:18 – Global, which we account for under the equity method of accounting (Note 7):
| |
| • | $108.3 million, of which our share was $53.1 million, or 49%, for an office facility in Stavanger, Norway on October 31, 2014; |
| |
| • | $147.9 million, of which our share was $74.0 million, or 50%, for an office facility in Warsaw, Poland on March 31, 2014; |
| |
| • | $97.0 million, of which our share was $19.4 million, or 20%, for a portfolio of five retail facilities in Croatia on December 18, 2013; and |
| |
| • | $115.6 million, of which our share was $57.8 million, or 50%, for an office facility in Austin, Texas on August 20, 2013. |
CPA®:18 – Global consolidates all of the above joint ventures because it is either the majority equity holder and/or controls the significant activities of the ventures.
CPA®:17 – Global 2014 10-K — 83
Notes to Consolidated Financial Statements
Note 5. Net Investments in Properties and Real Estate Under Construction
Real Estate
Real estate, which consists of land and buildings leased to others, at cost, and which are subject to operating leases, is summarized as follows (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2014 | | 2013 |
| Land | $ | 513,172 |
| | $ | 553,389 |
|
| Buildings | 1,883,543 |
| | 1,848,926 |
|
| Less: Accumulated depreciation | (175,478 | ) | | (129,051 | ) |
| | $ | 2,221,237 |
| | $ | 2,273,264 |
|
The impact on the carrying value of our Real estate due to the strengthening of the U.S. dollar relative to foreign currencies during 2014 was a $116.0 million decrease from December 31, 2013 to December 31, 2014.
Acquisitions of Real Estate During 2014
During 2014, we entered into the following investments, which were deemed to be real estate asset acquisitions because we acquired the sellers’ properties and then entered into new leases in connection with these acquisitions, at a total cost of $40.7 million, including net lease intangibles of $8.4 million (Note 8) and acquisition-related costs and fees of $3.6 million, which were capitalized:
| |
| • | $4.4 million for an industrial facility in New Concord, Ohio on April 21, 2014; |
| |
| • | $12.5 million for an office facility in Krakow, Poland on September 9, 2014; and |
| |
| • | $23.8 million for a retail facility in Gelsenkirchen, Germany on October 13, 2014. |
We also entered into the following investments, which were deemed to be business combinations because we assumed the existing leases on the properties, for which the sellers were not the lessees, at a total cost of $37.7 million, including land of $5.0 million, buildings of $26.8 million, net lease intangibles of $6.6 million (Note 8), and a purchase option of $0.6 million to acquire an office facility adjacent to one of the properties we purchased:
| |
| • | $19.0 million for an office facility and an adjacent plot of land in Tucson, Arizona on February 7, 2014. We also assumed a non-recourse mortgage loan of $10.3 million (Note 11); and |
| |
| • | $18.7 million for an office facility in Plymouth, Minnesota on December 9, 2014. This amount excludes a tenant improvement allowance of $7.3 million and a lease inducement of $2.0 million that we provided to the tenant. |
In connection with these investments, we expensed acquisition-related costs and fees totaling $4.7 million, which are included in Acquisition expenses in the consolidated financial statements. Dollar amounts are based on the exchange rates of the foreign currencies on the dates of acquisitions, as applicable.
During the year ended December 31, 2014, we funded an additional $83.0 million for build-to-suit projects that were placed into service and $3.6 million for building improvements with existing tenants.
Acquisitions of Real Estate During 2013
During 2013, we entered into the following investments, which were deemed to be real estate asset acquisitions because we acquired the sellers’ properties and then entered into new leases in connection with the acquisitions, at a total cost of $44.4 million, including net lease intangibles of $8.1 million and acquisition-related costs and fees of $2.2 million, which were capitalized:
| |
| • | $18.2 million for two parcels of land, which were then leased to a provider of private school education that intends to construct two buildings on the site in Chicago, Illinois on April 18, 2013; |
| |
| • | $15.3 million for an automotive dealership in Lewisville, Texas on August 26, 2013; and |
| |
| • | $10.9 million for a manufacturing and office facility in Portage, Wisconsin on January 25, 2013. |
CPA®:17 – Global 2014 10-K — 84
Notes to Consolidated Financial Statements
We also entered into the following investments, which were deemed to be business combinations because we assumed the existing leases on the properties, for which the sellers were not the lessees, at a total cost of $234.6 million, including land of $29.7 million, buildings of $157.7 million, and net lease intangibles of $48.8 million:
| |
| • | $78.1 million for a logistics facility in Gadki, Poland on July 16, 2013; |
| |
| • | $38.6 million for an R&D/office facility in Wageningen, Netherlands on July 12, 2013; |
| |
| • | $26.6 million for an office headquarters facility in Haibach, Germany on October 31, 2013; |
| |
| • | $41.7 million for an office facility in Houston, Texas on December 19, 2013; |
| |
| • | $17.0 million for an office headquarters facility in Tempe, Arizona on December 30, 2013; |
| |
| • | $15.7 million for an entertainment complex in Dallas, Texas on February 20, 2013; |
| |
| • | $9.0 million for an office facility in Auburn Hills, Michigan on October 22, 2013; and |
| |
| • | $7.9 million for a building with a ground lease in Northbrook, Illinois on May 29, 2013. |
In connection with these investments, we expensed acquisition-related costs and fees totaling $15.1 million, which are included in Acquisition expenses in the consolidated financial statements. Dollar amounts are based on the exchange rates of the foreign currencies on the dates of acquisitions, as applicable.
During the year ended December 31, 2013, we funded an additional $9.7 million for build-to-suit projects that were placed into service and $9.0 million for building improvements with existing tenants.
We updated our purchase price allocation during the first quarter of 2014 for our investment located in Tempe, Arizona that was acquired during the three months ended December 31, 2013, and recorded measurement period adjustments of $1.6 million, $1.8 million, and $3.4 million to increase buildings, intangible assets, and intangible liabilities, respectively.
Scheduled Future Minimum Rents
Scheduled future minimum rents, exclusive of renewals and expenses paid by tenants and future CPI-based adjustments, under non-cancelable operating leases at December 31, 2014 are as follows (in thousands):
|
| | | | |
| Years Ending December 31, | | Total |
| 2015 | | $ | 235,870 |
|
| 2016 | | 236,073 |
|
| 2017 | | 236,586 |
|
| 2018 | | 238,773 |
|
| 2019 | | 240,863 |
|
| Thereafter | | 2,527,908 |
|
| Total | | $ | 3,716,073 |
|
Operating Real Estate
At December 31, 2014, Operating real estate consisted of our self-storage operations. At December 31, 2013, Operating real estate consisted of our self-storage operations and a hotel. Below is a summary of our Operating real estate (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2014 | | 2013 |
| Land | $ | 66,066 |
| | $ | 66,066 |
|
| Buildings | 206,793 |
| | 217,304 |
|
| Less: Accumulated depreciation | (22,217 | ) | | (15,354 | ) |
| | $ | 250,642 |
| | $ | 268,016 |
|
Acquisitions of Operating Real Estate
We did not acquire any operating properties during 2014.
During 2013, we acquired eight self-storage properties for $31.9 million. The total cost includes buildings of $20.8 million, land of $6.9 million, and lease intangibles of $4.2 million. As these acquisitions were deemed to be business combinations, we
CPA®:17 – Global 2014 10-K — 85
Notes to Consolidated Financial Statements
expensed the acquisition-related costs and fees of $0.6 million, which are included in Acquisition expenses in the consolidated financial statements.
During 2013, we sold a hotel property (Note 15).
Partial Sale
On December 1, 2011, we entered into a contract with I Shops LLC, a real estate developer, to finance the renovation of a hotel and construction of a shopping center in Orlando, Florida. Additionally, as a condition to providing the construction loan, we entered into a contract with the developer that granted us the option to acquire a 15% equity interest in the parent company that owns I Shops LLC. However, we decided not to exercise the equity option and it expired subsequent to December 31, 2014. During 2011, we consolidated I Shops LLC, which held title to the property that secured our loan, because we had (i) control over the decisions that most significantly impacted the developer’s economic performance and (ii) the obligation to absorb losses and right to receive benefits from I Shops LLC. The property included an operating hotel and vacant land. We had accounted for the construction loan as Real estate under construction. During 2013 and 2014, the hotel renovation was completed and the shopping center was placed into service, respectively. We have an additional option to purchase two retail properties located within the shopping center from I Shops LLC, but as of December 31, 2014 we had not exercised this option.
On April 24, 2014, the developer repaid $68.3 million of the outstanding $84.6 million loan balance. The remaining balance of the loan was related to the two retail properties that had been under construction. Upon this substantial repayment of the loan, the I Shops LLC investment no longer met the criteria for consolidation and was deconsolidated, with the exception of the two construction-in-progress retail properties. When construction is completed, we plan to exercise our purchase option for these properties concurrently with the repayment of the outstanding loan balance. These transactions, which we refer to as the I Shops Partial Sale, were accounted for as a partial sale resulting in a reduction in assets of $55.4 million, of which $27.9 million was included in Real estate, at cost; $25.8 million was included in Operating real estate; and $4.8 million was reclassified from Real estate, at cost, to Real estate under construction. We had recognized a gain on disposition of real estate of $12.5 million associated with the completed hotel and the portions of the shopping center that had been transferred to the developer. In accordance with ASU 2014-08, the results of operations for assets related to the I Shops Partial Sale are included in continuing operations in the consolidated financial statements.
In September 2014, the two retail properties were placed into service. As of December 31, 2014, construction of the properties was not yet completed and the remaining loan balance was still outstanding.
Real Estate Under Construction
The following table provides the activity of our Real estate under construction (in thousands): |
| | | | | | | |
| | Years Ended December 31, |
| | 2014 | | 2013 |
| Beginning balance | $ | 127,935 |
| | $ | 71,285 |
|
| Capitalized funds | 74,420 |
| | 90,007 |
|
| Placed into service | (96,807 | ) | | (42,225 | ) |
| Capitalized interest | 6,661 |
| | 5,208 |
|
| Foreign currency translation adjustments, building improvements, and other | (1,226 | ) | | 3,660 |
|
| Ending balance | $ | 110,983 |
| | $ | 127,935 |
|
Capitalized Funds
During 2014, total capitalized funds were primarily comprised of $59.7 million in construction draws related to five existing build-to-suit projects, $9.9 million for the initial funding of two new build-to-suit projects, and $4.8 million that was reclassified to Real estate under construction from Real estate, at cost as a result of the I Shops Partial Sale. This reclassification was made to account for the two retail properties that we have an option to purchase from I Shops LLC, which we had not exercised as of December 31, 2014. See discussion above under Partial Sale. The amount capitalized also included acquisition-related costs and fees of $1.6 million related to the two new build-to-suit projects. Additionally, of the total capitalized funds, $1.0 million was unpaid and has been included in Accounts payable, accrued expenses and other liabilities in the consolidated financial statements at December 31, 2014.
CPA®:17 – Global 2014 10-K — 86
Notes to Consolidated Financial Statements
During 2013, costs attributable to five build-to-suit projects comprised the balance of Real estate under construction, including capitalized acquisition-related costs and fees of $2.3 million.
Placed into Service
During 2014, we placed four build-to-suit projects into service, of which three were completed and one was partially-completed, in the amount of $96.8 million. Of the total, $81.9 million was reclassified to Real estate, at cost and $14.9 million was reclassified to Operating real estate, at cost, which was subsequently deconsolidated as a result of the I Shops Partial Sale. See discussion above under Partial Sale.
During 2013, we placed three build-to-suit projects into service, of which two were completed and one was partially-completed, in the amount of $42.2 million. Of the total, $26.1 million was reclassified to Real estate, at cost and $12.6 million was reclassified to Operating real estate, at cost. The remaining $3.5 million was related to improvements on an existing building that was reclassified to Real estate, at cost at December 31, 2013.
Capitalized Interest
Capitalized interest includes amortization of the mortgage discount and deferred financing costs and interest costs incurred during construction, totaling $6.7 million and $5.2 million for the years ended December 31, 2014 and 2013, respectively.
Ending Balance
At December 31, 2014, we had two open build-to-suit projects. At December 31, 2013, we had three open build-to-suit projects. The aggregate unfunded commitment on the remaining open projects totaled approximately $12.5 million and $46.7 million at December 31, 2014 and 2013, respectively.
Asset Retirement Obligations
We have recorded asset retirement obligations for the removal of asbestos and environmental waste in connection with several of our acquisitions. We estimated the fair value of the asset retirement obligations based on the estimated economic lives of the properties and the estimated removal costs provided by the inspectors. The liability was discounted using the weighted-average interest rate on the associated fixed-rate mortgage loans at the time the liability was incurred.
The following table provides the activity of our asset retirement obligations, which are included in Accounts payable, accrued expenses and other liabilities in the consolidated financial statements (in thousands):
|
| | | | | | | |
| | Years Ended December 31, |
| | 2014 | | 2013 |
| Beginning balance | $ | 22,076 |
| | $ | 19,194 |
|
| Additions | — |
| | 1,619 |
|
Accretion expense (a) | 1,233 |
| | 1,203 |
|
| Foreign currency translation adjustments and other | (38 | ) | | 60 |
|
| Ending balance | $ | 23,271 |
| | $ | 22,076 |
|
__________
| |
| (a) | Accretion of the liability is included in Property expenses and recognized over the economic life of the properties. |
Note 6. Finance Receivables
Assets representing rights to receive money on demand or at fixed or determinable dates are referred to as finance receivables. Our finance receivables portfolio consists of our Net investments in direct financing leases and Note receivable. Operating leases are not included in finance receivables as such amounts are not recognized as an asset in the consolidated financial statements.
CPA®:17 – Global 2014 10-K — 87
Notes to Consolidated Financial Statements
Net Investments in Direct Financing Leases
Net investments in direct financing leases is summarized as follows (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2014 | | 2013 |
| Minimum lease payments receivable | $ | 726,054 |
| | $ | 774,876 |
|
| Unguaranteed residual value | 466,170 |
| | 468,548 |
|
| | 1,192,224 |
| | 1,243,424 |
|
| Less: unearned income | (712,799 | ) | | (763,508 | ) |
| | $ | 479,425 |
| | $ | 479,916 |
|
At December 31, 2014 and 2013, Other assets, net included $0.6 million and $0.8 million, respectively, of accounts receivable related to amounts billed under our direct financing leases.
On April 21, 2014, we entered into a net lease financing transaction for a manufacturing facility in Bluffton, Indiana for $3.7 million, including capitalized acquisition-related costs and fees of $0.3 million.
Scheduled Future Minimum Rents
Scheduled future minimum rents, exclusive of renewals and expenses paid by tenants and future CPI-based adjustments, under non-cancelable direct financing leases at December 31, 2014 are as follows (in thousands):
|
| | | | |
| Years Ending December 31, | | Total |
| 2015 | | $ | 52,449 |
|
| 2016 | | 52,888 |
|
| 2017 | | 53,318 |
|
2018 (a) | | 288,142 |
|
| 2019 | | 26,232 |
|
| Thereafter | | 253,025 |
|
| Total | | $ | 726,054 |
|
___________
| |
| (a) | Includes $250.0 million for a purchase option that a tenant, The New York Times Company, may exercise to acquire the property it leases from us. |
Note Receivable
On December 14, 2010, we provided financing of $40.0 million to China Alliance Properties Limited, a subsidiary of Shanghai Forte Land Co., Ltd. The financing was provided through a collateralized loan that is guaranteed by Shanghai Forte Land Co., Ltd.’s parent company, Fosun International Limited, and has an interest rate of 11% and matures on December 14, 2015. At both December 31, 2014 and 2013, the balance of the note receivable was $40.0 million. Our Note receivable is included in Other assets, net in the consolidated financial statements.
Credit Quality of Finance Receivables
We generally seek investments in facilities that we believe are critical to a tenant’s business and that we believe have a low risk of tenant default. At both December 31, 2014 and 2013, none of the balances of our finance receivables were past due and we had not established any allowances for credit losses. Additionally, there were no modifications of finance receivables during the years ended December 31, 2014 and 2013. We evaluate the credit quality of our finance receivables utilizing an internal five-point credit rating scale, with one representing the highest credit quality and five representing the lowest. The credit quality evaluation of our finance receivables was last updated in the fourth quarter of 2014.
CPA®:17 – Global 2014 10-K — 88
Notes to Consolidated Financial Statements
A summary of our finance receivables by internal credit quality rating is as follows (dollars in thousands):
|
| | | | | | | | | | | | |
| | | Number of Tenants / Obligors at December 31, | | Carrying Value at December 31, |
| Internal Credit Quality Indicator | | 2014 | | 2013 | | 2014 | | 2013 |
| 1 | | — | | — | | $ | — |
| | $ | — |
|
| 2 | | 1 | | 1 | | 2,259 |
| | 2,250 |
|
| 3 | | 9 | | 8 | | 429,245 |
| | 430,713 |
|
| 4 | | 3 | | 3 | | 87,921 |
| | 86,953 |
|
| 5 | | — | | — | | — |
| | — |
|
| | | | | | | $ | 519,425 |
| | $ | 519,916 |
|
Note 7. Equity Investments in Real Estate
We own equity interests in 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. Earnings for each investment are recognized in accordance with each respective investment agreement and where applicable, based upon an allocation of the investment’s net assets at book value as if the investment were hypothetically liquidated at the end of each reporting period. Investments in unconsolidated investments are required to be evaluated periodically. We periodically 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. Additionally, we provide funding to developers for ADC Arrangements. Under ADC Arrangements, we have provided two loans to third-party developers of real estate projects, which we account for as equity investments as the characteristics of the arrangement with the third-party developers are more similar to a jointly-owned investment or partnership than a loan (Note 3).
