UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
_____________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________.
COMMISSION FILE NUMBER: 001-32162
______________________
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 80-0067704
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
50 ROCKEFELLER PLAZA 10020
NEW YORK, NEW YORK (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBERS:
INVESTOR RELATIONS (212) 492-8920
(212) 492-1100
_____________________
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 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 [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [ X ]
Registrant has 56,604,322 shares of common stock, $.001 par value outstanding at
August 9, 2005.
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
INDEX
Page No.
--------
PART I
Item 1. - Financial Statements*
Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004 3
Consolidated Statements of Income for the three and six months ended June 30, 2005 and 2004 4
Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2005 and 2004 4
Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004 5
Notes to Consolidated Financial Statements 6-10
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations 11-17
Item 3. - Quantitative and Qualitative Disclosures about Market Risk 18
Item 4. - Controls and Procedures 19
PART II - Other Information
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 4. - Submission of Matters to a Vote of Security Holders 20
Item 6. - Exhibits 20
Signatures 21
* The summarized consolidated financial statements contained herein are
unaudited; however, in the opinion of management, all adjustments (consisting of
normal recurring adjustments) necessary for a fair statement of such financial
statements have been included.
2
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
PART I
Item 1. - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands except share amounts)
December 31, 2004
June 30, 2005 (Note)
------------- -----------------
ASSETS:
Land and buildings, net of accumulated depreciation of $2,289 and $443 at June 30, 2005 and
December 31, 2004 $ 300,674 $ 58,654
Net investment in direct financing leases 129,644 97,102
Real estate under construction 21,612 9,994
Mortgage notes receivable 29,845 20,291
Cash and cash equivalents 159,176 217,310
Short-term investments 13,400 9,753
Equity investments 85,335 65,964
Marketable securities 10,900 69,900
Funds in escrow 15,802 22,922
Intangible assets, net of accumulated amortization of $1,137 at June 30, 2005 and $123 at
December 31, 2004 57,843 5,614
Deferred offering costs 1,327 3,080
Other assets 6,346 4,928
------------- ----------
Total assets $ 831,904 $ 585,512
============= ==========
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY:
Liabilities:
Limited recourse mortgage notes payable $ 290,302 $ 97,691
Accrued interest 1,626 298
Prepaid rental income and security deposits 4,996 2,821
Other deposits 1,000 2,458
Due to affiliates 6,762 4,399
Dividends payable 8,162 5,353
Deferred acquisition fees payable to affiliate 14,251 7,535
Accounts payable and accrued expenses 1,442 833
Other liabilities 7,799 916
------------- ----------
Total liabilities 336,340 122,304
------------- ----------
Minority interest 6,855 -
------------- ----------
Commitments and contingencies (Note 4)
Shareholders' equity:
Common stock, $.001 par value; 110,000,000 shares authorized; 56,236,347 and 51,426,720 shares
issued and outstanding at June 30, 2005 and December 31, 2004 56 51
Additional paid-in capital 505,561 465,292
Dividend in excess of accumulated earnings (13,390) (6,188)
Accumulated other comprehensive income (2,878) 4,053
------------- ----------
489,349 463,208
Less, treasury stock at cost, 68,770 shares at June 30, 2005 (640) -
------------- ----------
Total shareholders' equity 488,709 463,208
------------- ----------
Total liabilities, minority interest and shareholders' equity $ 831,904 $ 585,512
============= ==========
The accompanying notes are an integral part of these consolidated
financial statements.
Note: The balance sheet at December 31, 2004 has been derived from the audited
consolidated financial statements at that date.
3
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands except share and per share amounts)
Three Months Ended June 30, Six Months Ended June 30,
2005 2004 2005 2004
------------ ----------- ------------ ----------
Revenues:
Rental income $ 7,000 $ 106 $ 10,887 $ 106
Interest income from direct financing leases 2,380 341 4,307 341
Interest income on mortgage receivable 496 - 1,059 -
Other operating income 141 - 207 -
------------ ----------- ------------ ----------
10,017 447 16,460 447
------------ ----------- ------------ ----------
Operating expenses:
Depreciation and amortization 1,828 11 2,720 11
General and administrative 1,137 186 2,045 313
Property expenses 1,925 222 3,294 222
------------ ----------- ------------ ----------
4,890 419 8,059 546
------------ ----------- ------------ ----------
Income before other interest income, minority interest,
equity income, gains and losses, and interest expense 5,127 28 8,401 (99)
Other interest income 1,506 297 3,007 391
Minority interest in income (130) - (130) -
Income from equity investments 1,241 423 2,518 423
Loss on foreign currency transactions and derivative
instrument, net (20) - (186) -
Interest expense (3,680) (233) (5,722) (233)
------------ ----------- ------------ ----------
Net income $ 4,044 $ 515 $ 7,888 $ 482
============ =========== ============ ==========
Basic earnings per share $ 0.07 $ 0.03 $ 0.14 $ 0.05
============ =========== ============ ==========
Dividends declared per share $ .14500 $ .11290 $ .27001 $ .22537
============ =========== ============ ==========
Weighted average shares outstanding - basic 56,197,766 15,320,209 55,824,822 9,357,555
============ =========== ============ ==========
The accompanying notes are an integral part of these consolidated
financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(Unaudited)
(in thousands)
Three Months Ended June 30, Six Months Ended June 30,
2005 2004 2005 2004
----------- -------- ---------- --------
Net income $ 4,044 $ 515 $ 7,888 $ 482
Other comprehensive income (loss):
Change in foreign currency translation adjustment (4,172) 37 (6,931) 37
----------- -------- ---------- --------
Comprehensive income (loss) $ (128) $ 552 $ 957 $ 519
=========== ======== ========== ========
The accompanying notes are an integral part of these consolidated
financial statements.
4
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
Six Months Ended June 30,
2005 2004
------------ ----------
Cash flows from operating activities:
Net income $ 7,888 $ 482
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of intangible assets and deferred financing costs 2,754 13
Realized loss on foreign currency transactions, net 27 -
Unrealized loss on foreign currency transactions, net 185 -
Unrealized gain on derivative instrument (26) -
Equity income in excess of distributions received (303) (423)
Issuance of shares to affiliate in satisfaction of fees due 1,190 -
Minority interest in income 130 -
Straight-line rent adjustments and amortization of rent related intangibles (434) (7)
Increase in accrued interest 1,353 207
Increase in due to affiliates (a) 2,332 170
Increase in accounts payable and accrued expenses (a) 137 -
Increase in prepaid rent and security deposits 3,793 332
Net change in other operating assets and liabilities (752) 171
------------ ----------
Net cash provided by operating activities 18,274 945
------------ ----------
Cash flows from investing activities:
Distributions received from equity investments in excess of equity income 1,079 -
Contributions to equity investments (79) -
Purchase of short term investments (3,516) -
Purchase of securities (31,825) -
Proceeds from sale of securities 90,825 -
Purchase of mortgage note receivable (12,778) -
Funds held in escrow for acquisition of real estate (4,253) (37,206)
Release of funds held in escrow for acquisition of real estate and equity investments 12,371 -
Principal payment of mortgage note receivable 66 -
Acquisition of real estate and equity investments (b) (351,534) (84,542)
------------ ----------
Net cash used in investing activities (299,644) (121,748)
------------ ----------
Cash flows from financing activities:
Proceeds from issuance of stock, net of costs of raising capital 41,340 201,091
Proceeds from mortgages (c) 196,065 18,840
Deferred financing costs and mortgage deposits, net of deposits refunded 44 -
Payments of mortgage principal (1,056) -
Dividends paid (12,281) (369)
Purchase of treasury stock (640) -
------------ ----------
Net cash provided by financing activities 223,472 219,562
------------ ----------
Effect of exchange rate changes on cash (236) -
------------ ----------
Net (decrease) increase in cash and cash equivalents (58,134) 98,759
Cash and cash equivalents, beginning of period 217,310 170
------------ ----------
Cash and cash equivalents, end of period $ 159,176 $ 98,929
============ ==========
(a) Increase in due to affiliates and accounts payable and accrued expenses
excludes amounts related to the raising of capital (financing activities)
pursuant to the Company's initial public offering. At June 30, 2005 and
2004, the amount due to the Company's advisor for such costs were $3,583
and $2,166, respectively.
(b) The cost basis of real estate investments acquired during the six-month
periods ended June 30, 2005 and 2004 also includes deferred acquisition
fees payable of $6,716 and $2,919, respectively.
(c) Net of $2,325 retained by mortgage lenders during the six-month period
ended June 30, 2005.
The accompanying notes are an integral part of these consolidated
financial statements.
5
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per share amounts)
NOTE 1. BASIS OF PRESENTATION:
Corporate Property Associates 16 - Global Incorporated (the "Company") is a real
estate investment trust ("REIT") that invests in commercial and industrial
properties leased to companies domestically and internationally. As a REIT, the
Company is not subject to federal income taxation as long as it satisfies
certain requirements relating to the nature of its income, the level of its
distributions and other factors. The accompanying unaudited consolidated
financial statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Article 10 of
Regulation S-X of the United States Securities and Exchange Commission ("SEC").
They do not include all information and notes required by generally accepted
accounting principles for complete financial statements. All significant
intercompany balances and transactions have been eliminated. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair statement of the results of the interim periods
presented have been included. The results of operations for the interim periods
are not necessarily indicative of results for the full year. These financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2004.
Information About Geographic Areas
The Company has international investments in Canada, Finland, France, Germany,
Sweden, Thailand and the United Kingdom. These investments accounted for lease
revenues (rental income and interest income from direct financing leases) of
$1,745 and $341 for the three months ended June 30, 2005 and 2004, respectively,
lease revenues of $3,337 and $341 for the six months ended June 30, 2005 and
2004, respectively, income from equity investments of $518 and $25 for the three
months ended June 30, 2005 and 2004, respectively, and income from equity
investments of $1,020 and $25 for the six months ended June 30, 2005 and 2004,
respectively. As of June 30, 2005 and December 31, 2004, long-lived assets
related to international investments were $133,999 and $92,798, respectively.
NOTE 2. ORGANIZATION AND OFFERING:
The Company commenced its initial public offering of up to 110,000,000 shares of
common stock at a price of $10 per share in December 2003. The initial offering
was conducted on a "best efforts" basis by Carey Financial, LLC ("Carey
Financial"), a wholly-owned subsidiary of W. P. Carey and Co. LLC (the
"Advisor"), and selected other dealers. The Company sold 55,332,415 shares of
common stock in its initial offering before suspending sales activities on
December 30, 2004. The Company formally terminated its initial offering in March
2005 by filing an amendment to the registration statement for its initial
offering, to deregister shares of its common stock that remained unissued as of
March 8, 2005, excluding shares issuable under its Distribution Reinvestment and
Share Purchase Plan (the "Plan").
In August 2005, the Company filed an amendment to the registration statement
filed with the SEC in 2004 for a second "best efforts" public offering of up to
55,000,000 shares. This registration statement has not yet been declared
effective.
NOTE 3. TRANSACTIONS WITH RELATED PARTIES:
Pursuant to an advisory agreement between the Company and its Advisor, the
Advisor performs certain services for the Company including the identification,
evaluation, negotiation, purchase and disposition of property, the day-to-day
management of the Company and the performance of certain administrative duties.
The advisory agreement between the Company and the Advisor provides that the
Advisor will receive an asset management fee. The fee is 1% of average invested
assets as defined in the advisory agreement, 1/2 of which (the "performance
fee") is subordinated to the preferred return, a non-compounded cumulative
distribution return of 6%. As of June 30, 2005, the non-compounded cumulative
distribution return was 5.06%. The asset management and performance fees will be
payable in cash or restricted stock at the option of the Advisor. For 2005, the
Advisor has elected to receive its management fee in restricted shares of common
stock of the Company. In connection with the day-to-day operations, the Advisor
is also reimbursed for the allocated cost of personnel needed to provide
administrative services to the operation of the Company. For the three months
ended June 30, 2005 and 2004, the Company incurred asset management fees of $869
and $111, respectively and $1,506 and $111 for the six months ended June 30,
2005 and 2004, respectively, with performance fees in like amounts, which are
included in property expenses in the accompanying financial statements. For the
three and six months ended June 30, 2005, the Company incurred personnel
reimbursements of $99 and $178 respectively, which are included in general and
administrative expenses in the accompanying financial statements. No such
personnel cost reimbursements were incurred in the three and six-month periods
ended June 30, 2004.
In connection with structuring and negotiating acquisitions and related mortgage
financing on behalf of the Company, the advisory agreement provides for
acquisition fees averaging not more than 4.5%, based on the aggregate cost of
properties acquired, of which
6
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands except share and per share amounts)
2% will be deferred and payable in equal annual installments over three years
with payment subordinated to the preferred return. Unpaid installments bear
interest at an annual rate of 5%. For transactions that were completed during
the six months ended June 30, 2005, current and deferred acquisition fees were
$8,395 and $6,716, respectively, and were paid or payable to the Advisor. For
transactions that were completed during the six months ended June 30, 2004,
current and deferred acquisition fees were $3,440 and $2,752, respectively, and
were paid or payable to the Advisor. When a real estate acquisition is
completed, the Company pays the Advisor an acquisition expense allowance of 0.5%
of the cost of the properties in consideration for the Advisor's payment of
certain acquisition expenses. For the six months ended June 30, 2005 and 2004,
the allowance was $2,063 and $729, respectively.
NOTE 4. COMMITMENTS AND CONTINGENCIES:
As previously reported, the Advisor and Carey Financial, the wholly-owned
broker-dealer subsidiary of the Advisor, are currently subject to an
investigation by the SEC into payments made to third party broker-dealers and
other matters.
In response to subpoenas and requests of the Division of Enforcement of the SEC
("Enforcement Staff"), the Advisor and Carey Financial have produced documents
relating to payments made to certain broker-dealers, both during and after the
offering process, for certain of the REITs managed by the Advisor (including
Corporate Property Associates 10 Incorporated ("CPA(R):10"), Carey Institutional
Properties Incorporated ("CIP(R)"), Corporate Property Associates 12
Incorporated ("CPA(R):12"), Corporate Property Associates 14 Incorporated
("CPA(R):14") and Corporate Property Associates 15 Incorporated ("CPA(R):15"),
in addition to selling commissions and selected dealer fees.