The following table sets forth our ownership interests in our equity investments in real estate and their respective carrying values along with those ADC Arrangements that are recorded as equity investments (dollars in thousands):
|
| | | | | | | | | | | | |
| | | | | Ownership Interest | | Carrying Value at December 31, |
| Lessee/Equity Investee | | Co-owner | | at December 31, 2014 | | 2014 | | 2013 |
Shelborne Property Associates, LLC (a) | | Third Party | | 33% | | $ | 152,801 |
| | $ | 129,575 |
|
C1000 Logistiek Vastgoed B.V. (b) (c) (d) | | WPC | | 85% | | 71,130 |
| | 84,596 |
|
BG LLH, LLC (e) | | Third Party | | 7% | | 42,587 |
| | 2,410 |
|
| U-Haul Moving Partners, Inc. and Mercury Partners, LP | | WPC | | 12% | | 41,028 |
| | 43,051 |
|
BPS Nevada, LLC (f) | | Third Party | | 15% | | 40,032 |
| | 23,278 |
|
Bank Pekao S.A. (b) (f) | | CPA®:18 – Global | | 50% | | 31,045 |
| | — |
|
IDL Wheel Tenant, LLC (g) | | Third Party | | N/A | | 30,049 |
| | 6,017 |
|
State Farm (h) | | CPA®:18 – Global | | 50% | | 20,414 |
| | 20,913 |
|
Madison Storage NYC, LLC and Veritas Group IX-NYC, LLC (d) (i) | | Third Party | | 45% | | 20,147 |
| | 23,907 |
|
Apply Sørco AS (b) (f) | | CPA®:18 – Global | | 49% | | 19,076 |
| | — |
|
| Berry Plastics Corporation | | WPC | | 50% | | 16,632 |
| | 17,659 |
|
Tesco plc (b) | | WPC | | 49% | | 14,194 |
| | 17,965 |
|
Hellweg 2 (b) (d) | | WPC | | 37% | | 9,935 |
| | 12,978 |
|
Agrokor 5 (b) (h) | | CPA®:18 – Global | | 20% | | 8,760 |
| | 19,217 |
|
Eroski Sociedad Cooperativa – Mallorca (b) (j) | | WPC | | 30% | | 7,662 |
| | 9,639 |
|
| Dick’s Sporting Goods, Inc. | | WPC | | 45% | | 5,508 |
| | 4,646 |
|
| | | | | | | $ | 531,000 |
| | $ | 415,851 |
|
___________
| |
| (a) | Represents a domestic ADC Arrangement. We consider this investment a VIE. We provided funding of $18.0 million to this investment during the year ended December 31, 2014. At December 31, 2014, the unfunded balance on the loan |
CPA®:17 – Global 2014 10-K — 89
Notes to Consolidated Financial Statements
related to this investment was $3.6 million. Additionally, during the first quarter of 2014, capital contributions were made by our partners that resulted in income attributed to us of $6.5 million based upon the hypothetical liquidation at book value method of accounting. This income was offset during the year with our share of losses incurred by the lessee during the second, third, and fourth quarters of 2014.
| |
| (b) | The carrying value of this investment is affected by the impact of fluctuations in the exchange rate of the applicable foreign currency. |
| |
| (c) | This investment represents a tenancy-in-common interest, whereby the property is encumbered by debt for which we are jointly and severally liable. For this investment, the co-obligor is WPC and the total amount due under the arrangement was approximately $82.7 million and $95.6 million at December 31, 2014 and 2013, respectively. Of these amounts, $70.3 million and $81.3 million represent the amounts we agreed to pay and are included within the carrying value of this investment at December 31, 2014 and 2013, respectively. |
| |
| (d) | The decrease in carrying value is primarily due to distributions made to us. |
| |
| (e) | See Conversion to Equity Investment below. |
| |
| (f) | See Acquisitions of Equity Investments During 2014 below. |
| |
| (g) | Represents a domestic ADC Arrangement. We consider this investment a VIE. We provided funding of $22.9 million to this investment and capitalized $1.1 million of interest related to the investment during the year ended December 31, 2014. At December 31, 2014, the unfunded balance on the loan related to this investment was $19.3 million. |
| |
| (h) | See Acquisitions of Equity Investments During 2013 below. |
| |
| (i) | In addition to our 45% equity interest, we have a 40% indirect economic interest in this investment based upon certain contractual arrangements with our partner in this entity that enable or could require us to purchase their interest. |
| |
| (j) | In December 2014, we recognized an other-than-temporary impairment charge of $0.8 million on this investment (Note 9). |
The following tables present combined summarized investee financial information of our equity method investment properties. Amounts provided are the total amounts attributable to the investment properties and do not represent our proportionate share (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2014 | | 2013 |
| Real estate assets | $ | 1,494,621 |
| | $ | 1,360,072 |
|
| Other assets | 355,783 |
| | 346,335 |
|
| Total assets | 1,850,404 |
| | 1,706,407 |
|
| Debt | (858,410 | ) | | (776,467 | ) |
| Accounts payable, accrued expenses and other liabilities | (100,844 | ) | | (92,119 | ) |
| Total liabilities | (959,254 | ) | | (868,586 | ) |
| Partners’/members’ equity | $ | 891,150 |
| | $ | 837,821 |
|
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| Revenues | $ | 160,174 |
| | $ | 132,760 |
| | $ | 111,151 |
|
| Expenses | (130,997 | ) | | (135,339 | ) | | (80,237 | ) |
| Income (loss) from continuing operations | $ | 29,177 |
| | $ | (2,579 | ) | | $ | 30,914 |
|
We recorded our investments in BPS Nevada, LLC and Shelborne Property Associates, LLC on a one quarter lag, therefore, amounts in our financial statements for the years ended December 31, 2014, 2013, and 2012 are based on balances and results of operations from BPS Nevada, LLC and Shelborne Property Associates, LLC as of and for the 12 months ended September 30, 2014, 2013, and 2012.
At September 30, 2014 and December 31, 2013, Lineage Logistics Holdings, LLC reported total assets of $2.2 billion and $645.7 million, respectively, total liabilities of $1.7 billion and $468.7 million, respectively, and members’ equity of $481.6 million and $177.0 million, respectively. For the nine months ended September 30, 2014 and and the years ended December 31, 2013 and 2012, Lineage Logistics Holdings, LLC reported revenues of $435.1 million, $335.5 million and $214.5 million, respectively, and income from continuing operations of $148.5 million, $12.5 million, and $21.9 million, respectively. These amounts are not reflected in the summarized investee financial information tables presented above.
We recognized equity in earnings of equity method investments in real estate of $24.1 million for the year ended December 31, 2014, equity in losses of equity method investments in real estate of $9.5 million for the year ended December 31, 2013, and
CPA®:17 – Global 2014 10-K — 90
Notes to Consolidated Financial Statements
equity in earnings of equity method investments in real estate of $9.8 million for the year ended December 31, 2012. For certain investments, earnings or losses of equity investments are based on the hypothetical liquidation at book value model as well as some depreciation and amortization adjustments related to basis differentials. Aggregate distributions from our interests in other unconsolidated real estate investments were $28.7 million, $18.1 million, and $31.9 million for the years ended December 31, 2014, 2013, and 2012, respectively. At December 31, 2014 and 2013, the unamortized basis differences on our equity investments were $31.0 million and $25.9 million, respectively, excluding acquisition fees of $6.8 million and $6.0 million, respectively. Net amortization of the basis differences reduced the carrying values of our equity investments by $4.3 million, $3.9 million, and $3.3 million for the years ended December 31, 2014, 2013, and 2012, respectively.
Acquisitions of Equity Investments During 2014
On November 19, 2014, we acquired a preferred equity position in BPS Nevada, LLC, an entity in which we hold a 15% equity interest, for a total cost of $18.2 million, including acquisition-related costs and fees of $0.2 million. The preferred equity interest provides us with a preferred rate of return of 8%, 10%, and 12% during the first four months of the term, the next four months of the term, and thereafter, respectively, through November 19, 2019, the date on which the preferred equity interest is redeemable. Our equity interest and preferred equity position in BPS Nevada, LLC allow us to have significant influence over the entity. Accordingly, we account for this investment using the equity method of accounting. On February 2, 2015, we funded an additional $9.1 million, including acquisition-related costs and fees of $0.1 million, related to this investment. During the year ended December 31, 2014, we recognized $0.2 million of income related to this investment, which is included in Equity in earnings (losses) of equity method investments in real estate in the consolidated financial statements.
On October 31, 2014, we and CPA®:18 – Global acquired an office facility leased to Apply Sørco AS in Stavanger, Norway through a jointly-owned investment for a total cost of $108.3 million, including capitalized acquisition-related costs and fees totaling $5.7 million and a deferred tax liability of $12.5 million that was recorded because the investment was a share transaction. We acquired a 49% interest in this venture for $53.1 million and account for this investment under the equity method of accounting. In connection with this transaction, this jointly-owned investment issued privately-placed bonds of $53.3 million, of which our share is $26.1 million, which is included within the carrying value of this investment and is based on the exchange rate of the Norwegian krone on the date of acquisition. The bonds pay an annual coupon of 4.4% on October 30 and mature on October 31, 2021.
On March 31, 2014, we and CPA®:18 – Global acquired an office facility leased to Bank Pekao S.A. in Warsaw, Poland through a jointly-owned investment for a total cost of $147.9 million. Acquisition-related costs and fees totaling $8.4 million were expensed by the jointly-owned investment as this acquisition was deemed a business combination. We acquired a 50% interest in this venture for $74.0 million and account for this investment under the equity method of accounting. Our share of the acquisition expenses and value added taxes paid is included within the carrying value of the investment. On May 21, 2014, this jointly-owned investment obtained non-recourse mortgage financing of $73.1 million, of which our share is $36.6 million, which is included within the carrying value of this investment and is based on the exchange rate of the euro on that date. This mortgage loan bears a fixed annual interest rate of 3.3% and matures on March 10, 2021.
Acquisitions of Equity Investments During 2013
On December 18, 2013, we and CPA®:18 – Global acquired a portfolio of five retail facilities, referred to as Agrokor 5, from Agrokor d.d. in Croatia through a jointly-owned investment for a total cost of $97.0 million, including capitalized acquisition-related costs and fees totaling $6.3 million. We acquired a 20% interest in this venture for $19.4 million and account for this investment under the equity method of accounting. On February 25, 2014, this jointly-owned investment obtained non-recourse mortgage financing of $42.9 million, of which our share is $8.6 million, which is included within the carrying value of this investment and is based on the exchange rate of the euro on that date. This mortgage loan bears a fixed annual interest rate of 5.8% and matures on December 31, 2020.
On August 20, 2013, we and CPA®:18 – Global acquired an office facility from State Farm in Austin, Texas through a jointly-owned investment for a total cost of $115.6 million, including capitalized acquisition-related costs and fees totaling $5.6 million. We acquired a 50% interest in this venture for $57.8 million and account for this investment under the equity method of accounting. In connection with this transaction, this jointly-owned investment obtained non-recourse mortgage financing of $72.8 million, of which our share is $36.4 million, which is included within the carrying value of this investment. This mortgage loan bears a fixed annual interest rate of 4.5% and matures on September 10, 2023.
CPA®:17 – Global 2014 10-K — 91
Notes to Consolidated Financial Statements
Conversion to Equity Investment
On April 7, 2014, we made a follow-on equity investment of $20.4 million, including acquisition-related costs and fees of $0.4 million, to our existing equity holdings in BG LLH, LLC, which owns substantially all of the equity of Lineage Logistics Holdings, LLC, an entity that owns and operates cold storage facilities in the United States. We formerly accounted for our existing equity holdings using the cost method of accounting. With our investment in April 2014, we were deemed to have significant influence over BG LLH, LLC and accordingly, we changed our accounting for this investment to the equity method of accounting. We reclassified our existing holdings, totaling $8.3 million, from Other assets, net to Equity investments in real estate during 2014. In accordance with Accounting Standards Codification 323-10-35-33, Increase in Level of Ownership or Degree of Influence, we have adjusted our financial statements retrospectively as if the equity method of accounting had been in effect during all previous periods in which the investment was held (Note 3). In addition, we recorded equity income of $11.5 million related to this investment for the year ended December 31, 2014, which is primarily comprised of our share of earnings recorded by the investee related to a business combination during the year, and which is included in Equity in earnings (losses) of equity method investments in real estate in the consolidated financial statements.
Hellweg 2 Restructuring
In 2007, CPA®:14, CPA®:15, and CPA®:16 – Global acquired a 33%, 40%, and 27% interest, respectively, in an entity, which we refer to as Purchaser, for the purposes of acquiring a 25% interest in a property holding company, which we refer to as PropCo, that owns 37 do-it-yourself stores located in Germany. This is referred to as the Hellweg 2 transaction. The remaining 75% interest in PropCo was owned by a third party, which we refer to as Partner. In November 2010, CPA®:14, CPA®:15, and CPA®:16 – Global obtained a 70% additional interest in PropCo from the Partner, resulting in Purchaser owning approximately 95% of PropCo. In 2011, we acquired CPA®:14’s interests. In 2012, WPC acquired CPA®:15’s interests through its merger with CPA®:15.
In October 2013, we acquired the Partner’s remaining 5% equity interest in PropCo, which resulted in PropCo incurring a German real estate transfer tax of $21.9 million, of which our share was approximately $8.1 million and was recorded within Equity in earnings (losses) of equity method investments in real estate in our consolidated financial statements for the year ended December 31, 2013. PropCo intends to appeal the real estate transfer tax upon assessment, but there is no certainty it will be successful in appealing its obligation. On January 31, 2014, WPC acquired CPA®:16 – Global’s interests in Hellweg 2 through its merger with CPA®:16 – Global. As of December 31, 2014, WPC holds a 63% interest, and we hold a 37% interest, in the Hellweg 2 investment. We account for this investment under the equity method of accounting.
ADC Arrangements
We account for the following ADC Arrangements under the equity method of accounting as we will participate in the residual interests through the sale or refinancing of the property (Note 3):
On December 27, 2012, we funded a domestic build-to-suit project with Shelborne Property Associates, LLC for the construction of a hotel property for a total estimated construction cost of up to $125.0 million, which was subsequently increased to $154.9 million. We funded $151.3 million through December 31, 2014. The loan is collateralized by the property and has an annual interest rate ranging from 6% to 8% for the first three years of the term, followed by seven one-year extensions of the term at the option of the borrower, at which point the annual interest rate would be 10%. At December 31, 2014, the related loan had an unfunded balance of $3.6 million.
On November 16, 2012, we funded a domestic build-to-suit project with IDL Wheel Tenant, LLC for the construction of an observation wheel in an entertainment complex, which we also acquired as a build-to-suit project (Note 5). The total estimated construction cost of the observation wheel is up to $50.0 million, of which we funded $30.7 million through December 31, 2014. The loan is personally guaranteed by each of the principals of IDL Wheel Tenant, LLC and has an annual interest rate of 9% and matures in November 2017. As part of the arrangement, we agreed to fund a portion of the loan in euros and we locked the euro to U.S. dollar exchange rate to the developer at $1.278 at the time of the transaction. This component of the loan is deemed to be an embedded derivative (Note 10). At December 31, 2014, the related loan had an unfunded balance of $19.3 million.
Note 8. Intangible Assets and Liabilities
In connection with our acquisitions of properties, we have recorded net lease intangibles that are being amortized over periods ranging from one year to 53 years. In addition, we have several ground lease intangibles that are being amortized over periods of up to 94 years. In-place lease and tenant relationship intangibles are included in In-place lease and tenant relationship intangible assets, net in the consolidated financial statements. Above-market rent intangibles, below-market ground lease (as lessee) intangibles, and goodwill are included in Other intangible assets, net in the consolidated financial statements. Below-market rent and above-market ground lease (as lessor) intangibles are included in Below-market rent and other intangible liabilities, net in the consolidated financial statements.
CPA®:17 – Global 2014 10-K — 92
Notes to Consolidated Financial Statements
In connection with our investment activity during 2014, we recorded net lease intangibles comprised as follows (life in years, dollars in thousands):
|
| | | | | |
| | Weighted-Average Life | | Amount |
| Amortizable Intangible Assets | | | |
|
| In-place lease | 8.7 | | $ | 19,493 |
|
| Above-market rent | 13.1 | | 1,483 |
|
| | | | $ | 20,976 |
|
| Amortizable Intangible Liabilities | | | |
|
| Below-market rent | 18.7 | | $ | (5,981 | ) |
Intangible assets and liabilities are summarized as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2014 | | 2013 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Amortizable Intangible Assets | |
| | |
| | |
| | |
| | |
| | |
|
| In-place lease and tenant relationship | $ | 551,569 |
| | $ | (119,125 | ) | | $ | 432,444 |
| | $ | 550,823 |
| | $ | (84,326 | ) | | $ | 466,497 |
|
| Above-market rent | 92,548 |
| | (16,539 | ) | | 76,009 |
| | 97,109 |
| | (12,413 | ) | | 84,696 |
|
| Below-market ground leases | 7,124 |
| | (199 | ) | | 6,925 |
| | 7,124 |
| | (79 | ) | | 7,045 |
|
| | $ | 651,241 |
| | $ | (135,863 | ) | | $ | 515,378 |
| | $ | 655,056 |
| | $ | (96,818 | ) | | $ | 558,238 |
|
| Unamortizable Intangible Assets | | | | | | | | | | | |
| Goodwill | 304 |
| | — |
| | 304 |
| | 345 |
| | — |
| | 345 |
|
| Total intangible assets | $ | 651,545 |
| | $ | (135,863 | ) | | $ | 515,682 |
| | $ | 655,401 |
| | $ | (96,818 | ) | | $ | 558,583 |
|
| | | | | | | | | | | | |
Amortizable Intangible Liabilities | |
| | |
| | |
| | |
| | |
| | |
|
| Below-market rent | $ | (116,887 | ) | | $ | 13,293 |
| | $ | (103,594 | ) | | $ | (110,606 | ) | | $ | 8,163 |
| | $ | (102,443 | ) |
| Above-market ground lease | (1,145 | ) | | 17 |
| | (1,128 | ) | | (157 | ) | | 3 |
| | (154 | ) |
| Total intangible liabilities | $ | (118,032 | ) | | $ | 13,310 |
| | $ | (104,722 | ) | | $ | (110,763 | ) | | $ | 8,166 |
| | $ | (102,597 | ) |
Net amortization of intangibles, including the effect of foreign currency translation, was $38.0 million, $35.5 million, and $28.3 million for the years ended December 31, 2014, 2013, and 2012, respectively. Amortization of below-market rent and above-market rent intangibles is recorded as an adjustment to Rental income; amortization of below-market ground lease and above-market ground lease intangibles is included in Property expenses; and amortization of in-place lease and tenant relationship intangibles is included in Depreciation and amortization.
We performed our annual test for impairment of goodwill as of December 31, 2014 and no impairment was indicated.
Based on the intangible assets and liabilities recorded at December 31, 2014, scheduled annual net amortization of intangibles for each of the next five calendar years and thereafter is as follows (in thousands):
|
| | | | | | | | | | | | |
| Years Ending December 31, | | Net Increase in Rental Income | | Increase to Amortization/Property Expenses | | Net |
| 2015 | | $ | (1,244 | ) | | $ | 37,565 |
| | $ | 36,321 |
|
| 2016 | | (338 | ) | | 32,070 |
| | 31,732 |
|
| 2017 | | (100 | ) | | 29,070 |
| | 28,970 |
|
| 2018 | | (75 | ) | | 28,962 |
| | 28,887 |
|
| 2019 | | (67 | ) | | 28,917 |
| | 28,850 |
|
| Thereafter | | (25,761 | ) | | 281,657 |
| | 255,896 |
|
| Total | | $ | (27,585 | ) | | $ | 438,241 |
| | $ | 410,656 |
|
CPA®:17 – Global 2014 10-K — 93
Notes to Consolidated Financial Statements
Note 9. 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 swaps and foreign currency contracts; and Level 3, for securities and other derivative assets 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, which are included in Other assets, net in the consolidated financial statements, are comprised of interest rate swaps, foreign currency forward contracts, stock warrants, embedded derivatives, and a swaption (Note 10). The interest rate swaps, foreign currency forward contracts, and swaption 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. The stock warrants and embedded derivatives were measured at fair value using internal valuation models that incorporate market inputs and our own assumptions about future cash flows. We classified these assets as Level 3 because these assets are not traded in an active market.
Derivative Liabilities — Our derivative liabilities, which are included in Accounts payable, accrued expenses and other liabilities in the consolidated financial statements, are comprised of interest rate swaps, foreign currency forward contracts, and embedded derivatives (Note 10). The interest rate swaps and foreign currency forward contracts were measured at fair value using readily observable market inputs, such as quotations on interest rates, and were classified as Level 2 because they are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market. The embedded derivatives were measured at fair value using internal valuation models that incorporate market inputs and our own assumptions about future cash flows. We classified these liabilities as Level 3 because these liabilities are not traded in an active market.
We did not have any transfers into or out of Level 1, Level 2, and Level 3 measurements during the years ended December 31, 2014, 2013, and 2012. Gains and losses (realized and unrealized) included in earnings are reported in Other income and (expenses) in the consolidated financial statements.
Our other financial instruments had the following carrying values and fair values as of the dates shown (dollars in thousands):
|
| | | | | | | | | | | | | | | | | |
| | | | December 31, 2014 | | December 31, 2013 |
| | Level | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Non-recourse debt (a) | 3 | | $ | 1,896,489 |
| | $ | 1,961,905 |
| | $ | 1,915,601 |
| | $ | 1,944,865 |
|
Note receivable (a) | 3 | | 40,000 |
| | 41,990 |
| | 40,000 |
| | 43,890 |
|
Other securities (b) | 3 | | 9,381 |
| | 9,649 |
| | 9,915 |
| | 15,548 |
|
Deferred acquisition fees payable (c) | 3 | | 9,009 |
| | 10,077 |
| | 15,033 |
| | 15,950 |
|
CMBS (d) | 3 | | 3,053 |
| | 8,899 |
| | 2,791 |
| | 6,052 |
|
___________
| |
| (a) | We determined the estimated fair value of these 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. |
| |
| (b) | Amounts at December 31, 2014 primarily reflect our interest in a foreign debenture, which is included in Other assets, net in the consolidated financial statements. Amounts at December 31, 2013 reflect equity securities and our interest in the foreign debenture, both of which were included in Other assets, net in the consolidated financial statements. During 2014, we converted the equity securities to an equity investment in real estate (Note 7). |
CPA®:17 – Global 2014 10-K — 94
Notes to Consolidated Financial Statements
| |
| (c) | We determined the estimated fair value of our deferred acquisition fees based on an estimate of discounted cash flows using two significant unobservable inputs, which are the leverage adjusted unsecured spread and an illiquidity adjustment of 355 basis points and 75 basis points, respectively. Significant increases or decreases to these inputs in isolation would result in a significant change in the fair value measurement. |
| |
| (d) | The carrying value of our CMBS is inclusive of impairment charges recognized during 2014 and 2012, as well as accretion related to the estimated cash flows expected to be received. There were no purchases, sales, or impairment charges recognized during the year ended December 31, 2013. |
We estimated that our other financial assets and liabilities (excluding net investments in direct financing leases) had fair values that approximated their carrying values at both December 31, 2014 and 2013.
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 held for use for 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 property’s asset group to the future undiscounted net cash flows that we expect the property’s asset group will generate, including any estimated proceeds from the eventual sale of the property’s asset group. If this amount is less than the carrying value, the property’s asset group is considered to be impaired. We then measure the impairment charge as the excess of the carrying value of the property’s asset group over the estimated fair value of the property’s asset group, which is primarily determined using market information such as recent comparable sales, broker quotes, or third-party appraisals. 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 fair value reporting. 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 at fair value on a non-recurring basis (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2014 | | Year Ended December 31, 2013 | | Year Ended December 31, 2012 |
| | Fair Value Measurements | | Total Impairment Charges | | Fair Value
Measurements | | Total Impairment Charges | | Fair Value
Measurements | | Total Impairment Charges |
| Impairment Charges from Continuing Operations | |
| | |
| | |
| | |
| | |
| | |
|
| CMBS | $ | 1,808 |
| | $ | 570 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2,019 |
|
| Total impairment charges included in expenses |
|
| | 570 |
| |
|
| | — |
| |
|
| | 2,019 |
|
| Equity investments in real estate | 7,662 |
| | 766 |
| | 23,278 |
| | 3,778 |
| | — |
| | — |
|
| | | | $ | 1,336 |
| | | | $ | 3,778 |
| | | | $ | 2,019 |
|
Impairment charges, and their related fair value measurements, recognized during 2014, 2013, and 2012 were as follows:
CMBS
During 2014, we incurred other-than-temporary impairment charges on two tranches in our CMBS portfolio totaling $0.6 million to reduce their carrying values to their estimated fair values as a result of non-performance. The fair value measurements related to the impairment charges were based on a third-party appraisal, subject to our corroboration for reasonableness. The fair value measurements are based on input from dealers, buyers, and other market participants, as well as updates on prepayments, losses, and delinquencies within our CMBS portfolio.
During 2012, we incurred other-than-temporary impairment charges on our CMBS portfolio totaling $2.0 million to reduce the carrying values of three CMBS tranches to zero as a result of non-performance and the advisor’s assessment that the likelihood of receiving further interest payments or return of principal was remote.
CPA®:17 – Global 2014 10-K — 95
Notes to Consolidated Financial Statements
Equity Investments in Real Estate
During 2014, we recognized an other-than-temporary impairment charge of $0.8 million to reduce the carrying value of a property held by a jointly-owned investment to its estimated fair value due to a decline in market conditions. The fair value measurement related to the impairment charge was determined by estimating discounted cash flows using three significant unobservable inputs, which are the cash flow discount rate, the residual discount rate, and the residual capitalization rate equal to 11.75%, 10.5%, and 9.5%, respectively. Significant increases or decreases to these inputs in isolation would result in a significant change in the fair value measurement.
During 2013, we recognized an other-than-temporary impairment charge of $3.8 million to reduce the carrying value of a property held by a jointly-owned investment to its estimated fair value due to a bankruptcy filed by a major tenant. The fair value measurement related to the impairment charge was determined by estimating discounted cash flows using three significant unobservable inputs, which are the cash flow discount rate, the residual discount rate, and the residual capitalization rate equal to 6.0%, 6.25%, and 5.75%, respectively. Significant increases or decreases to these inputs in isolation would result in a significant change in the fair value measurement.
Note 10. Risk Management and Use of Derivative Financial Instruments
Risk Management
In the normal course of our ongoing business operations, we encounter economic risk. There are four main components of economic risk that impact us: interest rate risk, credit risk, market risk, and foreign currency risk. We are primarily subject to interest rate risk on our interest-bearing assets and liabilities. Credit risk is the risk of default on our operations and 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 investments due to changes in interest rates or other market factors. We own investments in Europe and in Asia and are subject to the risks associated with changing foreign currency exchange rates.
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 into, and do not plan to enter into, financial instruments for trading or speculative purposes. In addition to derivative instruments that we entered into on our own behalf, we may also be a party to derivative instruments that are embedded in other contracts, and we may own common stock warrants, granted to us by lessees when structuring lease transactions, 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. For a derivative designated, and that qualified, as a net investment hedge, the effective portion of the change in the fair value and/or the net settlement of the derivative are reported in Other comprehensive (loss) income as part of the cumulative foreign currency translation adjustment. Amounts are reclassified out of Other comprehensive (loss) income into earnings when the hedged investment is either sold or substantially liquidated. The ineffective portion of the change in fair value of the derivative is immediately recognized in earnings.
CPA®:17 – Global 2014 10-K — 96
Notes to Consolidated Financial Statements
The following table sets forth certain information regarding our derivative instruments (in thousands):
|
| | | | | | | | | | | | | | | | | | |
Derivatives Designated as Hedging Instruments | | | | Asset Derivatives Fair Value at December 31, | | Liability Derivatives Fair Value at December 31, |
| | Balance Sheet Location | | 2014 | | 2013 | | 2014 | | 2013 |
Foreign currency forward contracts (a) | | Other assets, net | | $ | 24,051 |
| | $ | 2,002 |
| | $ | — |
| | $ | — |
|
| Interest rate swaps | | Other assets, net | | 71 |
| | 1,895 |
| | — |
| | — |
|
| Foreign currency collars | | Other assets, net | | — |
| | 429 |
| | — |
| | — |
|
| Foreign currency forward contracts | | Accounts payable, accrued expenses and other liabilities | | — |
| | — |
| | — |
| | (11,928 | ) |
| Interest rate swaps | | Accounts payable, accrued expenses and other liabilities | | — |
| | — |
| | (14,554 | ) | | (12,911 | ) |
Derivatives Not Designated as Hedging Instruments | | | |
|
| |
|
| |
|
| |
|
|
Embedded derivatives (b) | | Accounts payable, accrued expenses and other liabilities | | — |
| | — |
| | — |
| | (2,164 | ) |
Embedded derivatives (b) (c) | | Other assets, net | | 499 |
| | 2,314 |
| | — |
| | — |
|
Stock warrants (d) | | Other assets, net | | 1,848 |
| | 1,782 |
| | — |
| | — |
|
Foreign currency forward contracts (e) | | Accounts payable, accrued expenses and other liabilities | | — |
| | — |
| | (2,904 | ) | | — |
|
Foreign currency forward contracts (a) (e) | | Other assets, net | | 5,120 |
| | 1,521 |
| | — |
| | — |
|
Swaption (f) | | Other assets, net | | 505 |
| | 1,205 |
| | — |
| | — |
|
| Total derivatives | | | | $ | 32,094 |
| | $ | 11,148 |
| | $ | (17,458 | ) | | $ | (27,003 | ) |
___________
| |
| (a) | In connection with an investment in Japan, we entered into a foreign currency forward contract that protects against fluctuations in foreign currency rates related to the Japanese yen, but did not qualify for hedge accounting as of December 31, 2013. During the year ended December 31, 2014, this foreign currency forward contract was re-designated as a net investment hedge. |
| |
| (b) | In connection with the ADC Arrangement with IDL Wheel Tenant, LLC, we agreed to fund to the developer a portion of the loan in the euro and we locked the euro to U.S. dollar exchange rate at $1.278 at the time of the transaction (Note 7). This component of the loan is deemed to be an embedded derivative that requires separate measurement. |
| |
| (c) | In December 2013, there was an amendment to the loan commitment for the refinancing of Agrokor d.d., referred to as the Agrokor 4 portfolio, which provided for an effective net settlement provision. In December 2014, the embedded derivative matured. |
| |
| (d) | As part of the purchase of an interest in Hellweg 2 from CPA®:14 in May 2011, we acquired warrants from CPA®:14, which were granted by Hellweg 2 to CPA®:14. These warrants give us participation rights to any distributions made by Hellweg 2 and we are entitled to a cash distribution that equals a certain percentage of the liquidity event price of Hellweg 2, should a liquidity event occur. |
| |
| (e) | In September 2014, a new forward contract was executed to offset an existing forward contract that has not yet reached its maturity. These two offsetting forward contracts will mature in July 2015. |
| |
| (f) | In connection with the non-recourse debt financing related to our Cuisine Solutions, Inc. investment, we executed a swap and purchased a swaption, which grants us the right to enter into a new swap with a predetermined fixed rate should there be an extension of the loan maturity date. |
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 our consolidated financial statements. At both December 31, 2014 and 2013, no cash collateral had been posted nor received for any of our derivative positions.
CPA®:17 – Global 2014 10-K — 97
Notes to Consolidated Financial Statements
The following tables present the impact of our derivative instruments in the consolidated financial statements (in thousands):
|
| | | | | | | | | | | | |
| | | Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) on Derivatives (Effective Portion) |
| | | Years Ended December 31, |
| Derivatives in Cash Flow Hedging Relationships | | 2014 | | 2013 | | 2012 |
Interest rate cap (a) | | $ | 913 |
| | $ | 1,188 |
| | $ | 811 |
|
| Interest rate swaps | | (5,542 | ) | | 10,107 |
| | (11,046 | ) |
| Foreign currency collars | | (290 | ) | | (2,059 | ) | | (2,951 | ) |
| Foreign currency forward contracts | | 29,313 |
| | (6,168 | ) | | (3,030 | ) |
| Put options | | — |
| | — |
| | 192 |
|
| | | | | | | |
Derivatives in Net Investment Hedging Relationships (b) | | | | | | |
| Foreign currency forward contracts | | 484 |
| | — |
| | — |
|
| | | | | | | |
Derivatives Formerly in Net Investment Hedging Relationships (c) | | |
| | |
| | |
|
| Foreign currency forward contracts | | 4,511 |
| | (2,237 | ) | | (1,014 | ) |
| Total | | $ | 29,389 |
| | $ | 831 |
| | $ | (17,038 | ) |
|
| | | | | | | | | | | | | | |
| | | | | Amount of Gain (Loss) Reclassified from Other Comprehensive Income (Loss) into Income (Effective Portion) |
| | | Location of Gain (Loss) | | Years Ended December 31, |
| Derivatives in Cash Flow Hedging Relationships | | Recognized in Income | | 2014 | | 2013 (d) | | 2012 (d) |
| Foreign currency collars | | Other income and (expenses) | | $ | 751 |
| | $ | 1,215 |
| | $ | 1,918 |
|
| Foreign currency forward contracts | | Other income and (expenses) | | 1,145 |
| | 909 |
| | 366 |
|
| Interest rate cap | | Interest expense | | (913 | ) | | (1,189 | ) | | (890 | ) |
| Interest rate swaps | | Interest expense | | (7,057 | ) | | (7,268 | ) | | (4,867 | ) |
| Total | | | | $ | (6,074 | ) | | $ | (6,333 | ) | | $ | (3,473 | ) |
___________
| |
| (a) | Includes a gain attributable to noncontrolling interests of $0.4 million, $0.5 million, and $0.4 million for the years ended December 31, 2014, 2013, and 2012, respectively. |
| |
| (b) | The effective portion of the change in fair value and the settlement of these contracts are reported in the foreign currency translation adjustment section of Other comprehensive (loss) income until the underlying investment is sold, at which time we reclassify the gain or loss to earnings. |
| |
| (c) | In September 2014, a new forward contract was executed to offset an existing forward contract that has not yet reached its maturity. As a result of this transaction, this existing forward contract was de-designated as a hedging instrument. However, the effective portion of the change in fair value, through the date of the de-designation, and the settlement of this contract are reported in the foreign currency translation adjustment section of Other comprehensive (loss) income until the underlying investment is sold, at which time we will reclassify the gain or loss to earnings. |
| |
| (d) | The amounts included in this column for the periods presented herein have been revised to reverse the signs that were incorrectly presented when originally filed. In addition, similar revisions will be made to the column for the quarter ended March 31, 2014 in the Form 10-Q for the quarter ended March 31, 2015 when filed. |
CPA®:17 – Global 2014 10-K — 98
Notes to Consolidated Financial Statements
|
| | | | | | | | | | | | | | |
| | | | | Amount of Gain (Loss) Recognized in Income on Derivatives |
| | | Location of Gain (Loss) | | Years Ended December 31, |
| Derivatives Not in Hedging Relationships | | Recognized in Income | | 2014 | | 2013 | | 2012 |
| Embedded credit derivatives | | Other income and (expenses) | | $ | 1,378 |
| | $ | 1,159 |
| | $ | (1,141 | ) |
| Foreign currency forward contracts | | Other income and (expenses) | | 364 |
| | 1,266 |
| | 254 |
|
| Put options | | Other income and (expenses) | | — |
| | — |
| | (2 | ) |
| Stock warrants | | Other income and (expenses) | | 66 |
| | 297 |
| | 66 |
|
| Swaption | | Other income and (expenses) | | (700 | ) | | 428 |
| | — |
|
| Derivatives in Hedging Relationships | | | | | | | | |
Interest rate swaps (a) | | Interest expense | | (88 | ) | | 212 |
| | (34 | ) |
| Total | | | | $ | 1,020 |
| | $ | 3,362 |
| | $ | (857 | ) |
___________
| |
| (a) | Relates to the ineffective portion of the hedging relationship. |
See below for information on our purposes for entering into derivative instruments and for information on derivative instruments owned by unconsolidated investments, which are excluded from the tables above.