Among the payments reflected in documents produced to the Enforcement Staff were
certain payments, aggregating in excess of $9,400, made to a broker-dealer which
distributed shares of the REITs. The expenses associated with these payments,
which were made during the period from early 2000 through the end of 2003, were
borne by and accounted for on the books and records of the REITs. Of these
payments, CPA(R):10 paid in excess of $40; CIP(R) paid in excess of $870;
CPA(R):12 paid in excess of $2,400; CPA(R):14 paid in excess of $4,900; and
CPA(R):15 paid in excess of $1,200. In addition, other smaller payments by these
REITs to the same and other broker-dealers have been identified aggregating less
than $1,000. The Company did not make, or make reimbursements in respect of, any
of these payments to broker-dealers.
Although no formal regulatory action has been initiated against the Advisor or
Carey Financial in connection with the matters being investigated, the SEC may
pursue such an action against either or both of them. The nature of the relief
or remedies the SEC may seek cannot be predicted at this time. If such an action
is brought, it could have a material adverse effect on the Advisor and the REITs
managed by the Advisor, including the Company, and the magnitude of that effect
would not necessarily be limited to the payments described above but could
include other payments and civil monetary penalties. Any action brought against
the Advisor or Carey Financial could also have a material adverse effect on the
Company because of the Company's dependence on the Advisor and Carey Financial
for a broad range of services, including in connection with the offering of
securities.
The Company is liable for certain expenses of offerings of its securities
including filing, legal, accounting, printing and escrow fees, which are to be
deducted from the gross proceeds of the offerings. The Company reimburses Carey
Financial or one of its affiliates for expenses (including fees and expenses of
its counsel) and for the costs of any sales and information meetings of Carey
Financial's employees or those of one of its affiliates relating to the
Company's securities offerings. Total underwriting compensation with respect to
any offering may not exceed 10% of gross proceeds of such offering. The Advisor
has agreed to be responsible for the payment of (i) organization and offering
expenses (excluding selling commissions and selected dealer fees paid and
expenses reimbursed to the sales agent and selected dealers) which exceed 4% of
the gross proceeds of each offering and (ii) organization and offering expenses
(including selling commissions, fees paid and expenses reimbursed to selected
dealers) which exceed 15% of the gross proceeds of each offering. The total
costs paid by the Advisor in connection with offerings of the Company's
securities were $13,638 through June 30, 2005, of which the Company has
reimbursed $10,527. Unpaid costs are included in due to affiliates in the
accompanying financial statements.
NOTE 5. EQUITY INVESTMENTS:
On April 29, 2004, the Company, along with two affiliates, CPA(R):14 and
CPA(R):15, through a limited partnership in which the Company owns a 30.77%
limited partnership interest, purchased 78 retail self-storage and truck rental
facilities and entered into master lease agreements with two lessees that
operate the facilities under the U-Haul brand name. The self-storage facilities
are leased to Mercury Partners, LP and the truck rental facilities are leased to
U-Haul Moving Partners, Inc.
7
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands except share and per share amounts)
Summarized financial information of the limited partnership is as follows:
June 30, 2005 December 31, 2004
------------- -----------------
Assets (primarily real estate) $ 344,158 $ 350,882
Liabilities (primarily mortgage notes payable) (214,965) (219,753)
------------- -------------
Partners' and members' equity $ 129,193 $ 131,129
============= =============
Company's share of equity investees' net assets $ 39,988 $ 40,596
============= =============
Six Months Ended June 30,
-------------------------
2005 2004
---------- ---------
Revenues (primarily rental income) $ 14,294 $ 4,927
Expenses (primarily interest on mortgages and depreciation) (9,385) (3,624)
---------- ---------
Net income $ 4,909 $ 1,303
========== =========
Company's share of net income from equity investments $ 1,498 $ 398
========== =========
The Company also owns interests in single-tenant net leased properties leased to
corporations through noncontrolling interests in partnerships and limited
liability companies in which its ownership interests are 50% or less and the
Company exercises significant influence. The underlying investments are owned
with affiliates that have similar investment objectives as the Company. The
ownership interests range from 25% to 50%. The lessees are Actuant Corporation,
Pohjola Non-Life Insurance Company, TietoEnator Plc., Thales S.A. and Hellweg
Die Profi-Baumarkte GmbH & Co. KG. The interests in Pohjola and Hellweg were
acquired in January 2005 and June 2005, respectively (see Note 6).
Summarized financial information of the above mentioned equity investees are as
follows:
June 30, 2005 December 31, 2004
------------- -----------------
Assets (primarily real estate) $ 483,657 $ 249,920
Liabilities (primarily mortgage notes payable) (353,063) (185,665)
------------- ------------
Partners' and members' equity $ 130,594 $ 64,255
============= ============
Company's share of equity investees' net assets $ 45,347 $ 25,368
============= ============
Six Months Ended June 30,
-------------------------
2005 2004
--------- ---------
Revenues (primarily rental income and interest income from direct financing leases) $ 14,368 $ 708
Expenses (primarily interest on mortgages and depreciation) (11,748) (161)
--------- ---------
Net income $ 2,620 $ 547
========= =========
Company's share of net income from equity investments $ 1,020 $ 25
========= =========
NOTE 6. ACQUISITIONS OF REAL ESTATE-RELATED INVESTMENTS:
A summary of properties (real estate accounted for under the operating method
and net investment in direct financing leases), equity investments and mortgage
notes receivable acquired in the six months ended June 30, 2005 and 2004 is as
follows:
PROPERTIES ACQUIRED
Initial Annual
Contractual Mortgage Annual Debt Date
Lease Obligor(s): Cost Location Rent Financing Service Acquired
- ------------------------------------------- --------- ----------------------- -------------- --------- ----------- ---------
HMS Healthcare, Inc. $ 18,732 Southfield, MI $ 1,228 $ 9,100 $ 643 1/3/2005
Clean Earth Kentucky, LLC 7,366 Cynthiana, KY 711 4,550 393 1/14/2005
Precise Technology Group, Inc. 16,469 Buffalo Grove, IL 1,448 - - 1/18/2005
LFD Manufacturing Limited and IDS Logistics 23,689 Lamlukka and 1,495 11,440 900 1/28/2005
(Thailand) Limited (1) (2) Bangpa-In, Thailand
Finisar Corporation 29,292 Sunnyvale, CA and 2,951 17,000 1,457 2/4/2005
Allen, TX
MetalsAmerica, Inc. 7,437 Shelby, NC 651 4,000 339 2/9/2005
PolyPipe, Inc. 8,714 Frenley, NV; 787 5,000 447 2/25/2005
Gainesville, TX;
Sandersville, GA
and Erwin, TN
Telcordia Technologies, Inc. (4) 116,908 Piscataway, NJ 8,913 79,686 4,436 3/15/2005
The Talaria Company (Hinckley) (5) 58,319 Stuart, FL; Portsmouth, 5,162 35,000 3,072 5/6/2005
RI and Southwest Harbor
And Trenton, ME
MetoKote Corporation and MetoKote Canada
Limited (1) 38,306 Huber Heights, 3,326 26,000 1,601 5/27/2005
Sheffield Village and
Lima, OH;
Lebanon, Tennessee and
Peru, IL; Ontario,
Canada
Career Education Corp. (7) 10,541 Nashville, TN 475 6,500 480 6/24/2005
8
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands except share and per share amounts)
EQUITY INVESTMENTS ACQUIRED
Initial Annual
Contractual Mortgage Annual Debt Date
Lease Obligor: Cost Location Rent Financing Service Acquired
- ------------------------------------------- --------- ----------------------- -------------- --------- ----------- ---------
Pohjola Non-Life Insurance Company (1) (3) $ 45,542 Helsinki, Finland $ 3,251 $ 33,865 $ 1,712 1/3/2005
Hellweg Die Profi-Baumarkte GmbH & Co. KG
(1) (6) 38,543 16 properties in 3,138 26,591 1,727 6/9/2005
Germany
(1) Based on the applicable exchange rate on the dates of acquisition.