Interest Rate Swaps and Swaption
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 have obtained, and may in the future obtain, variable-rate, non-recourse mortgage loans, and as a result, we have entered into, and may continue to enter into, interest rate swap agreements or swaptions 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 face amount on which the swaps are based is not exchanged. A swaption gives us the right but not the obligation to enter into an interest rate swap, of which the terms and conditions are set on the trade date, on a specified date in the future. Our objective in using these derivatives is to limit our exposure to interest rate movements.
The interest rate swaps and swaption that we had outstanding on our consolidated subsidiaries at December 31, 2014 are summarized as follows (currency in thousands):
|
| | | | | | | | | | |
| Interest Rate Derivatives | | Number of Instruments | | Notional Amount | | Fair Value at December 31, 2014 (a) |
| Designated as Cash Flow Hedging Instruments | | | | | | | |
| Interest rate swaps | | 6 | | EUR | 185,796 |
| | $ | (7,466 | ) |
| Interest rate swaps | | 13 | | USD | 234,089 |
| | (7,017 | ) |
| Not Designated as Hedging Instrument | | | | | | | |
| Swaption | | 1 | | USD | 13,230 |
| | 505 |
|
| | | | | | | | $ | (13,978 | ) |
____________
| |
| (a) | Fair value amount is based on the exchange rate of the euro at December 31, 2014, as applicable. |
The interest rate swap that one of our unconsolidated jointly-owned investments had outstanding at December 31, 2014 and was designated as a cash flow hedge is summarized as follows (currency in thousands):
|
| | | | | | | | | | | | |
| Interest Rate Derivative | | Ownership Interest in Investee at December 31, 2014 | | Number of Instruments | | Notional Amount | | Fair Value at
December 31, 2014 (a) |
| Interest rate swap | | 85% | | 1 | | EUR | 11,701 |
| | $ | (631 | ) |
____________
| |
| (a) | Fair value amount is based on the exchange rate of the euro at December 31, 2014. |
CPA®:17 – Global 2014 10-K — 99
Notes to Consolidated Financial Statements
Foreign Currency Contracts
We are exposed to foreign currency exchange rate movements, primarily in the euro and, to a lesser extent, the British pound sterling, the Japanese yen, and the Norwegian krone. 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. 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 may fluctuate.
The following table presents the foreign currency derivative contracts we had outstanding and their designations at December 31, 2014 (currency in thousands):
|
| | | | | | | | | | |
| Foreign Currency Derivatives | | Number of Instruments | | Notional Amount | | Fair Value at
December 31, 2014 (a) |
| Designated as Cash Flow Hedging Instruments | | | | | | | |
| Foreign currency forward contracts | | 97 | | EUR | 195,354 |
| | $ | 19,479 |
|
| Foreign currency forward contracts | | 12 | | JPY | 563,608 |
| | 2,211 |
|
| Foreign currency forward contracts | | 17 | | NOK | 12,239 |
| | 16 |
|
| Not Designated as Hedging Instruments | | | | | | | |
| Foreign currency forward contracts | | 2 | | EUR | 90,000 |
| | 2,216 |
|
| Designated as Net Investment Hedging Instruments | | | | | | | |
| Foreign currency forward contracts | | 1 | | JPY | 610,129 |
| | 2,335 |
|
| Foreign currency forward contracts | | 5 | | NOK | 7,996 |
| | 10 |
|
| | | | | | | | $ | 26,267 |
|
___________
| |
| (a) | Fair value amounts are based on the exchange rate of the euro, the Japanese yen, or the Norwegian krone, as applicable, at December 31, 2014. |
Credit Risk-Related Contingent Features
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 derivative contracts will be reclassified to Other income and (expenses) when the hedged foreign currency proceeds from foreign operations are repatriated to the United States. At December 31, 2014, we estimate that an additional $8.2 million and $5.4 million, inclusive of amounts attributable to noncontrolling interests of less than $0.1 million, will be reclassified as interest expense and other income, respectively, during the next 12 months.
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 December 31, 2014. At December 31, 2014, our total credit exposure was $24.3 million, inclusive of noncontrolling interest, and the maximum exposure to any single counterparty was $9.9 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 December 31, 2014, 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 $18.5 million and $25.1 million at December 31, 2014 and 2013, respectively, which included accrued interest and any adjustment for nonperformance risk. If we had breached any of these provisions at either December 31, 2014 or December 31, 2013, we could
CPA®:17 – Global 2014 10-K — 100
Notes to Consolidated Financial Statements
have been required to settle our obligations under these agreements at their aggregate termination value of $19.1 million or $27.1 million, respectively.
Portfolio Concentration Risk
For the year ended December 31, 2014, the following tenants represented 5% or more of total lease revenues:
| |
| • | Metro Cash & Carry Italia S.p.A. (10%); |
| |
| • | The New York Times Company (9%); |
| |
| • | General Parts Inc., Golden State Supply LLC, Straus-Frank Enterprises LLC, General Parts Distribution LLC, and Worldpac Inc. (6%). |
Note 11. Non-Recourse Debt
Non-recourse debt consists of mortgage notes payable, which are collateralized by the assignment of real estate properties with an aggregate carrying value of approximately $2.9 billion at both December 31, 2014 and 2013, respectively. At December 31, 2014, our mortgage notes payable bore interest at fixed annual rates ranging from 2.0% to 8.0% and variable contractual annual rates ranging from 2.6% to 6.1%, with maturity dates ranging from 2015 to 2039.
Financing Activity During 2014
During 2014, we obtained five new non-recourse mortgage financings totaling $67.9 million with a weighted-average annual interest rate and term of 3.7% and 7.1 years, respectively, of which $57.8 million related to investments that we acquired during prior years and $10.1 million related to investments that we acquired during the current year. We also assumed a non-recourse mortgage loan of $10.3 million, including unamortized premium of $1.3 million, in connection with a new investment acquired during 2014.
Additionally, we refinanced two non-recourse mortgage loans totaling $22.1 million with new non-recourse mortgage loans totaling $24.9 million, with a weighted-average annual interest rate and term of 7.0% and 13.7 years, respectively, and recognized a total of $0.3 million in losses on the extinguishment of the refinanced debts.
Financing Activity During 2013
During 2013, we obtained new non-recourse mortgage financings totaling $296.6 million with a weighted-average annual interest rate and term of 4.6% and 11 years, respectively. Of the total, $162.6 million related to net-lease investments acquired during 2013, $115.5 million related to investments acquired during prior years, and $18.5 million related to eight self-storage properties acquired during 2013.
Additionally, we refinanced two non-recourse mortgage loans totaling $23.4 million with new non-recourse mortgage loans totaling $16.5 million with an annual interest rate and term of 4.9% and ten years, respectively, related to nine self-storage properties acquired during prior years.
CPA®:17 – Global 2014 10-K — 101
Notes to Consolidated Financial Statements
Scheduled Debt Principal Payments
Scheduled debt principal payments during each of the next five calendar years following December 31, 2014 and thereafter are as follows (in thousands):
|
| | | | |
| Years Ending December 31, | | Total |
| 2015 | | $ | 67,858 |
|
| 2016 | | 272,144 |
|
| 2017 | | 351,238 |
|
| 2018 | | 154,884 |
|
| 2019 | | 39,196 |
|
| Thereafter through 2039 | | 1,014,313 |
|
| | | 1,899,633 |
|
Unamortized discount, net | | (3,144 | ) |
| Total | | $ | 1,896,489 |
|
Certain amounts in the table above are based on the applicable foreign currency exchange rate at December 31, 2014. The impact on the carrying value of our Non-recourse debt due to the strengthening of the U.S. dollar relative to foreign currencies during 2014 was a decrease of $69.9 million from December 31, 2013 to December 31, 2014.
Note 12. Commitments and Contingencies
At December 31, 2014, we were not involved in any material litigation. 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. See Note 5 for unfunded construction commitments.
Note 13. Equity
Distributions
Distributions paid to stockholders consist of ordinary income, capital gains, return of capital, or a combination thereof for income tax purposes. The following table presents annualized distributions per share reported for tax purposes and serves as a designation of capital gain distributions, if applicable, pursuant to Internal Revenue Code Section 857(b)(3)(C) and Treasury Regulation § 1.857-6(e):
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| Ordinary income | $ | 0.3528 |
| | $ | 0.3104 |
| | $ | 0.3022 |
|
| Capital gain | — |
| | 0.0110 |
| | — |
|
| Return of capital | 0.2972 |
| | 0.3286 |
| | 0.3478 |
|
| Total distributions paid | $ | 0.6500 |
| | $ | 0.6500 |
| | $ | 0.6500 |
|
During the fourth quarter of 2014, our board of directors declared a quarterly distribution of $0.1625 per share, which was paid on January 15, 2015 to stockholders of record on December 31, 2014, in the amount of $53.4 million.
CPA®:17 – Global 2014 10-K — 102
Notes to Consolidated Financial Statements
Accumulated Other Comprehensive Loss
The following table presents the components of Accumulated other comprehensive loss reflected in equity, net of tax. Amounts include our proportionate share of other comprehensive loss from our unconsolidated investments (in thousands):
|
| | | | | | | | | | | |
| | December 31, |
| | 2014 | | 2013 | | 2012 |
| Foreign currency translation adjustments | $ | (88,212 | ) | | $ | 3,666 |
| | $ | (21,864 | ) |
| Net unrealized gain (loss) on derivative instruments | 7,311 |
| | (16,717 | ) | | (19,250 | ) |
| Unrealized loss on marketable securities | (106 | ) | | (391 | ) | | (485 | ) |
| Accumulated other comprehensive loss | $ | (81,007 | ) | | $ | (13,442 | ) | | $ | (41,599 | ) |
Reclassifications Out of Accumulated Other Comprehensive Loss
The following tables present a reconciliation of changes in Accumulated other comprehensive loss by component for the periods presented (in thousands):
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2014 |
| | Gains and Losses on Derivative Instruments | | Gains and Losses on Marketable Securities | | Foreign Currency Translation Adjustments | | Total |
| Beginning balance | $ | (16,717 | ) | | $ | (391 | ) | | $ | 3,666 |
| | $ | (13,442 | ) |
| Other comprehensive income (loss) before reclassifications | 18,365 |
| | 285 |
| | (93,401 | ) | | (74,751 | ) |
| Amounts reclassified from accumulated other comprehensive loss to: | | | | | | | |
| Interest expense | 7,970 |
| | — |
| | — |
| | 7,970 |
|
| Other income and (expenses) | (1,896 | ) | | — |
| | — |
| | (1,896 | ) |
| Total | 6,074 |
| | — |
| | — |
| | 6,074 |
|
| Net current-period Other comprehensive income (loss) | 24,439 |
| | 285 |
| | (93,401 | ) | | (68,677 | ) |
| Net current-period Other comprehensive (income) loss attributable to noncontrolling interests | (411 | ) | | — |
| | 1,523 |
| | 1,112 |
|
| Ending balance | $ | 7,311 |
| | $ | (106 | ) | | $ | (88,212 | ) | | $ | (81,007 | ) |
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2013 |
| | Gains and Losses
on Derivative Instruments | | Gains and Losses on Marketable Securities | | Foreign Currency Translation Adjustments | | Total |
| Beginning balance | $ | (19,250 | ) | | $ | (485 | ) | | $ | (21,864 | ) | | $ | (41,599 | ) |
| Other comprehensive (loss) income before reclassifications | (3,265 | ) | | 94 |
| | 25,742 |
| | 22,571 |
|
| Amounts reclassified from accumulated other comprehensive loss to: | | | | | | | |
| Interest expense | 8,457 |
| | — |
| | — |
| | 8,457 |
|
| Other income and (expenses) | (2,124 | ) | | — |
| | — |
| | (2,124 | ) |
| Total | 6,333 |
| | — |
| | — |
| | 6,333 |
|
| Net current-period Other comprehensive income | 3,068 |
| | 94 |
| | 25,742 |
| | 28,904 |
|
| Net current-period Other comprehensive income attributable to noncontrolling interests | (535 | ) | | — |
| | (212 | ) | | (747 | ) |
| Ending balance | $ | (16,717 | ) | | $ | (391 | ) | | $ | 3,666 |
| | $ | (13,442 | ) |
CPA®:17 – Global 2014 10-K — 103
Notes to Consolidated Financial Statements
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2012 |
| | Gains and Losses
on Derivative Instruments | | Gains and Losses on Marketable Securities | | Foreign Currency Translation Adjustments | | Total |
| Beginning balance | $ | (3,141 | ) | | $ | (1,520 | ) | | $ | (33,489 | ) | | $ | (38,150 | ) |
| Other comprehensive (loss) income before reclassifications | (19,217 | ) | | 281 |
| | 11,816 |
| | (7,120 | ) |
| Amounts reclassified from accumulated other comprehensive loss to: | | | | | | | |
| Interest expense | 5,757 |
| | — |
| | — |
| | 5,757 |
|
| Other income and (expenses) | (2,284 | ) | | 754 |
| | — |
| | (1,530 | ) |
| Total | 3,473 |
| | 754 |
| | — |
| | 4,227 |
|
| Net current-period Other comprehensive (loss) income | (15,744 | ) | | 1,035 |
| | 11,816 |
| | (2,893 | ) |
| Net current-period Other comprehensive income attributable to noncontrolling interests | (365 | ) | | — |
| | (191 | ) | | (556 | ) |
| Ending balance | $ | (19,250 | ) | | $ | (485 | ) | | $ | (21,864 | ) | | $ | (41,599 | ) |
Note 14. Income Taxes
We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code. We believe we have operated, and we intend to continue to operate, in a manner that allows us to continue to qualify as a REIT. Under the REIT operating structure, we are permitted to deduct distributions paid to our stockholders and generally will not be required to pay U.S. federal income taxes. Accordingly, no provision has been made for U.S. federal income taxes in the consolidated financial statements.
We conduct business in various states and municipalities within the United States, Europe, and Asia, and as a result, we file income tax returns in the U.S. federal jurisdiction and various states and certain foreign jurisdictions.
We account for uncertain tax positions in accordance with Accounting Standards Codification 740, Income Taxes. The following table presents a reconciliation of the beginning and ending amount of unrecognized tax benefits (in thousands):
|
| | | | | | | |
| | Years Ended December 31, |
| | 2014 | | 2013 |
| Beginning balance | $ | 931 |
| | $ | 647 |
|
| (Reductions) additions based on tax positions related to the current year | (53 | ) | | 284 |
|
| Reduction for tax positions of prior years | (267 | ) | | — |
|
| Ending balance | $ | 611 |
| | $ | 931 |
|
At December 31, 2014 and 2013, we had unrecognized tax benefits as presented in the table above that, if recognized, would have a favorable impact on our effective income tax rate in future periods. We recognize interest and penalties related to uncertain tax positions in income tax expense. At both December 31, 2014 and 2013, we had approximately $0.1 million of accrued interest related to uncertain tax positions.
Our tax returns are subject to audit by taxing authorities. Such audits can often take years to complete and settle. The tax years 2010 through 2014 remain open to examination by the major taxing jurisdictions to which we are subject.
During 2010, we elected to treat our corporate subsidiary that engaged in hotel operations as a TRS. This subsidiary owned a hotel that was managed on our behalf by a third-party hotel management company. A TRS is subject to corporate federal income taxes. This subsidiary recognized de minimis profit since inception. This hotel property was sold in October 2013 and we dissolved the TRS after filing the final tax return.
CPA®:17 – Global 2014 10-K — 104
Notes to Consolidated Financial Statements
Deferred Income Taxes
Our deferred tax assets before valuation allowances were $16.2 million and $7.8 million at December 31, 2014 and 2013, respectively. Our deferred tax liabilities were $12.2 million and $4.6 million at December 31, 2014 and 2013, respectively. In connection with our adoption of the equity method of accounting for our investment in BG LLH, LLC, our deferred tax liability of $4.6 million at December 31, 2013 included adjustments of $0.6 million and $0.5 million related to increases to Provision for income taxes for the years ended December 31, 2012 and 2011, respectively (Note 3). We determined that $13.1 million and $4.8 million of our deferred tax assets did not meet the criteria for recognition under the accounting guidance for income taxes and accordingly, we established valuation allowances in those amounts at December 31, 2014 and 2013, respectively. Our deferred tax assets and liabilities at December 31, 2014 and 2013 are primarily the result of temporary differences related to:
| |
| • | basis differences between tax and GAAP for real estate assets and equity investments (For income tax purposes, certain acquisitions have resulted in us assuming the seller’s basis, or the carry-over basis, in assets and liabilities for tax purposes. In accordance with purchase accounting requirements under GAAP, we record all of the acquired assets and liabilities at their estimated fair values at the date of acquisition. For our subsidiaries subject to income taxes in the United States or in foreign jurisdictions, we recognize deferred income tax liabilities representing the tax effect of the difference between the tax basis and the fair value of the tangible and intangible assets recorded at the date of acquisition for GAAP.); and |
| |
| • | tax net operating losses in foreign jurisdictions that may be realized in future periods if we generate sufficient taxable income. |
At December 31, 2014 and 2013, we had net operating losses in foreign jurisdictions of approximately $46.6 million and $58.8 million, respectively. Our net operating losses will begin to expire in 2015 in certain foreign jurisdictions. The utilization of net operating losses may be subject to certain limitations under the tax laws of the relevant jurisdiction.
Note 15. Property Dispositions and Discontinued Operations
From time to time, we may decide to sell a property. We have an active capital recycling program, with a goal of extending the average lease term through reinvestment, improving portfolio credit quality through dispositions and acquisitions of assets, increasing the asset criticality factor in our portfolio, and/or executing strategic dispositions of assets. 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. We may also sell a property when we receive an unsolicited offer or negotiate a price for an investment that is consistent with our strategy for that investment. When it is appropriate to do so, we classify the property as an asset held for sale on our consolidated balance sheet. For those properties sold or classified as held-for-sale prior to January 1, 2014, we classify current and prior period results of operations of the property as discontinued operations under current accounting guidance (Note 3).
Property Dispositions Included in Continuing Operations
During 2014, we recognized a gain on sale of real estate of $12.5 million in connection with the I Shops Partial Sale (Note 5).
Property Dispositions Included in Discontinued Operations
The results of operations for properties that have been sold prior to January 1, 2014, 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):
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| Revenues | $ | — |
| | $ | 3,807 |
| | $ | 4,568 |
|
| Expenses | — |
| | (3,324 | ) | | (3,385 | ) |
| Gain on sale of real estate | — |
| | 7,987 |
| | 740 |
|
| Loss on extinguishment of debt | — |
| | (983 | ) | | — |
|
| Income from discontinued operations | $ | — |
| | $ | 7,487 |
| | $ | 1,923 |
|
2014 — None of our property dispositions during 2014 qualified for classification as a discontinued operation.
CPA®:17 – Global 2014 10-K — 105
Notes to Consolidated Financial Statements
2013 — During 2013, we sold one hotel property for $20.0 million, net of selling costs, and recognized a gain on the sale of $8.0 million. We repaid the related outstanding non-recourse mortgage loan of $5.1 million at the time of the sale and recognized a loss on the extinguishment of debt of $1.0 million.
2012 — During 2012, we sold 12 domestic properties for a total cost of $12.7 million, net of selling costs, and recognized a net gain on the sale of $0.7 million.
Note 16. Segment Information
We have determined that we operate in one reportable segment, real estate ownership, with domestic and international investments. Geographic information for this segment is as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| Year Ended December 31, 2014 | | Domestic | | Italy | | Other International (a) | | Total |
| Revenues | | $ | 279,483 |
| | $ | 31,072 |
| | $ | 86,151 |
| | $ | 396,706 |
|
| Income from continuing operations before income taxes and after gain on sale of real estate, net of tax | | 84,493 |
| | 7,482 |
| | 25,743 |
| | 117,718 |
|
| Net income attributable to noncontrolling interests | | (32,093 | ) | | — |
| | (749 | ) | | (32,842 | ) |
Net income attributable to CPA®:17 – Global | | 43,987 |
| | 7,342 |
| | 22,822 |
| | 74,151 |
|
Long-lived assets (b) | | 2,454,911 |
| | 297,112 |
| | 841,264 |
| | 3,593,287 |
|
| Non-recourse debt | | 1,353,641 |
| | 196,745 |
| | 346,103 |
| | 1,896,489 |
|
| | | | | | | | | |
| Year Ended December 31, 2013 | | Domestic | | Italy | | Other International (a) | | Total |
| Revenues | | $ | 256,350 |
| | $ | 30,795 |
| | $ | 75,627 |
| | $ | 362,772 |
|
| Income from continuing operations before income taxes and after gain on sale of real estate, net of tax | | 24,265 |
| | 7,208 |
| | 30,156 |
| | 61,629 |
|
| Net income attributable to noncontrolling interests | | (28,297 | ) | | — |
| | (638 | ) | | (28,935 | ) |
Net income attributable to CPA®:17 – Global | | 2,569 |
| | 7,128 |
| | 29,017 |
| | 38,714 |
|
Long-lived assets (b) | | 2,346,340 |
| | 343,876 |
| | 874,766 |
| | 3,564,982 |
|
| Non-recourse debt | | 1,319,094 |
| | 223,937 |
| | 372,570 |
| | 1,915,601 |
|
| | | | | | | | | |
| Year Ended December 31, 2012 | | Domestic | | Italy | | Other International (a) | | Total |
| Revenues | | $ | 203,919 |
| | $ | 29,396 |
| | $ | 56,662 |
| | $ | 289,977 |
|
| Income from continuing operations before income taxes and after gain on sale of real estate, net of tax | | 32,969 |
| | 6,771 |
| | 29,644 |
| | 69,384 |
|
| Net income attributable to noncontrolling interests | | (25,898 | ) | | — |
| | (600 | ) | | (26,498 | ) |
Net income attributable to CPA®:17 – Global | | 8,036 |
| | 6,733 |
| | 28,827 |
| | 43,596 |
|
___________
| |
| (a) | All years include operations in Croatia, Germany, Hungary, Japan, Poland, the Netherlands, Spain, and the United Kingdom; 2014 and 2013 include an investment in India; and 2014 includes an investment in Norway. |
| |
| (b) | Consists of Net investments in real estate and Equity investments in real estate. |
CPA®:17 – Global 2014 10-K — 106
Notes to Consolidated Financial Statements
Note 17. Selected Quarterly Financial Data (Unaudited)
(Dollars in thousands, except per share amounts)
|
| | | | | | | | | | | | | | | |
| | Three Months Ended |
| | March 31, 2014 | | June 30, 2014 | | September 30, 2014 | | December 31, 2014 |
| Revenues | $ | 101,149 |
| | $ | 98,786 |
| | $ | 97,987 |
| | $ | 98,784 |
|
| Expenses | 58,523 |
| | 53,365 |
| | 52,186 |
| | 57,152 |
|
Net income (a) | 16,478 |
| | 42,246 |
| | 19,482 |
| | 28,787 |
|
| Net income attributable to noncontrolling interests | (7,677 | ) | | (7,640 | ) | | (9,193 | ) | | (8,332 | ) |
Net income attributable to CPA®:17 – Global (b) | $ | 8,801 |
| | $ | 34,606 |
| | $ | 10,289 |
| | $ | 20,455 |
|
| | | | | | | | |
Earnings per share attributable to CPA®:17 – Global (b) | $ | 0.03 |
| | $ | 0.11 |
| | $ | 0.03 |
| | $ | 0.06 |
|
| Distributions declared per share | $ | 0.1625 |
| | $ | 0.1625 |
| | $ | 0.1625 |
| | $ | 0.1625 |
|
| | | | | | | | |
| | Three Months Ended |
| | March 31, 2013 | | June 30, 2013 | | September 30, 2013 | | December 31, 2013 |
| Revenues | $ | 86,798 |
| | $ | 89,082 |
| | $ | 91,209 |
| | $ | 95,683 |
|
| Expenses | 48,752 |
| | 49,038 |
| | 58,649 |
| | 60,393 |
|
| Net income | 21,186 |
| | 21,256 |
| | 13,788 |
| | 11,419 |
|
| Net income attributable to noncontrolling interests | (7,280 | ) | | (7,926 | ) | | (6,508 | ) | | (7,221 | ) |
Net income attributable to CPA®:17 – Global (b) | $ | 13,906 |
| | $ | 13,330 |
| | $ | 7,280 |
| | $ | 4,198 |
|
| | | | | | | | |
Earnings per share attributable to CPA®:17 – Global (b) | $ | 0.05 |
| | $ | 0.04 |
| | $ | 0.02 |
| | $ | 0.01 |
|
| Distributions declared per share | $ | 0.1625 |
| | $ | 0.1625 |
| | $ | 0.1625 |
| | $ | 0.1625 |
|
__________
| |
| (a) | Amount for the three months ended June 30, 2014 includes a gain on sale of real estate of $12.5 million recognized in connection with the I Shops Partial Sale (Note 5). |
| |
| (b) | In the course of preparing our 2014 consolidated financial statements, we discovered an error related to our accounting for a subsidiary’s functional currency. We corrected this error, and other errors previously recorded as out-of-period adjustments, and revised our consolidated financial statements for all prior periods impacted (Note 2). These errors resulted in an increase (decrease) to both Net income and Net income attributable to CPA®:17 – Global of $0.2 million, $(1.7) million and $(4.9) million for the three months ended March 31, 2014, June 30, 2014, and September 30, 2014, respectively, and a decrease to Earnings per share attributable to CPA®:17 – Global of $0.02 for the three months ended September 30, 2014. These errors also resulted in a (decrease) increase to Net income of $(0.9) million, $0.5 million, $2.2 million, and $(3.4) million, Net income attributable to CPA®:17 – Global of $(0.9) million, $0.5 million, $2.3 million and $(3.0) million for the three months ended March 31, 2013, June 30, 2013, September 30, 2013 and December 31, 2013, respectively, and a decrease to Earnings per share attributable to CPA®:17 – Global of $0.01 for the three months ended December 31, 2013. There were no impacts to Earnings per share attributable to CPA®:17 – Global in any other periods. In our quarterly reports for the periods ending March 31, 2015, June 30, 2015, and September 30, 2015 we will revise the presentation of the periods ended March 31, 2014, June 30, 2014, and September 30, 2014 to reflect these revision adjustments. |
Note 18. Subsequent Event
In March 2015, our board of directors and the board of directors of WPC approved unsecured loans from WPC to us of up to $75.0 million, in the aggregate, at a rate equal to the rate at which WPC is able to borrow funds under its senior credit facility, for the purpose of facilitating acquisitions approved by the advisor’s investment committee that we would not otherwise have sufficient available funds to complete, with any loans to be made solely at the discretion of the management of WPC.
CPA®:17 – Global 2014 10-K — 107
CORPORATE PROPERTY ASSOCIATES 17 – GLOBAL INCORPORATED
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2014, 2013, and 2012
(in thousands)
|
| | | | | | | | | | | | |
| Description | | Balance at Beginning of Year | | Change | | Balance at End of Year |
| Year Ended December 31, 2014 | | |
| | |
| | |
|
| Valuation reserve for deferred tax assets | | $ | 5,581 |
| | $ | 7,522 |
| | $ | 13,103 |
|
| | | | | | | |
| Year Ended December 31, 2013 | | | | | | |
| Valuation reserve for deferred tax assets | | $ | 3,901 |
| | $ | 1,680 |
| | $ | 5,581 |
|
| | | | | | | |
Year Ended December 31, 2012 (a) | | | | | | |
| Valuation reserve for deferred tax assets | | $ | 3,057 |
| | $ | 844 |
| | $ | 3,901 |
|
| |
| (a) | The amounts for the year ended December 31, 2012 and 2011 have been revised due to an error in the consolidated financial statements related to accounting for deferred foreign income taxes (Note 2). |
CPA®:17 – Global 2014 10-K — 108
CORPORATE PROPERTY ASSOCIATES 17 – GLOBAL INCORPORATED
SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2014
(in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Initial Cost to Company | | Cost Capitalized Subsequent to Acquisition (a) | | Increase (Decrease) in Net Investments (b) | | Gross Amount at which Carried at Close of Period (c) | | Accumulated Depreciation (c) | | Date of Construction | | Date Acquired | | Life on which Depreciation in Latest Statement of Income is Computed |
| Description | | Encumbrances | | Land | | Buildings | | | | Land | | Buildings | | Total | | | | |
| Real Estate Under Operating Leases | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | | | | | |
| Industrial facility in Norfolk, NE | | $ | 1,577 |
| | $ | 625 |
| | $ | 1,713 |
| | $ | — |
| | $ | 107 |
| | $ | 625 |
| | $ | 1,820 |
| | $ | 2,445 |
| | $ | 399 |
| | 1975 | | Jun. 2008 | | 30 yrs. |
| Office facility in Soest, Germany and warehouse/distribution facility in Bad Wünnenbeg, Germany | | 24,345 |
| | 3,193 |
| | 45,932 |
| | — |
| | (11,398 | ) | | 2,451 |
| | 35,276 |
| | 37,727 |
| | 6,118 |
| | 1982; 1996 | | Jul. 2008 | | 36 yrs. |
| Learning center in Chicago, IL | | 13,876 |
| | 6,300 |
| | 20,509 |
| | — |
| | (527 | ) | | 6,300 |
| | 19,982 |
| | 26,282 |
| | 4,330 |
| | 1912 | | Jul. 2008 | | 30 yrs. |
| Industrial facilities in Sergeant Bluff, IA; Bossier City, LA; and Alvarado, TX | | 30,245 |
| | 2,725 |
| | 25,233 |
| | 28,116 |
| | (3,395 | ) | | 4,701 |
| | 47,978 |
| | 52,679 |
| | 5,268 |
| | Various | | Aug. 2008 | | 25 - 40 yrs. |
| Industrial facility in Waldaschaff, Germany | | 5,719 |
| | 10,373 |
| | 16,708 |
| | — |
| | (11,495 | ) | | 5,911 |
| | 9,675 |
| | 15,586 |
| | 3,759 |
| | 1937 | | Aug. 2008 | | 15 yrs. |
| Sports facilities in Phoenix, AZ and Columbia, MD | | 36,304 |
| | 14,500 |
| | 48,865 |
| | — |
| | (2,062 | ) | | 14,500 |
| | 46,803 |
| | 61,303 |
| | 7,313 |
| | 2006 | | Sep. 2008 | | 40 yrs. |
| Office facility in Birmingham, United Kingdom | | 12,932 |
| | 3,591 |
| | 15,810 |
| | 949 |
| | (731 | ) | | 3,438 |
| | 16,181 |
| | 19,619 |
| | 2,037 |
| | 2009 | | Sep. 2009 | | 40 yrs. |
| Retail facilities in Gorzow, Poland | | 6,807 |
| | 1,095 |
| | 13,947 |
| | — |
| | (2,600 | ) | | 907 |
| | 11,535 |
| | 12,442 |
| | 1,519 |
| | 2007; 2008 | | Oct. 2009 | | 40 yrs. |
| Office facility in Hoffman Estates, IL | | 18,912 |
| | 5,000 |
| | 21,764 |
| | — |
| | — |
| | 5,000 |
| | 21,764 |
| | 26,764 |
| | 2,757 |
| | 2009 | | Dec. 2009 | | 40 yrs. |
| Office facility in The Woodlands, TX | | 37,039 |
| | 1,400 |
| | 41,502 |
| | — |
| | — |
| | 1,400 |
| | 41,502 |
| | 42,902 |
| | 5,274 |
| | 2009 | | Dec. 2009 | | 40 yrs. |
| Retail facilities located throughout Spain | | 41,920 |
| | 32,574 |
| | 52,101 |
| | — |
| | (10,732 | ) | | 28,284 |
| | 45,659 |
| | 73,943 |
| | 5,698 |
| | Various | | Dec. 2009 | | 20 yrs. |
| Industrial facilities in Middleburg Heights and Union Township, OH | | 6,131 |
| | 1,000 |
| | 10,793 |
| | 2 |
| | — |
| | 1,000 |
| | 10,795 |
| | 11,795 |
| | 1,327 |
| | 1997 | | Feb. 2010 | | 40 yrs. |
| Industrial facilities in Phoenix, AZ; Colton, Fresno, Los Angeles, Orange, Pomona, and San Diego, CA; Safety Harbor, FL; Durham, NC; and Columbia, SC | | 13,322 |
| | 19,001 |
| | 13,059 |
| | — |
| | — |
| | 19,001 |
| | 13,059 |
| | 32,060 |
| | 1,832 |
| | Various | | Mar. 2010 | | 27 - 40 yrs. |
| Industrial facility in Evansville, IN | | 16,419 |
| | 150 |
| | 9,183 |
| | 11,745 |
| | — |
| | 150 |
| | 20,928 |
| | 21,078 |
| | 2,210 |
| | 2009 | | Mar. 2010 | | 40 yrs. |
| Warehouse/distribution facilities in Bristol, Cannock, Liverpool, Luton, Plymouth, Southampton, and Taunton, United Kingdom | | 5,100 |
| | 8,639 |
| | 2,019 |
| | — |
| | 112 |
| | 8,714 |
| | 2,056 |
| | 10,770 |
| | 343 |
| | Various | | Apr. 2010 | | 28 yrs. |
| Warehouse/distribution facilities in Zagreb, Croatia | | 44,339 |
| | 31,941 |
| | 45,904 |
| | — |
| | (5,607 | ) | | 29,472 |
| | 42,766 |
| | 72,238 |
| | 6,650 |
| | 2001; 2009 | | Apr. 2010 | | 30 yrs. |
| Office facilities in Tampa, FL | | 34,093 |
| | 18,300 |
| | 32,856 |
| | 549 |
| | — |
| | 18,323 |
| | 33,382 |
| | 51,705 |
| | 3,790 |
| | 1985; 2000 | | May 2010 | | 40 yrs. |
| Warehouse/distribution facility in Bowling Green, KY | | 27,318 |
| | 1,400 |
| | 3,946 |
| | 33,809 |
| | — |
| | 1,400 |
| | 37,755 |
| | 39,155 |
| | 3,146 |
| | 2011 | | May 2010 | | 40 yrs. |
| Retail facility in Elorrio, Spain | | — |
| | 19,924 |
| | 3,981 |
| | — |
| | 352 |
| | 20,113 |
| | 4,144 |
| | 24,257 |
| | 465 |
| | 1996 | | Jun. 2010 | | 40 yrs. |
| Warehouse/distribution facility in Gadki, Poland | | 4,526 |
| | 1,134 |
| | 1,183 |
| | 7,611 |
| | (1,376 | ) | | 973 |
| | 7,579 |
| | 8,552 |
| | 710 |
| | 2011 | | Aug. 2010 | | 40 yrs. |
| Industrial and office facilities in Elberton, GA | | — |
| | 560 |
| | 2,467 |
| | — |
| | — |