(2) The Company is committed to funding expansions at these properties, at the
option of the lessees, in an amount up to $6,057. In the event the
expansions take place, the Company has the ability to increase its
borrowing under the loan facility by $3,900 at substantially the same
terms as the original borrowing.
(3) Amounts shown represent the Company's 40% interest in this investment. The
remaining interest is owned by an affiliate.
(4) Annual debt service increases to $5,578 in year three.
(5) The Company acquired a 70% interest in this investment. The remaining
interest is owned by an affiliate. Amounts in the table above represent 100% of
the investment as the investment is consolidated by the Company.
(6) Amounts shown represent the Company's 25% interest in this investment. The
remaining interest is owned by an affiliate.
(7) Career Education Corp. is expected to increase its occupancy at the property
in stages over an 18-month period. As a result of the increased occupancy as
well as stated annual rent increases, rental income will be recognized on an
annual straight-line basis of $868.
MORTGAGE NOTES RECEIVABLE ACQUIRED
In January 2005, the Company originated a $54,000 mortgage collateralized by
distribution and storage facilities of Reyes Holdings L.L.C. The mortgage was
originated as a 10-year loan with a 25-year amortization schedule, bearing
interest at a fixed rate of approximately 6.34%. The Advisor arranged for the
syndication of the first $41,260 in the form of an A-note, bearing interest at a
fixed rate of 5.14%. In consideration for an investment of $12,740, the Company
obtained the $12,740 B-note, which bears interest at a fixed rate of 6.34%, and
an interest only participation in the A-note for the difference between the
stated amounts payable under the A-note and the amounts receivable from the
interests sold to the participants in the A-note (the difference between the
amounts payable at an annual rate of 6.34% and 5.14%). The interest only
participation is accounted for as a derivative instrument with changes in its
fair value included in the determination of net income.
During the six months ended June 30, 2004, the Company completed real estate
related investments totaling approximately $146,700 (based on the exchange rate
on the date of acquisition). Included in this total is $96,620 representing an
equity method investment in 78 self-storage facilities that operate under the
U-Haul brand name. These investments have been disclosed in the Company's Annual
Report on Form 10-K for the year ended December 31, 2004.
Costs incurred in connection with structuring proposed transactions that were
not completed were $309 and $593 for the three and six months ended June 30,
2005, respectively. No such costs were incurred in the three and six months
ended June 30, 2004. These costs are included in general and administrative
expenses in the accompanying financial statements.
NOTE 7. INTANGIBLES:
In connection with its acquisition of properties, the Company has recorded net
intangibles of $50,989, which are being amortized over periods ranging from 12
years to 40 years. Amortization of below-market and above-market rent
intangibles is recorded as an adjustment to rental income.
Intangibles are summarized as follows:
JUNE 30, 2005 DECEMBER 31, 2004
------------- -----------------
Lease intangibles
In-place lease $ 40,106 $ 3,822
Tenant relationship 11,552 1,568
Above-market rent 7,322 347
Less: accumulated amortization (1,137) (123)
----------- ---------
$ 57,843 $ 5,614
----------- ---------
Below-market rent $ (7,991) $ (938)
Less: accumulated amortization 192 22
----------- ---------
$ (7,799) $ (916)
=========== =========
9
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands except share and per share amounts)
Net amortization of intangibles was $619 and $844 for the three and six months
ended June 30, 2005, respectively. Net amortization for the three and six months
ended June 30, 2004 was $1. Based on the intangibles recorded through June 30,
2005, annual net amortization of intangibles for each of the next five years is
expected to be $2,650.
NOTE 8. PRO FORMA FINANCIAL INFORMATION:
The following consolidated pro forma financial information has been presented as
if the Company's acquisitions made during the six month period ended June 30,
2005 had occurred on January 1, 2005 and 2004 for the three month and six month
periods ended June 30, 2005 and 2004. The pro forma financial information is not
necessarily indicative of what the actual results would have been, nor does it
purport to represent the results of operations for future periods
Three Months Ended June 30,
---------------------------
2005 2004
--------- ---------
Pro forma total revenues $ 18,062 $ 8,835
Pro forma net income 11,609 1,020
Pro forma earnings per share:
Basic and diluted $ .21 $ .02
Six Months Ended June 30,
-------------------------
2005 2004
--------- --------
Pro forma total revenues $ 27,070 $ 17,735
Pro forma net income 15,696 4,402
Pro forma earnings per share:
Basic and diluted $ .28 $ .08
The pro forma net income and earnings per share figures for the three and
six-month periods ended June 30, 2005 presented above include losses on foreign
currency transactions of $118 and $212, respectively. No such losses on foreign
currency transactions were incurred in the three and six-month periods ended
June 30, 2004. The pro forma weighted average shares outstanding for the three
and six month periods ended June 30, 2005 and 2004 were determined as if all
shares issued since the inception of the Company were issued on January 1, 2004.
NOTE 9. SUBSEQUENT EVENTS:
In July 2005, the Company and CPA(R):15, each through 50% interests, purchased
land and buildings in Paris, France, for E88,564 ($107,074 based on the exchange
rate of the Euro on the date of acquisition) and assumed an existing lease
agreement with The Paris Police Department. The assumed lease expires in June
2019 and does not provide for any renewal options. Annual rent as of the date of
lease assumption is E5,011 ($6,058 based on the exchange rate of the Euro on the
date of acquisition). Limited recourse mortgage financing totaling E65,000
($78,585 based on the exchange rate of the Euro on the date of acquisition) was
obtained in connection with this purchase.
In July 2005, the Company purchased land and building in Saltillo, Mexico, for
$3,782, and entered into a net lease agreement guaranteed by MetoKote
Corporation and denominated in U.S. dollars. The lease has an initial term of 20
years with two 10-year renewal options and provides for initial annual rent of
$335.
10
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands except share and per share amounts)
The following discussion and analysis of financial condition and results of
operations of Corporate Property Associates 16 - Global Incorporated contain
forward-looking statements and should be read in conjunction with the
consolidated financial statements and notes thereto as of June 30, 2005. As used
in this quarterly report on Form 10-Q, the terms "the Company," "we," "us" and
"our" include Corporate Property Associates 16 - Global Incorporated, its
consolidated subsidiaries and predecessors, unless otherwise indicated.