| | 560 |
| | 2,467 |
| | 3,027 |
| | 308 |
| | 1997; 2002 | | Sep. 2010 | | 40 yrs. |
CPA®:17 – Global 2014 10-K — 109
SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
December 31, 2014
(in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Initial Cost to Company | | Cost Capitalized Subsequent to Acquisition (a) | | Increase (Decrease) in Net Investments (b) | | Gross Amount at which Carried at Close of Period (c) | | Accumulated Depreciation (c) | | Date of Construction | | Date Acquired | | Life on which Depreciation in Latest Statement of Income is Computed |
| Description | | Encumbrances | | Land | | Buildings | | | | Land | | Buildings | | Total | | | | |
| Warehouse/distribution facilities in Rincon and Unadilla, GA | | 25,998 |
| | 1,595 |
| | 44,446 |
| | — |
| | — |
| | 1,595 |
| | 44,446 |
| | 46,041 |
| | 4,630 |
| | 2000; 2006 | | Nov. 2010 | | 40 yrs. |
| Office facility in Hartland, WI | | 3,471 |
| | 1,402 |
| | 2,041 |
| | — |
| | — |
| | 1,402 |
| | 2,041 |
| | 3,443 |
| | 243 |
| | 2001 | | Nov. 2010 | | 35 yrs. |
| Retail facilities in Kutina, Slavonski Brod, Spansko, and Zagreb, Croatia | | 19,332 |
| | 6,700 |
| | 24,114 |
| | 194 |
| | (2,672 | ) | | 6,079 |
| | 22,257 |
| | 28,336 |
| | 3,025 |
| | 2002; 2003; 2007 | | Dec. 2010 | | 30 yrs. |
| Warehouse/distribution facilities located throughout the United States | | 110,281 |
| | 31,735 |
| | 129,011 |
| | — |
| | (9,680 | ) | | 28,511 |
| | 122,555 |
| | 151,066 |
| | 14,102 |
| | Various | | Dec. 2010 | | 40 yrs. |
| Office facility in Madrid, Spain | | — |
| | 22,230 |
| | 81,508 |
| | — |
| | (7,726 | ) | | 20,570 |
| | 75,442 |
| | 96,012 |
| | 7,538 |
| | 2002 | | Dec. 2010 | | 40 yrs. |
| Office facility in Houston, TX | | 3,451 |
| | 1,838 |
| | 2,432 |
| | — |
| | 20 |
| | 1,838 |
| | 2,452 |
| | 4,290 |
| | 392 |
| | 1982 | | Dec. 2010 | | 25 yrs. |
| Retail facility in Las Vegas, NV | | 40,000 |
| | 26,934 |
| | 31,037 |
| | 26,048 |
| | (44,166 | ) | | 5,070 |
| | 34,783 |
| | 39,853 |
| | 2,176 |
| | 2012 | | Dec. 2010 | | 40 yrs. |
| Warehouse/distribution facilities in Oxnard and Watsonville, CA | | 43,927 |
| | 16,036 |
| | 67,300 |
| | — |
| | (7,149 | ) | | 16,036 |
| | 60,151 |
| | 76,187 |
| | 6,698 |
| | Various | | Jan. 2011 | | 10 - 40 yrs. |
| Warehouse/distribution facility in Dillon, SC | | 19,173 |
| | 1,355 |
| | 15,620 |
| | 1,600 |
| | (69 | ) | | 1,286 |
| | 17,220 |
| | 18,506 |
| | 1,520 |
| | 2001 | | Mar. 2011 | | 40 yrs. |
| Warehouse/distribution facility in Middleburg Heights, OH | | — |
| | 600 |
| | 1,690 |
| | — |
| | — |
| | 600 |
| | 1,690 |
| | 2,290 |
| | 158 |
| | 2002 | | Mar. 2011 | | 40 yrs. |
| Office facility in Martinsville, VA | | 8,620 |
| | 600 |
| | 1,998 |
| | 10,999 |
| | — |
| | 600 |
| | 12,997 |
| | 13,597 |
| | 982 |
| | 2011 | | May 2011 | | 40 yrs. |
| Land in Chicago, IL | | 5,031 |
| | 7,414 |
| | — |
| | — |
| | — |
| | 7,414 |
| | — |
| | 7,414 |
| | — |
| | N/A | | Jun. 2011 | | N/A |
| Industrial facility in Fraser, MI | | 4,215 |
| | 928 |
| | 1,392 |
| | 5,803 |
| | (80 | ) | | 928 |
| | 7,115 |
| | 8,043 |
| | 541 |
| | 2012 | | Sep. 2011 | | 35 yrs. |
| Retail facilities located throughout Italy | | 196,745 |
| | 91,691 |
| | 262,377 |
| | — |
| | (35,797 | ) | | 81,944 |
| | 236,327 |
| | 318,271 |
| | 21,159 |
| | Various | | Sep. 2011 | | 29 - 40 yrs. |
| Retail facilities in Delnice, Pozega, and Sesvete, Croatia | | 21,230 |
| | 2,687 |
| | 24,820 |
| | 15,378 |
| | (5,025 | ) | | 3,611 |
| | 34,249 |
| | 37,860 |
| | 3,513 |
| | 2011 | | Nov. 2011 | | 30 yrs. |
| Retail facility in Orlando, FL | | — |
| | 32,739 |
| | — |
| | 19,909 |
| | (32,739 | ) | | 5,577 |
| | 14,332 |
| | 19,909 |
| | 147 |
| | 2011 | | Dec. 2011 | | 40 yrs. |
| Land in Hudson, NY | | 809 |
| | 2,080 |
| | — |
| | — |
| | — |
| | 2,080 |
| | — |
| | 2,080 |
| | — |
| | N/A | | Dec. 2011 | | N/A |
| Office facilities in Aurora, Eagan, and Virginia, MN | | 92,400 |
| | 13,546 |
| | 110,173 |
| | — |
| | 993 |
| | 13,546 |
| | 111,166 |
| | 124,712 |
| | 11,203 |
| | Various | | Jan. 2012 | | 32 - 40 yrs. |
| Industrial facility in Chimelow, Poland | | 11,453 |
| | 1,323 |
| | 5,245 |
| | 18,841 |
| | (914 | ) | | 1,274 |
| | 23,221 |
| | 24,495 |
| | 1,353 |
| | 2012 | | Apr. 2012 | | 40 yrs. |
| Office facility in St. Louis, MO | | 4,107 |
| | 954 |
| | 4,665 |
| | — |
| | — |
| | 954 |
| | 4,665 |
| | 5,619 |
| | 316 |
| | 1995 | | Jul. 2012 | | 38 yrs. |
| Industrial facility in Avon, OH | | 3,659 |
| | 926 |
| | 4,975 |
| | — |
| | — |
| | 926 |
| | 4,975 |
| | 5,901 |
| | 367 |
| | 2001 | | Aug. 2012 | | 35 yrs. |
| Industrial facility in Elk Grove Village, IL | | 9,223 |
| | 1,269 |
| | 11,317 |
| | 59 |
| | — |
| | 1,269 |
| | 11,376 |
| | 12,645 |
| | 1,256 |
| | 1961 | | Aug. 2012 | | 40 yrs. |
| Learning centers in Montgomery, AL and Savannah, GA | | 16,318 |
| | 5,255 |
| | 16,960 |
| | — |
| | — |
| | 5,255 |
| | 16,960 |
| | 22,215 |
| | 1,203 |
| | 1969; 2002 | | Sep. 2012 | | 40 yrs. |
| Automotive dealerships in Huntsville, AL; Bentonville, AR; Bossier City, LA; Lee’s Summit, MO; Fayetteville, TN; and Fort Worth, TX | | 36,896 |
| | 17,283 |
| | 32,225 |
| | — |
| | (15 | ) | | 17,269 |
| | 32,224 |
| | 49,493 |
| | 3,327 |
| | Various | | Sep. 2012 | | 16 yrs. |
| Office facility in Warrenville, IL | | 19,319 |
| | 3,698 |
| | 28,635 |
| | — |
| | — |
| | 3,698 |
| | 28,635 |
| | 32,333 |
| | 1,879 |
| | 2002 | | Sep. 2012 | | 40 yrs. |
| Office and warehouse/distribution facilities in Zary, Poland | | 3,405 |
| | 356 |
| | 1,168 |
| | 6,910 |
| | (574 | ) | | 332 |
| | 7,528 |
| | 7,860 |
| | 345 |
| | 2013 | | Sep. 2012 | | 40 yrs. |
CPA®:17 – Global 2014 10-K — 110
SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
December 31, 2014
(in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Initial Cost to Company | | Cost Capitalized Subsequent to Acquisition (a) | | Increase (Decrease) in Net Investments (b) | | Gross Amount at which Carried at Close of Period (c) | | Accumulated Depreciation (c) | | Date of Construction | | Date Acquired | | Life on which Depreciation in Latest Statement of Income is Computed |
| Description | | Encumbrances | | Land | | Buildings | | | | Land | | Buildings | | Total | | | | |
| Industrial facility in Sterling, VA | | 14,430 |
| | 3,118 |
| | 14,007 |
| | 5,071 |
| | — |
| | 3,118 |
| | 19,078 |
| | 22,196 |
| | 1,242 |
| | 1980 | | Oct. 2012 | | 35 yrs. |
| Office facility in Houston, TX | | 128,200 |
| | 19,331 |
| | 123,084 |
| | 4,088 |
| | 2,899 |
| | 19,331 |
| | 130,071 |
| | 149,402 |
| | 9,193 |
| | 1973 | | Nov. 2012 | | 30 yrs. |
| Retail facility in Orlando, FL | | 48,914 |
| | 3,307 |
| | 10,607 |
| | — |
| | — |
| | 3,307 |
| | 10,607 |
| | 13,914 |
| | — |
| | 2012 | | Nov. 2012 | | 40 yrs. |
| Office facility in Eagan, MN | | 9,640 |
| | 2,104 |
| | 11,462 |
| | — |
| | (84 | ) | | 1,994 |
| | 11,488 |
| | 13,482 |
| | 725 |
| | 2003 | | Dec. 2012 | | 35 yrs. |
| Warehouse/distribution facility in Saitama Prefecture, Japan | | 21,679 |
| | 17,292 |
| | 28,575 |
| | — |
| | (14,445 | ) | | 11,846 |
| | 19,576 |
| | 31,422 |
| | 1,617 |
| | 2006 | | Dec. 2012 | | 26 yrs. |
| Retail facilities in Bjelovar, Karlovac, Krapina, Metkovic, Novigrad, Porec, Umag, and Vodnjan, Croatia | | 19,793 |
| | 5,059 |
| | 28,294 |
| | 5,816 |
| | (3,045 | ) | | 6,619 |
| | 29,505 |
| | 36,124 |
| | 1,484 |
| | Various | | Dec. 2012 | | 32 - 40 yrs. |
| Industrial facility in Portage, WI | | 4,836 |
| | 3,338 |
| | 4,556 |
| | 502 |
| | — |
| | 3,338 |
| | 5,058 |
| | 8,396 |
| | 347 |
| | 1970 | | Jan. 2013 | | 30 yrs. |
| Retail facility in Dallas, TX | | 10,237 |
| | 4,441 |
| | 9,649 |
| | — |
| | — |
| | 4,441 |
| | 9,649 |
| | 14,090 |
| | 456 |
| | 1913 | | Feb. 2013 | | 40 yrs. |
| Warehouse/distribution facility in Dillon, SC | | 26,000 |
| | 3,096 |
| | 2,281 |
| | 37,989 |
| | — |
| | 3,096 |
| | 40,270 |
| | 43,366 |
| | 582 |
| | 2013 | | Mar. 2013 | | 40 yrs. |
| Land in Chicago, IL | | — |
| | 15,459 |
| | — |
| | — |
| | — |
| | 15,459 |
| | — |
| | 15,459 |
| | — |
| | N/A | | Apr. 2013 | | N/A |
| Office facility in Northbrook, IL | | 5,742 |
| | — |
| | 942 |
| | — |
| | — |
| | — |
| | 942 |
| | 942 |
| | 98 |
| | 2007 | | May 2013 | | 40 yrs. |
| Industrial facility in Wageningen, Netherlands | | 19,807 |
| | 4,790 |
| | 24,301 |
| | 47 |
| | (2,039 | ) | | 4,497 |
| | 22,602 |
| | 27,099 |
| | 855 |
| | 2013 | | Jul. 2013 | | 40 yrs. |
| Warehouse/distribution facilities in Gadki, Poland | | 35,460 |
| | 9,219 |
| | 48,578 |
| | 121 |
| | (3,983 | ) | | 8,584 |
| | 45,351 |
| | 53,935 |
| | 1,823 |
| | 2007; 2010 | | Jul. 2013 | | 40 yrs. |
| Automotive dealership in Lewisville, TX | | 9,450 |
| | 3,269 |
| | 9,605 |
| | — |
| | — |
| | 3,269 |
| | 9,605 |
| | 12,874 |
| | 449 |
| | 2004 | | Aug. 2013 | | 39 yrs. |
| Office facility in Auburn Hills, MI | | 6,151 |
| | 789 |
| | 7,163 |
| | — |
| | — |
| | 789 |
| | 7,163 |
| | 7,952 |
| | 230 |
| | 2012 | | Oct. 2013 | | 40 yrs. |
| Office facility in Haibach, Germany | | 10,473 |
| | 2,544 |
| | 11,114 |
| | — |
| | (1,369 | ) | | 2,289 |
| | 10,000 |
| | 12,289 |
| | 461 |
| | 1993 | | Oct. 2013 | | 30 yrs. |
| Office facility in Houston, TX | | 31,200 |
| | 7,898 |
| | 37,474 |
| | 435 |
| | 1,619 |
| | 7,898 |
| | 39,528 |
| | 47,426 |
| | 1,450 |
| | 1963 | | Dec. 2013 | | 30 yrs. |
| Office facility in Tempe, AZ | | 14,800 |
| | — |
| | 16,996 |
| | 1,630 |
| | — |
| | — |
| | 18,626 |
| | 18,626 |
| | 543 |
| | 2000 | | Dec. 2013 | | 40 yrs. |
| Office facility in Tucson, AZ | | 9,662 |
| | 2,440 |
| | 11,175 |
| | — |
| | — |
| | 2,440 |
| | 11,175 |
| | 13,615 |
| | 312 |
| | 2002 | | Feb. 2014 | | 38 yrs. |
| Industrial facility in New Concord, OH | | 1,742 |
| | 784 |
| | 2,636 |
| | — |
| | — |
| | 784 |
| | 2,636 |
| | 3,420 |
| | 61 |
| | 1999 | | Apr. 2014 | | 35 - 40 yrs. |
| Office facility in Krakow, Poland | | 6,316 |
| | 2,771 |
| | 6,549 |
| | — |
| | (540 | ) | | 2,603 |
| | 6,177 |
| | 8,780 |
| | 58 |
| | 2003 | | Sep. 2014 | | 40 yrs. |
| Retail facility in Gelsenkirchen, Germany | | — |
| | 2,060 |
| | 17,534 |
| | — |
| | (688 | ) | | 1,982 |
| | 16,924 |
| | 18,906 |
| | 130 |
| | 1981 | | Oct. 2014 | | 35 yrs. |
| Office facility in Plymouth, Minnesota | | — |
| | 2,601 |
| | 15,599 |
| | — |
| | — |
| | 2,601 |
| | 15,599 |
| | 18,200 |
| | 36 |
| | 1999 | | Dec. 2014 | | 40 yrs. |
| | | $ | 1,514,519 |
| | $ | 592,309 |
| | $ | 1,776,805 |
| | $ | 244,221 |
| | $ | (216,620 | ) | | $ | 513,172 |
| | $ | 1,883,543 |
| | $ | 2,396,715 |
| | $ | 175,478 |
| | | | | | |
CPA®:17 – Global 2014 10-K — 111
SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
December 31, 2014
(in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Initial Cost to Company | | Cost Capitalized Subsequent to Acquisition (a) | | Increase (Decrease) in Net Investments (b) | | Gross Amount at which Carried at Close of Period Total | | Date of Construction | | Date Acquired |
| Description | | Encumbrances | | Land | | Buildings | | | | | |
| Direct Financing Method | | |
| | |
| | |
| | |
| | |
| | |
| | | | |
| Industrial and office facilities in Nagold, Germany | | $ | 10,423 |
| | $ | 6,012 |
| | $ | 41,493 |
| | $ | — |
| | $ | (25,949 | ) | | $ | 21,556 |
| | 1937; 1994 | | Aug. 2008 |
| Industrial facilities in Mayodan, Sanford, and Stoneville, NC | | 21,444 |
| | 3,100 |
| | 35,766 |
| | — |
| | (1,616 | ) | | 37,250 |
| | 1992; 1997; 1998 | | Dec. 2008 |
| Industrial facility in Glendale Heights, IL | | 17,931 |
| | 3,820 |
| | 11,148 |
| | 18,245 |
| | 2,431 |
| | 35,644 |
| | 1991 | | Jan. 2009 |
| Office facility in New York City, NY | | 111,702 |
| | — |
| | 233,720 |
| | — |
| | 12,095 |
| | 245,815 |
| | 2007 | | Mar. 2009 |
| Industrial facilities in Colton, Fresno, Los Angeles, Orange, Pomona, and San Diego, CA; Holly Hill, FL; Rockmart, GA; Ooltewah, TN; and Dallas, TX | | 9,665 |
| | 1,730 |
| | 20,778 |
| | — |
| | (579 | ) | | 21,929 |
| | Various | | Mar. 2010 |
| Warehouse/distribution facilities in Bristol, Leeds, Liverpool, Luton, Newport, Plymouth, and Southampton, United Kingdom | | 11,696 |
| | 508 |
| | 24,009 |
| | — |
| | (606 | ) | | 23,911 |
| | Various | | Apr. 2010 |
| Retail facilities in Dugo Selo and Samobor, Croatia | | 9,349 |
| | 1,804 |
| | 11,618 |
| | — |
| | (1,182 | ) | | 12,240 |
| | 2002; 2003 | | Dec. 2010 |
| Warehouse/distribution facility in Oxnard, CA | | 5,777 |
| | — |
| | 8,957 |
| | — |
| | 181 |
| | 9,138 |
| | 1975 | | Jan. 2011 |
| Industrial facilities in Bartow, FL; Momence, IL; Smithfield, NC; Hudson, NY; and Ardmore, OK | | 22,473 |
| | 3,750 |
| | 50,177 |
| | — |
| | 3,893 |
| | 57,820 |
| | Various | | Apr. 2011 |
| Industrial facility in Clarksville, TN | | 4,535 |
| | 600 |
| | 7,291 |
| | — |
| | 281 |
| | 8,172 |
| | 1998 | | Aug. 2011 |
| Industrial facility in Countryside, IL | | 2,000 |
| | 425 |
| | 1,800 |
| | — |
| | 34 |
| | 2,259 |
| | 1981 | | Dec. 2011 |
| Industrial facility in Bluffton, IN | | 1,914 |
| | 264 |
| | 3,407 |
| | — |
| | 20 |
| | 3,691 |
| | 1975 | | Apr. 2014 |
| | | $ | 228,909 |
| | $ | 22,013 |
| | $ | 450,164 |
| | $ | 18,245 |
| | $ | (10,997 | ) | | $ | 479,425 |
| | | | |
CPA®:17 – Global 2014 10-K — 112
SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
December 31, 2014
(in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Initial Cost to Company | | Costs Capitalized Subsequent to
Acquisition (a) | | Increase (Decrease) in Net
Investments (b) | | Gross Amount at which Carried at Close of Period (c) | | | | Date of Construction | | | | Life on which Depreciation in Latest Statement of Income is
Computed |
| Description | | Encumbrances | | Land | | Buildings | | Personal Property | | | | Land | | Buildings | | Personal Property | | Total | | Accumulated Depreciation (c) | | | Date Acquired | |
| Operating Real Estate – Self-Storage Facilities | | | | | | | | | | | | | | | | | | | | | | |
| Fort Worth, TX | | $ | 1,538 |
| | $ | 610 |
| | $ | 2,672 |
| | $ | — |
| | $ | 14 |
| | $ | — |
| | $ | 610 |
| | $ | 2,686 |
| | $ | — |
| | $ | 3,296 |
| | $ | 301 |
| | 2004 | | Apr. 2011 | | 33 yrs. |
| Anaheim, CA | | 1,148 |
| | 1,040 |
| | 1,166 |
| | — |
| | 31 |
| | — |
| | 1,040 |
| | 1,197 |
| | — |
| | 2,237 |
| | 149 |
| | 1988 | | Jun. 2011 | | 33 yrs. |
| Apple Valley, CA | | 2,300 |
| | 400 |
| | 3,910 |
| | — |
| | 132 |
| | — |
| | 400 |
| | 4,042 |
| | — |
| | 4,442 |
| | 407 |
| | 1989 | | Jun. 2011 | | 35 yrs. |
| Apple Valley, CA | | 1,446 |
| | 230 |
| | 2,196 |
| | — |
| | 25 |
| | — |
| | 230 |
| | 2,221 |
| | — |
| | 2,451 |
| | 237 |
| | 1989 | | Jun. 2011 | | 33 yrs. |
| Bakersfield, CA | | 849 |
| | 370 |
| | 3,133 |
| | — |
| | 256 |
| | — |
| | 370 |
| | 3,389 |
| | — |
| | 3,759 |
| | 409 |
| | 1972 | | Jun. 2011 | | 30 yrs. |
| Bakersfield, CA | | 2,130 |
| | 690 |
| | 3,238 |
| | — |
| | 80 |
| | — |
| | 690 |
| | 3,318 |
| | — |
| | 4,008 |
| | 343 |
| | 1987 | | Jun. 2011 | | 34 yrs. |
| Bakersfield, CA | | 2,013 |
| | 690 |
| | 3,298 |
| | — |
| | 62 |
| | — |
| | 690 |
| | 3,360 |
| | — |
| | 4,050 |
| | 343 |
| | 1990 | | Jun. 2011 | | 35 yrs. |
| Bakersfield, CA | | 1,714 |
| | 480 |
| | 3,297 |
| | — |
| | 56 |
| | — |
| | 480 |
| | 3,353 |
| | — |
| | 3,833 |
| | 451 |
| | 1974 | | Jun. 2011 | | 35 yrs. |
| Fresno, CA | | 2,638 |
| | 601 |
| | 7,300 |
| | — |
| | 201 |
| | — |
| | 601 |
| | 7,501 |
| | — |
| | 8,102 |
| | 1,243 |
| | 1976 | | Jun. 2011 | | 30 yrs. |
| Grand Terrace, CA | | 728 |
| | 950 |
| | 1,903 |
| | — |
| | 42 |
| | — |
| | 950 |
| | 1,945 |
| | — |
| | 2,895 |
| �� | 270 |
| | 1978 | | Jun. 2011 | | 25 yrs. |
| Harbor City, CA | | 1,293 |
| | 1,487 |
| | 810 |
| | — |
| | 22 |
| | — |
| | 1,487 |
| | 832 |
| | — |
| | 2,319 |
| | 116 |
| | 1987 | | Jun. 2011 | | 30 yrs. |
| San Diego, CA | | 6,273 |
| | 7,951 |
| | 3,926 |
| | — |
| | 152 |
| | — |
| | 7,951 |
| | 4,078 |
| | — |
| | 12,029 |
| | 495 |
| | 1986 | | Jun. 2011 | | 30 yrs. |
| Palm Springs, CA | | 2,511 |
| | 1,287 |
| | 3,124 |
| | — |
| | 65 |
| | — |
| | 1,287 |
| | 3,189 |
| | — |
| | 4,476 |
| | 378 |
| | 1989 | | Jun. 2011 | | 30 yrs. |
| Palmdale, CA | | 2,773 |
| | 940 |
| | 4,263 |
| | — |
| | 225 |
| | — |
| | 940 |
| | 4,488 |
| | — |
| | 5,428 |
| | 492 |
| | 1988 | | Jun. 2011 | | 32 yrs. |
| Palmdale, CA | | 2,081 |
| | 1,220 |
| | 2,954 |
| | — |
| | 33 |
| | — |
| | 1,220 |
| | 2,987 |
| | — |
| | 4,207 |
| | 321 |
| | 1988 | | Jun. 2011 | | 33 yrs. |
| Riverside, CA | | 1,124 |
| | 560 |
| | 1,492 |
| | — |
| | 35 |
| | — |
| | 560 |
| | 1,527 |
| | — |
| | 2,087 |
| | 180 |
| | 1985 | | Jun. 2011 | | 30 yrs. |
| Rosamond, CA | | 1,700 |
| | 460 |
| | 3,220 |
| | — |
| | 27 |
| | — |
| | 460 |
| | 3,247 |
| | — |
| | 3,707 |
| | 347 |
| | 1995 | | Jun. 2011 | | 33 yrs. |
| Rubidoux, CA | | 1,247 |
| | 514 |
| | 1,653 |
| | — |
| | 40 |
| | — |
| | 514 |
| | 1,693 |
| | — |
| | 2,207 |
| | 180 |
| | 1986 | | Jun. 2011 | | 33 yrs. |
| South Gate, CA | | 1,774 |
| | 1,597 |
| | 2,067 |
| | — |
| | 86 |
| | — |
| | 1,597 |
| | 2,153 |
| | — |
| | 3,750 |
| | 258 |
| | 1925 | | Jun. 2011 | | 30 yrs. |
| Kailua-Kona, HI | | 832 |
| | 1,000 |
| | 1,108 |
| | — |
| | 59 |
| | — |
| | 1,000 |
| | 1,167 |
| | — |
| | 2,167 |
| | 159 |
| | 1987 | | Jun. 2011 | | 30 yrs. |
| Chicago, IL | | 2,342 |
| | 600 |
| | 4,124 |
| | — |
| | 194 |
| | — |
| | 600 |
| | 4,318 |
| | — |
| | 4,918 |
| | 452 |
| | 1916 | | Jun. 2011 | | 25 yrs. |
| Chicago, IL | | 1,321 |
| | 400 |
| | 2,074 |
| | — |
| | 143 |
| | — |
| | 400 |
| | 2,217 |
| | — |
| | 2,617 |
| | 243 |
| | 1968 | | Jun. 2011 | | 30 yrs. |
| Rockford, IL | | 1,363 |
| | 548 |
| | 1,881 |
| | — |
| | 5 |
| | — |
| | 548 |
| | 1,886 |
| | — |
| | 2,434 |
| | 268 |
| | 1979 | | Jun. 2011 | | 25 yrs. |
| Rockford, IL | | 250 |
| | 114 |
| | 633 |
| | — |
| | 9 |
| | — |
| | 114 |
| | 642 |
| | — |
| | 756 |
| | 89 |
| | 1979 | | Jun. 2011 | | 25 yrs. |
| Rockford, IL | | 1,319 |
| | 380 |
| | 2,321 |
| | — |
| | 15 |
| | — |
| | 380 |
| | 2,336 |
| | — |
| | 2,716 |
| | 326 |
| | 1957 | | Jun. 2011 | | 25 yrs. |
| Kihei, HI | | 5,501 |
| | 2,523 |
| | 7,481 |
| | — |
| | 414 |
| | — |
| | 2,523 |
| | 7,895 |
| | — |
| | 10,418 |
| | 668 |
| | 1991 | | Aug. 2011 | | 40 yrs. |
| Bakersfield, CA | | 1,900 |
| | 1,060 |
| | 3,138 |
| | — |
| | 37 |
| | (464 | ) | | 1,060 |
| | 2,711 |
| | — |
| | 3,771 |
| | 368 |
| | 1979 | | Aug. 2011 | | 25 yrs. |
| Bakersfield, CA | | 2,025 |
| | 767 |
| | 2,230 |
| | — |
| | 57 |
| | — |
| | 767 |
| | 2,287 |
| | — |
| | 3,054 |
| | 313 |
| | 1979 | | Aug. 2011 | | 25 yrs. |
| National City, CA | | 2,550 |
| | 3,158 |
| | 1,483 |
| | — |
| | 44 |
| | — |
| | 3,158 |
| | 1,527 |
| | — |
| | 4,685 |
| | 188 |
| | 1987 | | Aug. 2011 | | 28 yrs. |
| Mundelein, IL | | 3,600 |
| | 1,080 |
| | 5,287 |
| | — |
| | 192 |
| | — |
| | 1,080 |
| | 5,479 |
| | — |
| | 6,559 |
| | 736 |
| | 1991 | | Aug. 2011 | | 25 yrs. |
| Pearl City, HI | | 3,450 |
| | — |
| | 5,141 |
| | — |
| | 240 |
| | — |
| | — |
| | 5,381 |
| | — |
| | 5,381 |
| | 908 |
| | 1977 | | Aug. 2011 | | 20 yrs. |
| Palm Springs, CA | | 2,000 |
| | 1,019 |
| | 2,131 |
| | — |
| | 140 |
| | — |
| | 1,019 |
| | 2,271 |
| | — |
| | 3,290 |
| | 269 |
| | 1987 | | Sep. 2011 | | 28 yrs. |
| Loves Park, IL | | 1,244 |
| | 394 |
| | 3,390 |
| | — |
| | 12 |
| | (139 | ) | | 394 |
| | 3,263 |
| | — |
| | 3,657 |
| | 547 |
| | 1997 | | Sep. 2011 | | 20 yrs. |
| Mundelein, IL | | 765 |
| | 535 |
| | 1,757 |
| | — |
| | 44 |
| | — |
| | 535 |
| | 1,801 |
| | — |
| | 2,336 |
| | 300 |
| | 1989 | | Sep. 2011 | | 20 yrs. |
CPA®:17 – Global 2014 10-K — 113
SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
December 31, 2014
(in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Initial Cost to Company | | Costs Capitalized Subsequent to
Acquisition (a) | | Increase (Decrease) in Net
Investments (b) | | Gross Amount at which Carried at Close of Period (c) | | | | Date of Construction | | | | Life on which Depreciation in Latest Statement of Income is
Computed |
| Description | | Encumbrances | | Land | | Buildings | | Personal Property | | | | Land | | Buildings | | Personal Property | | Total | | Accumulated Depreciation (c) | | | Date Acquired | |
| Chicago, IL | | 3,200 |
| | 1,049 |
| | 5,672 |
| | — |
| | 241 |
| | (3 | ) | | 1,049 |
| | 5,910 |
| | — |
| | 6,959 |
| | 625 |
| | 1988 | | Sep. 2011 | | 30 yrs. |
| Bakersfield, CA | | 2,500 |
| | 1,068 |
| | 2,115 |
| | — |
| | 70 |
| | 464 |
| | 1,068 |
| | 2,649 |
| | — |
| | 3,717 |
| | 294 |
| | 1971 | | Nov. 2011 | | 40 yrs. |
| Beaumont, CA | | 2,610 |
| | 1,616 |
| | 2,873 |
| | — |
| | 48 |
| | — |
| | 1,616 |
| | 2,921 |
| | — |
| | 4,537 |
| | 291 |
| | 1992 | | Nov. 2011 | | 40 yrs. |
| Victorville, CA | | 1,200 |
| | 299 |
| | 1,766 |
| | — |
| | 36 |
| | — |
| | 299 |
| | 1,802 |
| | — |
| | 2,101 |
| | 189 |
| | 1990 | | Nov. 2011 | | 40 yrs. |
| Victorville, CA | | 1,020 |
| | 190 |
| | 1,756 |
| | — |
| | 46 |
| | — |
| | 190 |
| | 1,802 |
| | — |
| | 1,992 |
| | 180 |
| | 1990 | | Nov. 2011 | | 40 yrs. |
| San Bernardino, CA | | 1,000 |
| | 698 |
| | 1,397 |
| | — |
| | 75 |
| | — |
| | 698 |
| | 1,472 |
| | — |
| | 2,170 |
| | 136 |
| | 1989 | | Nov. 2011 | | 40 yrs. |
| Peoria, IL | | 2,230 |
| | 549 |
| | 2,424 |
| | — |
| | 20 |
| | — |
| | 549 |
| | 2,444 |
| | — |
| | 2,993 |
| | 319 |
| | 1990 | | Nov. 2011 | | 35 yrs. |
| East Peoria, IL | | 1,775 |
| | 409 |
| | 1,816 |
| | — |
| | 43 |
| | — |
| | 409 |
| | 1,859 |
| | — |
| | 2,268 |
| | 224 |
| | 1986 | | Nov. 2011 | | 35 yrs. |
| Loves Park, IL | | 1,000 |
| | 439 |
| | 998 |
| | — |
| | 106 |
| | 139 |
| | 439 |
| | 1,243 |
| | — |
| | 1,682 |
| | 144 |
| | 1978 | | Nov. 2011 | | 35 yrs. |
| Hesperia, CA | | 900 |
| | 648 |
| | 1,377 |
| | — |
| | 11 |
| | — |
| | 648 |
| | 1,388 |
| | — |
| | 2,036 |
| | 148 |
| | 1989 | | Dec. 2011 | | 40 yrs. |
| Mobile, AL | | 1,975 |
| | 1,078 |
| | 3,799 |
| | — |
| | 7 |
| | — |
| | 1,078 |
| | 3,806 |
| | — |
| | 4,884 |
| | 972 |
| | 1974 | | Jun. 2012 | | 12 yrs. |
| Slidell, LA | | 2,400 |
| | 620 |
| | 3,434 |
| | — |
| | 32 |
| | — |
| | 620 |
| | 3,466 |
| | — |
| | 4,086 |
| | 406 |
| | 1998 | | Jun. 2012 | | 32 yrs. |
| Baton Rouge, LA | | 800 |
| | 401 |
| | 955 |
| | — |
| | 11 |
| | — |
| | 401 |
| | 966 |
| | — |
| | 1,367 |
| | 188 |
| | 1980 | | Jun. 2012 | | 18 yrs. |
| Baton Rouge, LA | | 2,125 |
| | 820 |
| | 3,222 |
| | — |
| | 94 |
| | — |
| | 820 |
| | 3,316 |
| | — |
| | 4,136 |
| | 481 |
| | 1980 | | Jun. 2012 | | 25 yrs. |
| Gulfport, MS | | 1,200 |
| | 591 |
| | 2,539 |
| | — |
| | 58 |
| | — |
| | 591 |
| | 2,597 |
| | — |
| | 3,188 |
| | 586 |
| | 1977 | | Jun. 2012 | | 15 yrs. |
| Cherry Valley, IL | | 1,818 |
| | 1,076 |
| | 1,763 |
| | — |
| | 2 |
| | — |
| | 1,076 |
| | 1,765 |
| | — |
| | 2,841 |
| | 296 |
| | 1988 | | Jul. 2012 | | 20 yrs. |
| Fayetteville, NC | | 3,120 |
| | 1,677 |
| | 3,116 |
| | — |
| | 23 |
| | — |
| | 1,677 |
| | 3,139 |
| | — |
| | 4,816 |
| | 315 |
| | 2001 | | Sep. 2012 | | 34 yrs. |
| Tampa, FL | | 3,800 |
| | 599 |
| | 6,273 |
| | — |
| | 12 |
| | — |
| | 599 |
| | 6,285 |
| | — |
| | 6,884 |
| | 339 |
| | 1999 | | Nov. 2012 | | 40 yrs. |
| St. Petersburg, FL | | 4,100 |
| | 2,253 |
| | 3,512 |
| | — |
| | 137 |
| | (1 | ) | | 2,253 |
| | 3,648 |
| | — |
| | 5,901 |
| | 204 |
| | 1990 | | Nov. 2012 | | 40 yrs. |
| Palm Harbor, FL | | 7,100 |
| | 2,192 |
| | 7,237 |
| | — |
| | 131 |
| | — |
| | 2,192 |
| | 7,368 |
| | — |
| | 9,560 |
| | 423 |
| | 2001 | | Nov. 2012 | | 40 yrs. |
| Midland, TX | | 4,300 |
| | 1,026 |
| | 5,546 |
| | — |
| | — |
| | — |
| | 1,026 |
| | 5,546 |
| | — |
| | 6,572 |
| | 392 |
| | 2008 | | Dec. 2012 | | 20 yrs. |
| Midland, TX | | 5,830 |
| | 2,136 |
| | 6,665 |
| | — |
| | — |
| | — |
| | 2,136 |
| | 6,665 |
| | — |
| | 8,801 |
| | 454 |
| | 2006 | | Dec. 2012 | | 20 yrs. |
| Odessa, TX | | 3,970 |
| | 975 |
| | 4,924 |
| | — |
| | — |
| | — |
| | 975 |
| | 4,924 |
| | — |
| | 5,899 |
| | 347 |
| | 2006 | | Dec. 2012 | | 20 yrs. |
| Odessa, TX | | 5,400 |
| | 1,099 |
| | 6,510 |
| | — |
| | — |
| | — |
| | 1,099 |
| | 6,510 |
| | — |
| | 7,609 |
| | 465 |
| | 2004 | | Dec. 2012 | | 20 yrs. |
| Cathedral City, CA | | 1,429 |
| | — |
| | 2,275 |
| | — |
| | 2 |
| | — |
| | — |
| | 2,277 |
| | — |
| | 2,277 |
| | 157 |
| | 1990 | | Mar. 2013 | | 34 yrs. |
| Hilo, HI | | 3,965 |
| | 296 |
| | 4,996 |
| | — |
| | — |
| | — |
| | 296 |
| | 4,996 |
| | — |
| | 5,292 |
| | 194 |
| | 2007 | | Jun. 2013 | | 40 yrs. |
| Clearwater, FL | | 2,880 |
| | 924 |
| | 2,966 |
| | — |
| | 18 |
| | — |
| | 924 |
| | 2,984 |
| | — |
| | 3,908 |
| | 140 |
| | 2001 | | Jul. 2013 | | 32 yrs. |
CPA®:17 – Global 2014 10-K — 114
SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
December 31, 2014
(in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Initial Cost to Company | | Costs
Capitalized
Subsequent to
Acquisition (a) | | Increase
(Decrease)
in Net
Investments (b) | | Gross Amount at which Carried
at Close of Period (c) | | | | | | | | Life on which
Depreciation
in Latest
Statement of
Income is
Computed |
| Description | | Encumbrances | | Land | | Buildings | | Personal
Property | | | | Land | | Buildings | | Personal
Property | | Total | | Accumulated
Depreciation (c) | | Date of Construction | | Date
Acquired | |
| Winder, GA | | 415 |
| | 546 |
| | 30 |
| | — |
| | 5 |
| | — |
| | 546 |
| | 35 |
| | — |
| | 581 |
| | 3 |
| | 2006 | | Jul. 2013 | | 31 yrs. |
| Winder, GA | | 1,427 |
| | 495 |
| | 1,253 |
| | — |
| | 41 |
| | — |
| | 495 |
| | 1,294 |
| | — |
| | 1,789 |
| | 99 |
| | 2001 | | Jul. 2013 | | 25 yrs. |
| Orlando, FL | | 4,160 |
| | 1,064 |
| | 4,889 |
| | — |
| | 36 |
| | — |
| | 1,064 |
| | 4,925 |
| | — |
| | 5,989 |
| | 213 |
| | 2000 | | Aug. 2013 | | 35 yrs. |
| Palm Coast, FL | | 3,420 |
| | 1,749 |
| | 3,285 |
| | — |
| | 20 |
| | — |
| | 1,749 |
| | 3,305 |
| | — |
| | 5,054 |
| | 176 |
| | 2001 | | Sep. 2013 | | 29 yrs. |
| Holiday, FL | | 2,250 |
| | 1,829 |
| | 1,097 |
| | — |
| | 2 |
| | — |
| | 1,829 |
| | 1,099 |
| | — |
| | 2,928 |
| | 63 |
| | 1975 | | Nov. 2013 | | 23 yrs. |
| | | $ | 153,061 |
| | $ | 66,066 |
| | $ | 202,281 |
| | $ | — |
| | $ | 4,516 |
| | $ | (4 | ) | | $ | 66,066 |
| | $ | 206,793 |
| | $ | — |
| | $ | 272,859 |
| | $ | 22,217 |
| | | | | | |
___________
| |
| (a) | Consists of the cost of improvements subsequent to acquisition and acquisition costs, including construction costs on build-to-suit transactions, legal fees, appraisal fees, title costs, and other related professional fees. For business combinations, transaction costs are excluded. |
| |
| (b) | The increase (decrease) in net investment was primarily due to (i) the amortization of unearned income from net investment in direct financing leases, which produces a periodic rate of return that at times may be greater or less than lease payments received, (ii) sales of properties, (iii) impairment charges, and (iv) changes in foreign currency exchange rates. |
| |
| (c) | A reconciliation of real estate and accumulated depreciation follows: |
CPA®:17 – Global 2014 10-K — 115
CORPORATE PROPERTY ASSOCIATES 17 – GLOBAL INCORPORATED
NOTES TO SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
|
| | | | | | | | | | | |
| | Reconciliation of Real Estate Subject to Operating Leases |
| | Years Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| Beginning balance | $ | 2,402,315 |
| | $ | 2,107,549 |
| | $ | 1,494,273 |
|
| Additions | 65,115 |
| | 226,123 |
| | 508,443 |
|
| Improvements | 3,554 |
| | 8,970 |
| | 4,964 |
|
| Dispositions | (32,739 | ) | | — |
| | (56,200 | ) |
| Foreign currency translation adjustment | (124,536 | ) | | 30,155 |
| | 23,123 |
|
| Reclassification from real estate under construction | 83,006 |
| | 29,518 |
| | 140,324 |
|
| Reclassification to direct financing lease | — |
| | — |
| | (7,378 | ) |