Forward-looking statements discuss matters that are not historical facts.
Because they discuss future events or conditions, forward-looking statements may
include words such as "anticipate," "believe," "expect," "estimate," "intend,"
"could," "should," "would," "may," "seeks," "plans" or similar expressions. Do
not unduly rely on forward-looking statements. They give our expectations about
the future and are not guarantees, and speak only as of the date they are made.
Such statements involve known and unknown risks, uncertainties and other factors
that may cause our actual results, performance or achievement to be materially
different from the results of operations or plan expressed or implied by such
forward-looking statements. While we cannot predict all of the risks and
uncertainties, they include, but are not limited to, the risk factors described
in Item 1 of our Annual Report on Form 10-K for the year ended December 31,
2004. Accordingly, such information should not be regarded as representations
that the results or conditions described in such statements or that our
objectives and plans will be achieved. Additionally, a description of our
critical accounting estimates is included in the management's discussion and
analysis section in our Annual Report on Form 10-K for the year ended December
31, 2004. There has been no significant change in such critical accounting
estimates.
EXECUTIVE OVERVIEW
BUSINESS OVERVIEW
We were formed in 2003 for the purpose of investing primarily in commercial and
industrial properties leased to companies domestically and internationally and
are managed by a wholly-owned subsidiary of W. P. Carey & Co. LLC (the
"Advisor"). We intend to file our 2004 Federal tax return as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, and
accordingly will not be subject to Federal income taxes on income distributed to
shareholders, provided we distribute at least 90% of our REIT taxable income to
shareholders on an annual basis and meet certain other conditions. We intend to
retain our REIT status.
HOW WE EARN REVENUE
The primary source of our revenue is earned from leasing real estate. We invest
in commercial and industrial properties that are then leased to companies
domestically and internationally, primarily on a net lease basis. We also invest
in mortgage loans that are collateralized by real estate. Revenue is subject to
fluctuation because of lease expirations, lease terminations, the timing of new
lease transactions, tenant defaults and sales of property.
HOW MANAGEMENT EVALUATES RESULTS OF OPERATIONS
Management evaluates our results with a primary focus on the ability to generate
cash flow necessary to meet its objectives of funding distributions to our
shareholders and overall property appreciation. As a result, management's
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 flow, and to other noncash charges such as
depreciation and impairment charges. In evaluating cash flow from operations,
management includes equity distributions that are included in investing
activities to the extent that the distributions in excess of equity income are
the result of noncash charges such as depreciation and amortization. Management
does not consider unrealized gains and losses resulting from short-term foreign
currency fluctuations or derivative instruments when evaluating our ability to
fund distributions. Management's evaluation of our potential for generating cash
flow includes our assessment of the long-term sustainability of our real estate
portfolio.
Our Results of Operations section below contains a table describing our
investments as of June 30, 2005 and annual cash flow expected from each
investment.
11
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands except share and per share amounts)
CURRENT DEVELOPMENTS AND TRENDS
Competition for investments continues to remain strong. Inflation and interest
rates, at least for the short term, are expected to rise.
Rising interest rates are expected to have the following impact on our business:
- - Rising interest rates would likely cause a decline in the values of
properties in our investment portfolio;
- - Rising interest rates would likely cause an increase in inflation and a
corresponding increase in the Consumer Price Index ("CPI"), which over
time will result in increased revenue and partially offset the impact of
declining property values;
- - The impact of rising interest rates would be mitigated through our use of
fixed interest rates on our current debt; however, financing obtained in
connection with subsequent investments or on unencumbered properties could
be affected;
- - Rising interest rates would likely enable us to achieve higher rates of
return on new investments, which would be partially offset by increased
debt costs associated with increased interest rates;
- - Rising interest rates could make other income generating products more
attractive to investors on a relative basis and affect our ability to
raise capital; and
- - Rising interest rates may have an impact on the credit quality of certain
tenants.
We will continue to pursue our objectives through long-term investment
transactions and diversifying our portfolio. We expect to continue investing in
the international commercial real estate market, as we believe the international
market may provide for favorable opportunities. In addition, financing terms are
generally more favorable for international transactions. Financing terms for
international transactions generally provide for lower interest rates and
greater flexibility to finance the underlying property. These benefits are
partially offset by shorter lease and loan maturities. Investing in additional
international properties increases our exposure to fluctuations in foreign
currency exchange rates.
For the six months ended June 30, 2005, cash flows generated from operations and
equity investments were sufficient to fund distributions paid and meet other
obligations, including paying scheduled mortgage principal payments. As of June
30, 2005, we had $159,176 in cash and cash equivalents as well as $13,400 in
short-term instruments and $10,900 in auction-rate marketable securities that we
intend to convert to cash, which will primarily be used to fund future real
estate investments, as well as maintain sufficient working capital balances and
meet other commitments.
We intend to fund quarterly distributions from cash generated from operations.
We also currently expect to continue raising funds through an additional public
offering of our common stock. Substantially all of the capital raised has been
raised by one selected-dealer and any adverse change in our relationship with
this selected-dealer could limit our ability to sell additional shares of common
stock.
Management believes that as the portfolio matures there is a potential for an
increase in the value of the portfolio and that any increase may not be
reflected in the financial statements; however, rising interest rates and other
market conditions may have an adverse affect on the future value of the
portfolio.
Current Developments Include:
ACQUISITIONS - Our Advisor is continuing to evaluate investments to utilize our
existing cash balances raised from our initial public offering. During the
quarter ended June 30, 2005, we completed transactions totaling approximately
$128,000. In May 2005, we and an affiliate, Corporate Property Associates 15
("CPA(R):15"), through 70% and 30% interests, respectively, in a limited
liability company, acquired land and buildings in Stuart, FL; Portsmouth, Rhode
Island and Southwest Harbor and Trenton, ME for $58,319 and entered into a net
lease with The Talaria Company (doing business as The Hinckley Company). The
lease has an initial term of 25 years with two 5-year renewal options followed
by two 10-year renewal options and provides for initial annual rent of $5,162.
The lease also provides for rent increases every four years based on increases
in the CPI. In connection with the purchase, the limited liability company
obtained a limited recourse mortgage loan of $35,000.
12
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands except share and per share amounts)
In May 2005, we acquired land and buildings in Huber Heights, Sheffield Village
and Lima, OH; and Lebanon, Tennessee and Peru, IL for $28,414 and Ontario,
Canada for CAD 12,464 ($9,892 based on the exchange rate of the Canadian Dollar
as of the date of the agreement) and entered into leases with MetoKote
Corporation for the domestic properties and MetoKote Canada Limited for the
Canadian property. The leases each have an initial lease term of 20 years with
two 10-year renewal options and provide for initial annual rent of $2,471 on the
domestic properties and CAD 1,084 ($885) on the Canadian property. Each lease
also provides for annual rent increases based on increases in the CPI of the
respective country. In connection with the purchase, we obtained limited
recourse mortgage loans of $20,000 on the domestic properties and CAD 7,492
($6,000) on the Canadian Property.
In June 2005, we and CPA(R):15, through 25% and 75% interests, respectively, in
a limited liability company, acquired 16 retail facilities throughout Germany
for E126,101 ($154,171 based on the exchange rate of the Euro as of the date of
the agreement, of which our share is $38,543), and entered into a net lease with
Hellweg Die Profi-Baumarkte GmbH & Co. KG. The lease has an initial term of 25
years with a 5-year renewal option and provides for initial annual rent of
E10,267 ($12,552, of which our share is $3,138). The lease also provides for
rent increases every two years based on increases in the German CPI. In
connection with the acquisition, the limited liability company obtained a
limited recourse mortgage loan of E87,000 ($106,366 of which our share is
$26,591).
In June 2005, we acquired land and buildings in Nashville, TN for $10,541 and
assumed a net lease with Career Education Corporation. The lease expires in June
2019 with two 5-year renewal options and provides for annual rent at the date of
assumption of $475. Career Education is expected to increase its occupancy over
an 18-month period as the property is being retrofitted to their specifications
per an existing agreement with the former owner of the property. Accordingly,
rent will increase in accordance with the tenant's expanded occupancy followed
by stated annual rent increases. As a result, rental income will be recognized
on an annual straight-line basis of $868. In connection with the purchase, we
obtained a limited recourse mortgage loan of $6,500.
See Subsequent Events below for descriptions of acquisitions completed in July
2005.
FUND RAISING ACTIVITY - Our initial public offering was terminated in March 2005
following the sale of 55,332,415 shares. In August 2005, we filed an amendment
to our registration statement filed with the United States Securities and
Exchange Commission ("SEC") in 2004 for a second "best efforts" public offering
of up to 55,000,000 shares. This registration statement has not yet been
declared effective. We currently anticipate that sales of shares in our second
offering will commence before the end of 2005.
DIVIDEND - In June 2005, our board of directors approved and increased the
second quarter dividend to $.1450 per share payable in July 2005 to shareholders
of record as of June 30, 2005.
RESULTS OF OPERATIONS
We commenced real estate operations in 2004, and our results of operations for
the three and six months ended June 30, 2004 reflect the limited nature of our
operations during those periods. Through June 30, 2005, we have invested in
several properties, both domestic and international, leased to companies on a
net lease basis. We have also invested in mortgage loans that are collateralized
by real estate. We anticipate that we will continue to use the proceeds of our
initial public offering along with limited recourse property-level mortgage
financing and proceeds from future offerings of our common stock to form a
diversified portfolio of real estate net leased to corporate tenants.
Accordingly, the results of operations for the three-month period ended June 30,
2005 are not expected to be representative of our future results because we
expect that our asset base will continue to increase. As our asset base
increases, revenues and general and administrative, property and depreciation
expenses will increase. Interest expense will increase as mortgage loans are
obtained. We have investments in Europe, the United Kingdom, Thailand and Canada
and as such, results of operations are subject to fluctuations in foreign
currency exchange rates.
Real Estate Investments
13
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
Our real estate portfolio as of June 30, 2005 is expected to generate annual
cash flow (annual contractual rent less annual property level debt service) of
$19,424, from our direct ownership of real estate as follows:
Annual Estimated
Contractual Annual Annual
Lease Obligor Rent Debt Service Cash Flow
- ------------------------------------------------------------------ ----------- ------------ ---------
2005 ACQUISITIONS
Telcordia Technologies, Inc. (1) (3) $ 8,913 $ 4,436 $ 4,477
The Talaria Company (Hinckley) (3) (6) 5,162 3,072 2,090
MetoKote Corporation and MetoKote Canada Limited (2) (3) (5) 3,326 1,601 1,725
Finisar Corporation 2,951 1,457 1,494
Precise Technology Group, Inc. 1,448 - 1,448
LFD Manufacturing Limited and IDS Logistics (Thailand) Limited (2) 1,495 900 595
HMS Healthcare, Inc. (4) 1,228 643 585
PolyPipe, Inc. 787 447 340
Clean Earth Kentucky, LLC 711 393 318
MetalsAmerica, Inc. 651 339 312
Career Education Corp. (3) (7) 475 480 (5)
2004 ACQUISITIONS
Ply Gem Industries, Inc. (2) 3,510 1,790 1,720
Foss Manufacturing Company, Inc. 3,195 1,533 1,662
Plantasjen ASA (2) 2,162 1,385 777
Polestar Petty Ltd. (2) 2,116 1,363 753
Xpedite Systems, Inc. 1,395 820 575
Castle Rock Industries, Inc. 1,328 770 558
----------- ------------ ---------
$ 40,853 $ 21,429 $ 19,424
=========== ============ =========
(1) Annual debt service increases to $5,578 in year three.
(2) Based on the applicable exchange rate on the date of acquisition. Amounts
are subject to fluctuations in foreign currency exchange rates.
(3) Represents investment completed during the quarter ended June 30, 2005.
(4) Excludes two assumed leases that provide for annual rent of $318 and $63,
respectively, and which expire in December 2005 and December 2010,
respectively.
(5) Annual debt service increases to $2,171 in year two.
(6) Includes lease revenues applicable to minority interests. Minority
interests included in the consolidated amounts above total $627 for the
six months ended June 30, 2005.
(7) Career Education Corp. is expected to increase its occupancy at the
property in stages over an 18-month period. As a result of the increased
occupancy as well as stated annual rent increases, rental income will be
recognized on an annual straight-line basis of $868.
We recognize income from equity investments of which lease revenues are a
significant component. Our ownership interests range from 25% to 50%. Our pro
rata share of equity investments as of June 30, 2005 is expected to generate
annual cash flow (annual contractual rent less annual property level debt
service) of $10,668 as follows:
Annual Estimated
Contractual Annual Annual
Lease Obligor Rent Debt Service Cash Flow
- ------------------------------------------------- ----------- ------------ ---------
2005 ACQUISITIONS
Pohjola Non-Life Insurance Company (1) $ 3,251 $ 1,712 $ 1,539
Hellweg Die Profi-Baumarkte GmbH & Co. KG (1) (2) 3,138 1,727 1,411
2004 ACQUISITIONS
U-Haul Moving Partners, Inc. and Mercury LP 8,782 4,541 4,241
Thales S.A. (1) 4,142 2,053 2,089
TietoEnator Plc. (1) 2,793 1,731 1,062
Actuant Corporation (1) 803 477 326
----------- ---------- ---------
$ 22,909 $ 12,241 $ 10,668
=========== ========== =========
14
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
(1) Based on the applicable exchange rate on the date of acquisition. Amounts
are subject to fluctuations in foreign currency exchange rates.
(2) Represents investment completed during the quarter ended June 30, 2005.
A build-to-suit project for a building to be leased to Huntsman LLC is expected
to be completed in September 2005 and is expected to provide for estimated
annual cash flow of $3,545 once completed.
Mortgage Notes Receivable
We currently have interests in two mortgage notes receivable. Our interest in a
mortgage note receivable collateralized by the distribution facilities of
BlueLinx Holdings, Inc. was purchased in December 2004 and is expected to
provide annual cash flow of approximately $1,300, which is based on a floating
rate of interest. The note is initially scheduled to mature in November 2007 and
may be extended for two-1 year periods.