| Ending balance | $ | 2,396,715 |
| | $ | 2,402,315 |
| | $ | 2,107,549 |
|
|
| | | | | | | | | | | |
| | Reconciliation of Accumulated Depreciation for Real Estate Subject to Operating Leases |
| | Years Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| Beginning balance | $ | 129,051 |
| | $ | 77,326 |
| | $ | 39,857 |
|
| Depreciation expense | 54,976 |
| | 49,785 |
| | 37,265 |
|
| Dispositions | — |
| | — |
| | (447 | ) |
| Foreign currency translation adjustment | (8,549 | ) | | 1,940 |
| | 1,371 |
|
| Reclassification to direct financing lease | — |
| | — |
| | (720 | ) |
| Ending balance | $ | 175,478 |
| | $ | 129,051 |
| | $ | 77,326 |
|
|
| | | | | | | | | | | |
| | Reconciliation of Operating Real Estate |
| | Years Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| Beginning balance | $ | 283,370 |
| | $ | 254,805 |
| | $ | 178,141 |
|
| Additions | — |
| | 27,697 |
| | 74,968 |
|
| Improvements | 2,047 |
| | 1,369 |
| | 2,235 |
|
| Reclassification from real estate under construction | 14,929 |
| | 12,557 |
| | — |
|
| Dispositions | (27,487 | ) | | (13,058 | ) | | — |
|
| Write-off of fully depreciated asset | — |
| | — |
| | (539 | ) |
| Ending balance | $ | 272,859 |
| | $ | 283,370 |
| | $ | 254,805 |
|
|
| | | | | | | | | | | |
| | Reconciliation of Accumulated Depreciation for Operating Real Estate |
| | Years Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| Beginning balance | $ | 15,354 |
| | $ | 7,757 |
| | $ | 2,745 |
|
| Depreciation expense | 8,664 |
| | 8,470 |
| | 5,551 |
|
| Dispositions | (1,801 | ) | | (873 | ) | | — |
|
| Write-off of fully depreciated asset | — |
| | — |
| | (539 | ) |
| Ending balance | $ | 22,217 |
| | $ | 15,354 |
| | $ | 7,757 |
|
At December 31, 2014, the aggregate cost of real estate that we and our consolidated subsidiaries own for federal income tax purposes was approximately $3.3 billion.
CPA®:17 – Global 2014 10-K — 116
CORPORATE PROPERTY ASSOCIATES 17 – GLOBAL INCORPORATED
SCHEDULE IV — MORTGAGE LOANS ON REAL ESTATE
December 31, 2014
(dollars in thousands)
|
| | | | | | | | | | | | | |
| | | Interest Rate | | Final Maturity Date | | Fair Value | | Carrying Amount |
| Description | | | | |
| Financing agreement — China Alliance Properties Limited | | 11.0 | % | | Dec. 2015 | | $ | 41,990 |
| | $ | 40,000 |
|
NOTES TO SCHEDULE IV — MORTGAGE LOANS ON REAL ESTATE
(in thousands)
|
| | | | | | | | | | | |
| | Reconciliation of Mortgage Loans on Real Estate |
| | Years Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| Balance | $ | 40,000 |
| | $ | 40,000 |
| | $ | 70,000 |
|
| Conversion to equity investment | — |
| | — |
| | (30,000 | ) |
| Ending balance | $ | 40,000 |
| | $ | 40,000 |
| | $ | 40,000 |
|
CPA®:17 – Global 2014 10-K — 117
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
Our disclosure controls and procedures include our controls and other procedures designed to provide reasonable assurance that information required to be disclosed in this and other reports filed under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized, and reported within the required time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosures. It should be noted that no system of controls can provide complete assurance of achieving a company’s objectives and that future events may impact the effectiveness of a system of controls.
Our chief executive officer and chief financial officer, after conducting an evaluation, together with members of our management, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2014, have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective as of December 31, 2014 at a reasonable level of assurance.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
We assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. In making this assessment, we used criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, we concluded that, as of December 31, 2014, our internal control over financial reporting is effective based on those criteria.
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to SEC rules that permit us to provide only management’s report in this Annual Report.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
CPA®:17 – Global 2014 10-K — 118
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
This information will be contained in our definitive proxy statement for the 2015 Annual Meeting of Stockholders, to be filed within 120 days following the end of our fiscal year, and is incorporated by reference.
Item 11. Executive Compensation.
This information will be contained in our definitive proxy statement for the 2015 Annual Meeting of Stockholders, to be filed within 120 days following the end of our fiscal year, and is incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
This information will be contained in our definitive proxy statement for the 2015 Annual Meeting of Stockholders, to be filed within 120 days following the end of our fiscal year, and is incorporated by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
This information will be contained in our definitive proxy statement for the 2015 Annual Meeting of Stockholders, to be filed within 120 days following the end of our fiscal year, and is incorporated by reference.
Item 14. Principal Accounting Fees and Services.
This information will be contained in our definitive proxy statement for the 2015 Annual Meeting of Stockholders, to be filed within 120 days following the end of our fiscal year, and is incorporated by reference.
CPA®:17 – Global 2014 10-K — 119
Item 15. Exhibits and Financial Statement Schedules.
The following exhibits are filed with this Report, except where indicated.
|
| | | | | |
| Exhibit No. |
| | Description | | Method of Filing |
| 3.1 |
| | Articles of Incorporation of Registrant | | Incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-11 (No. 333-140842) filed February 22, 2007 |
| | | | | |
| 3.2 |
| | Articles of Amendment and Restatement of Corporate Property Associates 17 – Global Incorporated, or the Charter | | Incorporated by reference to Exhibit 3.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 filed December 14, 2007 |
| | | | | |
| 3.3 |
| | Articles of Amendment to the Charter | | Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed January 29, 2013 |
| | | | | |
| 3.4 |
| | Bylaws of Corporate Property Associates 17 – Global Incorporated | | Incorporated by reference to Exhibit 3.2 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 filed December 14, 2007 |
| | | | | |
| 4.1 |
| | 2007 Distribution Reinvestment and Stock Purchase Plan | | Incorporated by reference to Exhibit 4.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 filed December 14, 2007 |
| | | | | |
| 10.1 |
| | Amended and Restated Agreement of Limited Partnership of CPA®:17 Limited Partnership dated January 1, 2015 by and among, Corporate Property Associates 17 – Global Incorporated and W. P. Carey Holdings, LLC | | Filed herewith |
| | | | | |
| 10.2 |
| | Amended and Restated Advisory Agreement dated as of January 1, 2015 among Corporate Property Associates 17 – Global Incorporated, CPA®:17 Limited Partnership and Carey Asset Management Corp. | | Incorporated by reference to Exhibit 10.12 to Annual Report on Form 10-K for W. P. Carey Inc. for the year ended December 31, 2014 filed March 2, 2015 |
| | | | | |
| 10.3 |
| | Asset Management Agreement dated as of July 1, 2008 between Corporate Property Associates 17 – Global Incorporated and W. P. Carey & Co. B. V. | | Incorporated by reference to Exhibit 10.9 to Registration Statement on Form S-11 (No. 333-140842) filed on August 1, 2008 |
| | | | | |
| 10.4 |
| | Form of Indemnification Agreement with independent directors | | Incorporated by reference to Exhibit 10.14 to Registration Statement on Form S-11 (No. 333-140842) filed on August 1, 2008 |
CPA®:17 – Global 2014 10-K — 120
|
| | | | | |
| Exhibit No. |
| | Description | | Method of Filing |
| 21.1 |
| | List of Registrant Subsidiaries | | Filed herewith |
| | | | | |
| 23.1 |
| | Consent of PricewaterhouseCoopers LLP | | Filed herewith |
| | | | | |
| 31.1 |
| | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
| | | | | |
| 31.2 |
| | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
| | | | | |
| 32 |
| | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
|
| | | | | |
| 101 |
| | The following materials from Corporate Property Associates 17 – Global Incorporated’s Annual Report on Form 10-K for the year ended December 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2014 and 2013, (ii) Consolidated Statements of Income for the years ended December 31, 2014, 2013, and 2012, (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013, and 2012, (iv) Consolidated Statements of Equity for the years ended December 31, 2014, 2013, and 2012, (v) Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013, and 2012, (vi) Notes to Consolidated Financial Statements, (vii) Schedule II — Valuation and Qualifying Accounts, (viii) Schedule III — Real Estate and Accumulated Depreciation, (ix) Notes to Schedule III, (x) Schedule IV — Mortgage Loans on Real Estate, and (xi) Notes to Schedule IV. | | Filed herewith |
CPA®:17 – Global 2014 10-K — 121
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | |
| | | | Corporate Property Associates 17 – Global Incorporated |
| Date: | March 31, 2015 | | |
| | | By: | /s/ Catherine D. Rice |
| | | | Catherine D. Rice |
| | | | Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
| Signature | | Title | | Date |
| | | | | |
| /s/ Trevor P. Bond | | Chief Executive Officer and Director | | March 31, 2015 |
| Trevor P. Bond | | (Principal Executive Officer) | | |
| | | | | |
| /s/ Catherine D. Rice | | Chief Financial Officer | | March 31, 2015 |
| Catherine D. Rice | | (Principal Financial Officer) | | |
| | | | | |
| /s/ Hisham A. Kader | | Chief Accounting Officer | | March 31, 2015 |
| Hisham A. Kader | | (Principal Accounting Officer) | | |
| | | | | |
| /s/ Marshall E. Blume | | Director | | March 31, 2015 |
| Marshall E. Blume | | | | |
| | | | | |
| /s/ Elizabeth P. Munson | | Director | | March 31, 2015 |
| Elizabeth P. Munson | | | | |
| | | | | |
| /s/ Richard J. Pinola | | Director | | March 31, 2015 |
| Richard J. Pinola | | | | |
| | | | | |
| /s/ James D. Price | | Director | | March 31, 2015 |
| James D. Price | | | | |
CPA®:17 – Global 2014 10-K — 122
EXHIBIT INDEX
The following exhibits are filed with this Report, except where indicated.
|
| | | | | |
| Exhibit No. |
| | Description | | Method of Filing |
| 3.1 |
| | Articles of Incorporation of Registrant | | Incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-11 (No. 333-140842) filed February 22, 2007 |
| |
| | | | |
| 3.2 |
| | Articles of Amendment and Restatement of Corporate Property Associates 17 – Global Incorporated, or the Charter | | Incorporated by reference to Exhibit 3.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 filed December 14, 2007 |
| |
| | | | |
| 3.3 |
| | Articles of Amendment to the Charter | | Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed January 29, 2013 |
| |
| | | | |
| 3.4 |
| | Bylaws of Corporate Property Associates 17 – Global Incorporated | | Incorporated by reference to Exhibit 3.2 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 filed December 14, 2007 |
| |
| | | | |
| 4.1 |
| | 2007 Distribution Reinvestment and Stock Purchase Plan | | Incorporated by reference to Exhibit 4.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 filed December 14, 2007 |
| |
| | | | |
| 10.1 |
| | Amended and Restated Agreement of Limited Partnership of CPA®:17 Limited Partnership dated January 1, 2015 by and among, Corporate Property Associates 17 – Global Incorporated and W. P. Carey Holdings, LLC | | Filed herewith |
| |
| | | | |
| 10.2 |
| | Amended and Restated Advisory Agreement dated as of January 1, 2015 among Corporate Property Associates 17 – Global Incorporated, CPA®:17 Limited Partnership and Carey Asset Management Corp. | | Incorporated by reference to Exhibit 10.12 to Annual Report on Form 10-K for W. P. Carey Inc. for the year ended December 31, 2014 filed March 2, 2015 |
| |
| | | | |
| 10.3 |
| | Asset Management Agreement dated as of July 1, 2008 between Corporate Property Associates 17 – Global Incorporated and W. P. Carey & Co. B. V. | | Incorporated by reference to Exhibit 10.9 to Registration Statement on Form S-11 (No. 333-140842) filed on August 1, 2008 |
| |
| | | | |
| 10.4 |
| | Form of Indemnification Agreement with independent directors | | Incorporated by reference to Exhibit 10.14 to Registration Statement on Form S-11 (No. 333-140842) filed on August 1, 2008 |
|
| | | | | |
| Exhibit No. |
| | Description | | Method of Filing |
| 21.1 |
| | List of Registrant Subsidiaries | | Filed herewith |
| |
| | | | |
| 23.1 |
| | Consent of PricewaterhouseCoopers LLP | | Filed herewith |
| |
| | | | |
| 31.1 |
| | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
| |
| | | | |
| 31.2 |
| | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
| |
| | | | |
| 32 |
| | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
|
| | | | | |
| 101 |
| | The following materials from Corporate Property Associates 17 – Global Incorporated’s Annual Report on Form 10-K for the year ended December 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2014 and 2013, (ii) Consolidated Statements of Income for the years ended December 31, 2014, 2013, and 2012, (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013, and 2012, (iv) Consolidated Statements of Equity for the years ended December 31, 2014, 2013, and 2012, (v) Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013, and 2012, (vi) Notes to Consolidated Financial Statements, (vii) Schedule II — Valuation and Qualifying Accounts, (viii) Schedule III — Real Estate and Accumulated Depreciation, (ix) Notes to Schedule III, (x) Schedule IV — Mortgage Loans on Real Estate, and (xi) Notes to Schedule IV. | | Filed herewith |