In January 2005, we purchased a $12,740 mortgage note receivable and related
interest-only participation collateralized by the distribution and storage
facilities of Reyes Holding L.L.C. Annual cash flow from this investment,
including installments of principal, is expected to approximate $1,515. The note
expires in February 2015.
FINANCIAL CONDITION
Uses of Cash During the Period
We used a combination of existing cash balances, limited recourse financing and
other sources (see investing activities below) to fund acquisitions totaling
$402,000 for the six months ended June 30, 2005. As a result, our cash and cash
equivalents decreased $58,134 from the December 31, 2004 balance. Management
believes we have sufficient cash balances to acquire a diversified real estate
portfolio and meet our working capital needs including our distribution rate.
Our use of cash during the period is described below.
OPERATING ACTIVITIES - In evaluating cash flow from operations, management
includes equity distributions that are included in investing activities to the
extent that the distributions in excess of equity income are the result of
noncash charges such as depreciation and amortization. For the six months ended
June 30, 2005, cash flows from operating activities and equity investments of
$19,353 were sufficient to pay distributions to shareholders of $12,281 and meet
scheduled principal payment installments on mortgage debt of $1,056. Annual
operating cash flow is expected to increase as a result of recent investment
activity. Investments completed in the six month period ended June 30, 2005 are
expected to generate annual cash flow of approximately $18,000 (subject to
fluctuations in foreign currency exchange rates).
INVESTING ACTIVITIES - Our investing activities are generally comprised of real
estate related transactions (purchases and sales of real estate and mortgage
loans collateralized by real estate) and the purchase of and sale of short-term
investments and marketable securities which we intend to convert to cash.
We completed several investments during the six months ended June 30, 2005,
including the purchase of a mortgage note receivable. These investments are
described in Results of Operations above and in the accompanying financial
statements. Our recent investment activity was funded through the use of
existing cash balances, proceeds from mortgage financings, the release of funds
of $12,371 held in escrow and a portion of the proceeds from the sale of
marketable securities and the issuance of our stock. During the six months ended
June 30, 2005, we had net sales (purchases less proceeds from sale) of
marketable securities of $59,000, which was used to fund investment activity and
for working capital needs. We also placed $4,253 in escrow in connection with a
potential acquisition.
FINANCING ACTIVITIES - In addition to paying distributions to shareholders and
making scheduled mortgage principal payments, we obtained $196,065 in mortgage
financing to fund investment activity and received $41,340 from the issuance of
stock, net of costs. The decrease in proceeds from the issuance of our stock as
compared to the comparable prior year period is due to the termination of our
initial offering in March 2005.
15
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(Amounts in thousands, except share amounts)
All of our mortgage obligations are limited recourse and bear interest at fixed
rates and provide for monthly or quarterly installments which include scheduled
payments of principal. Accordingly, our cash flow should not be adversely
affected by increases in interest rates, which are near historical lows.
However, financing on future acquisitions will likely bear higher rates of
interest.
Cash Resources
As of June 30, 2005, we had $159,176 in cash and cash equivalents as well as
$13,400 in short-term instruments and $10,900 in auction-rate marketable
securities that we intend to convert to cash, which will primarily be used to
fund future real estate related investments, as well as maintain sufficient
working capital balances and meet other commitments. In addition, debt may be
incurred on unleveraged properties with a carrying value of $16,290 as of June
30, 2005 and any proceeds may be used to finance future real estate purchases.
We also currently anticipate that sales of shares in our second offering will
commence before the end of 2005 (see Current Developments and Trends above).
Cash Requirements
During the next twelve months, cash requirements will include scheduled mortgage
principal payment installments (we have no mortgage balloon payments scheduled
until 2011), paying distributions to shareholders, funding build-to-suit
commitments on projects that we currently project to total $35,388 as well as
other normal recurring operating expenses. We also intend to use our cash to
purchase new properties to further diversify our portfolio and maintain cash
balances sufficient to meet working capital needs. Based on the projected
increase in operating cash flows from recent real estate related acquisitions,
cash flow from operations and distributions from operations of equity
investments in excess of equity income is expected to be sufficient to meet
operating cash flow objectives during the next twelve months.
OFF-BALANCE SHEET AND AGGREGATE CONTRACTUAL AGREEMENTS
The table below summarizes our contractual obligations as of June 30, 2005 and
the effect that such obligations are expected to have on our liquidity and cash
flow in future periods.
LESS THAN
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS MORE THAN 5 YEARS
---------- --------- --------- --------- -----------------
Limited recourse mortgage notes payable (1) $ 477,179 $ 21,244 $ 45,148 $ 46,514 $ 364,273
Deferred acquisition fees due to affiliate (1) 15,567 3,093 10,073 2,401 -
Deposit held for future expansion (2) 72 72 - - -
Build-to-suit commitment (3) 35,388 35,388 - - -
Operating leases (4) 1,228 82 177 222 747
---------- --------- --------- --------- ----------
$ 529,434 $ 59,879 $ 55,398 $ 49,137 $ 365,020
========== ========= ========= ========= ==========
(1) Amounts are inclusive of principal and interest.
(2) In connection with the acquisition of the Polestar Petty property in
2004, we entered into an agreement to fund a future expansion at the
property.
(3) Represents remaining build-to-suit commitments for two projects.
Commitments include a project in Woodlands, Texas where estimated
total construction costs are currently projected to total $38,025,
of which $7,842 was funded as of June 30, 2005 and a project in
Thailand where estimated total construction costs are currently
projected to total $5,205 (subject to fluctuations in foreign
currency exchange rates).
(4) Operating lease obligations consist primarily of our share of
minimum rents payable under an office cost-sharing agreement with
certain affiliates for the purpose of leasing office space used for
the administration of real estate entities. Such amounts are
allocated among the entities based on gross revenues and are
therefore subject to fluctuation.
Amounts related to our foreign operations are based on the exchange rate of the
local currencies as of June 30, 2005.
SUBSEQUENT EVENTS
In July 2005, we and CPA(R):15, each through 50% interests, purchased land and
buildings in Paris, France, for E88,564 ($107,074 based on the exchange rate of
the Euro on the date of acquisition) and assumed an existing lease agreement
with The Paris Police Department. The assumed lease expires in June 2019 and
does not provide for any renewal options. Annual rent as of the date of lease
16
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(in thousands except share and per share amounts)
assumption is E5,011 ($6,058 based on the exchange rate of the Euro on the date
of acquisition). Limited recourse mortgage financing totaling E65,000 ($78,585
based on the exchange rate of the Euro on the date of acquisition) was obtained
in connection with this purchase.
In July 2005, we purchased land and building in Saltillo, Mexico, for $3,782,
and entered into a net lease agreement guaranteed by MetoKote Corporation and
denominated in U. S. dollars. The lease has an initial term of 20 years with two
10-year renewal options and provides for initial annual rent of $335.
17
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(in thousands except share and per share amounts)
Market risk is the exposure to loss resulting from changes in interest rates,
credit spreads, foreign currency exchange rates and equity prices. In pursuing
our business plan, the primary market risks to which we are exposed are interest
rate and foreign currency exchange rate risks.
Interest Rate Risk
The value of our real estate is subject to fluctuations based on changes in
interest rates, local and regional economic conditions and changes in the
creditworthiness of lessees, and which may affect our ability to refinance our
debt when balloon payments are scheduled.
All of our long-term debt bears interest at fixed rates, and therefore the fair
value of these instruments is affected by changes in the market interest rates.
The following table presents principal cash flows based upon expected maturity
dates of our debt obligations and the related weighted-average interest rates by
expected maturity dates for our fixed rate debt. The interest rates on our fixed
rate debt as of June 30, 2005 ranged from 4.81% to 7.15%.
2005 2006 2007 2008 2009 Thereafter Total Fair Value
------- ------- ------- ------- ------- ---------- --------- ----------
Fixed rate debt $ 1,993 $ 4,532 $ 5,906 $ 6,860 $ 7,358 $ 263,653 $ 290,302 $ 291,106
Weighted average interest rate 6.01% 6.04% 5.88% 5.93% 5.93% 5.87%
A change in interest rates of 1% would not have an effect on annual interest
expense as we have no variable rate debt. A change in interest rates of 1% would
increase or decrease the fair value of our fixed rate debt at June 30, 2005 by
approximately $21,289.
At June 30, 2005, we own $10,900 of auction-rate securities which are long-term
securities that provide a resetting of their interest rate at intervals
(typically ranging between weekly and semi-annually) and provide a market
mechanism which allows a holder to sell at the interest reset date. Because of
the interest reset, auction-rate securities are priced and traded as short-term
investments. There is no assurance that an auction-rate security will be sold at
par nor can sellers force issuers to redeem if sell orders exceed buy orders at
an interest rate reset date.
Although we have not experienced any credit losses on investments in loan
participations, in the event of a significant rising interest rate environment
and/or economic downturn, loan defaults could increase and result in us
recognizing credit losses, which could adversely affect our liquidity and
operating results. Further, such defaults could have an adverse effect on the
spreads between interest earning assets and interest bearing liabilities.
Foreign Currency Exchange Rate Risk
We have foreign operations in the United Kingdom, France, Finland, Germany,
Sweden, Canada and Thailand and as such are subject to risk from the effects of
exchange rate movements of foreign currencies, which may affect future costs and
cash flows. The majority of our foreign operations were conducted in the Euro.
We are likely to conduct business in other currencies as we seek to invest funds
from our offering internationally. For all currencies we are a net receiver of
the foreign currency (we receive more cash then we pay out) and therefore our
foreign operations benefit from a weaker U.S. dollar and are adversely affected
by a stronger U.S. dollar relative to the foreign currency. Net realized and
unrealized foreign currency translation losses of $212 are included in the
accompanying condensed consolidated financial statements for the quarter ended
June 30, 2005.
To date, we have not entered into any foreign currency forward exchange
contracts to hedge the effects of adverse fluctuations in foreign currency
exchange rates. We have obtained limited recourse mortgage financing at fixed
rates of interest in the local currency. To the extent that currency
fluctuations increase or decrease rental revenues as translated to dollars, the
change in debt service, as translated to dollars, will partially offset the
effect of fluctuations in revenue, and, to some extent mitigate the risk from
changes in foreign currency rates.
18
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
Item 4. - CONTROLS AND PROCEDURES
Our disclosure controls and procedures include our controls and other procedures
designed to ensure that information required to be disclosed in this and other
reports filed under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), is accumulated and communicated to our management, including
our Chief Executive Officer and acting Chief Financial Officer, to allow timely
decisions regarding required disclosure and to ensure that such information is
recorded, processed, summarized and reported, within the required time periods.
Our Chief Executive Officer and acting Chief Financial Officer have conducted an
evaluation of our disclosure controls and procedures as of June 30, 2005.
Based upon this evaluation, our Chief Executive Officer and acting Chief
Financial Officer have concluded that our disclosure controls (as defined in
Rule 13a-15(e) promulgated under the Exchange Act) are sufficiently effective to
ensure that the information required to be disclosed by us in the reports we
file under the Exchange Act is recorded, processed, summarized and reported with
adequate timeliness.
There have been no changes during the most recent fiscal quarter in our internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
19
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
PART II
Item 2. - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) For the quarter ended June 30, 2005, 79,517 shares were issued to the
Advisor as consideration for asset management fees. Shares were issued at
$10 per share.
(b) Pursuant to Rule 701 of Regulation S-K, the use of proceeds from our
initial offering of common stock which commenced in December 2003 (File
#333-106838) is as follows as of June 30, 2005:
Shares registered: 110,000,000
Aggregate price of offering amount registered: $ 1,100,000,000
Shares sold: 55,453,937
Aggregated offering price of amount sold: $ 554,539,370
Direct or indirect payments to directors, officers, general partners of the issuer or their associates, to
persons owning ten percent or more of any class of equity securities of the issuer and to affiliates of the
issuer: $ -
Direct or indirect payments to others: $ 55,178,016
Net offering proceeds to the issuer after deducting expenses: $ 499,361,354
Purchases of real estate, mortgage notes receivable, and equity investments: $ 467,961,450
Temporary investments in cash and cash equivalents: $ 31,399,904
(c) Issuer Purchases of Equity Securities
TOTAL NUMBER OF SHARES PURCHASED
TOTAL NUMBER OF AVERAGE PRICE AS PART OF PUBLICLY ANNOUNCED
PERIOD SHARES PURCHASED PAID PER SHARE PLANS OR PROGRAMS (1)
- ---------------------------------------------- ---------------- -------------- --------------------------------
January 1, 2005 - January 31, 2005 -- -- N/A
February 1, 2005 - February 28, 2005 -- -- N/A
March 1, 2005 - March 31, 2005 -- -- N/A
April 1, 2005 - April 30, 2005 12,558 $9.30 N/A
May 1, 2005 - May 31, 2005 -- -- N/A
June 1, 2005 - June 30, 2005 56,212 9.30 N/A
------
Total 68,770
======
(1) All shares were purchased pursuant to the Company's redemption plan. The
maximum amount of shares purchasable in any period depends on the
availability of funds generated by the Distribution Reinvestment and Share
Purchase Plan and other factors at the discretion of the Company's Board of
Directors.
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual Shareholders' meeting was held on June 9, 2005, at which time a vote
was taken to elect the Company's directors through the solicitation of proxies.
The following directors were elected for a one-year term:
Name of Director Total Shares Voting Shares Voting For Shares Withheld
- ------------------- ------------------- ----------------- ---------------
Trevor P. Bond 28,055,065 27,160,888 894,177
William P. Carey 28,055,065 27,153,877 901,188
Gordon F. Dugan 28,055,065 27,168,867 886,198
Elizabeth P. Munson 28,055,065 27,156,183 898,882
Warren G. Wintrub 28,055,065 27,137,969 917,096
Item 6. - EXHIBITS:
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
20
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORPORATE PROPERTY ASSOCIATES 16-GLOBAL INCORPORATED
8/15/2005 By: /s/ Claude Fernandez
-------------------------------------
Date Claude Fernandez
Managing Director and
acting Chief Financial Officer
(acting Principal Financial Officer)
8/15/2005 By: /s/ Michael D. Roberts
-------------------------------------
Date Michael D. Roberts
Executive Director and Controller
(acting Principal Accounting Officer)
21