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 September 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, including area code:
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]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Registrant has 56,678,613 shares of common stock, $.001 par value outstanding at
November 8, 2005.
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
INDEX
PAGE NO.
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PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements*
Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004 3
Consolidated Statements of Income for the three and nine months ended
September 30, 2005 and 2004 4
Consolidated Statements of Comprehensive Income
for the three and nine months ended September 30, 2005 and 2004 4
Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004 5
Notes to Consolidated Financial Statements 6-12
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations 13-16
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. - Controls and Procedures 18
PART II - OTHER INFORMATION
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 6. - Exhibits 19
Signatures 20
* 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
SEPTEMBER 30, 2005 (NOTE)
------------------ ------
ASSETS:
Real estate, net of accumulated depreciation of $3,802 and $443 at
September 30, 2005 and December 31, 2004 $ 358,700 $ 58,654
Net investment in direct financing leases 130,491 97,102
Real estate under construction 4,473 9,994
Mortgage notes receivable 29,823 20,291
Cash and cash equivalents 131,081 217,310
Short-term investments 6,728 9,753
Equity investments 98,110 65,964
Marketable securities 9,183 69,900
Funds in escrow 3,854 22,922
Intangible assets, net 66,033 5,614
Deferred offering costs 2,233 3,080
Other assets, net 7,057 4,928
--------- ---------
Total assets $ 847,766 $ 585,512
========= =========
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY:
Liabilities:
Limited recourse mortgage notes payable $ 296,933 $ 97,691
Accrued interest 1,709 298
Prepaid rental income and security deposits 5,843 2,821
Other deposits -- 2,458
Due to affiliates 6,747 4,399
Dividends payable 8,496 5,353
Deferred acquisition fees payable to affiliate 16,112 7,535
Accounts payable and accrued expenses 6,069 833
Other liabilities 8,634 916
--------- ---------
Total liabilities 350,543 122,304
--------- ---------
Minority interest 6,665 --
--------- ---------
Commitments and contingencies (Note 8)
Shareholders' equity:
Common stock, $.001 par value; 110,000,000 shares authorized; 56,642,004
and 51,426,720 shares issued and outstanding at September 30, 2005 and
December 31, 2004 57 51
Additional paid-in capital 510,038 465,292
Dividends in excess of accumulated earnings (17,900) (6,188)
Accumulated other comprehensive (loss) income (410) 4,053
--------- ---------
491,785 463,208
Less, treasury stock at cost, 131,980 shares at September 30, 2005 (1,227) --
--------- ---------
Total shareholders' equity 490,558 463,208
--------- ---------
Total liabilities, minority interest and shareholders' equity $ 847,766 $ 585,512
========= =========
NOTE: The balance sheet at December 31, 2004 has been derived from the audited
consolidated financial statements at that date.
The accompanying notes are an integral part of these
consolidated financial statements.
3
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands except share and per share amounts)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2005 2004 2005 2004
---- ---- ---- ----
REVENUES:
Rental income $ 8,472 $ 1,214 $ 19,359 $ 1,320
Interest income from direct financing leases 2,657 945 6,964 1,286
Interest income on mortgage receivable 709 -- 1,768 --
Other operating income 137 1 344 1
------------ ------------ ------------ ------------
11,975 2,160 28,435 2,607
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Depreciation and amortization (2,187) (214) (4,907) (225)
Property expenses (2,449) (636) (5,743) (858)
General and administrative (1,237) (272) (3,282) (584)
------------ ------------ ------------ ------------
(5,873) (1,122) (13,932) (1,667)
------------ ------------ ------------ ------------
OTHER INCOME AND EXPENSES:
Income from equity investments 1,604 972 4,122 1,394
Other interest income 1,259 629 4,266 1,020
Minority interest in income (210) -- (340) --
Loss on foreign currency transactions and derivative
instrument, net (477) (196) (663) (197)
Interest expense (4,291) (695) (10,013) (927)
------------ ------------ ------------ ------------
(2,115) 710 (2,628) 1,290
------------ ------------ ------------ ------------
NET INCOME $ 3,987 $ 1,748 $ 11,875 $ 2,230
============ ============ ------------ ============
BASIC EARNINGS PER SHARE $ .07 $ 0.05 $ .21 $ 0.13
============ ============ ============ ============
DIVIDENDS DECLARED PER SHARE $ .15000 $ .11546 $ .42001 $ .34083
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 56,660,533 32,974,058 56,106,453 17,287,184
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2005 2004 2005 2004
---- ---- ---- ----
Net income $ 3,987 $ 1,748 $ 11,875 $ 2,230
Other comprehensive income:
Change in foreign currency translation adjustment 2,468 492 (4,463) 529
------------ ------------ ------------ ------------
Comprehensive income $ 6,455 $ 2,240 $ 7,412 $ 2,759
============ ============ ============ ============
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)
NINE MONTHS ENDED SEPTEMBER 30,
2005 2004
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,875 $ 2,230
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of intangible assets and deferred financing costs 4,681 191
Realized loss on foreign currency transactions, net 1,312 --
Unrealized loss (gain) on foreign currency transactions, net 117 (152)
Unrealized gain on derivative instrument (702) --
Equity income in excess of distributions received (413) (243)
Issuance of shares to affiliate in satisfaction of fees due 2,199 --
Minority interest in income 340 --
Straight-line rent adjustments and amortization of rent related intangibles (692) (62)
Increase in accrued interest 1,444 403
Increase in due to affiliates (a) 3,375 793
Increase in accounts payable and accrued expenses (a) 3,943 288
Increase in prepaid rent and security deposits 4,626 1,603
Net change in other operating assets and liabilities (1,112) 174
--------- ---------
Net cash provided by operating activities 30,993 5,225
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Distributions received from equity investments in excess of equity income 3,055 43
Contributions to equity investments (38,499) --
Purchase of short term investments 2,888 --
Purchases of securities (32,625) (65,325)
Proceeds from sale of securities 96,425 10,000
Purchase of mortgage note receivable (12,798) --
Release of funds held in escrow for acquisition of real estate and equity investments 19,631 --
Principal payment of mortgage note receivable 153 --
VAT taxes paid and recoverable from purchase of real estate (2,044) (1,739)
Acquisition of real estate and equity investments (b) (381,753) (193,858)
--------- ---------
Net cash used in investing activities (345,567) (250,879)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock, net of costs of raising capital 42,553 358,857
Proceeds from mortgages (c) 202,853 45,522
Contributions from minority partners 6,724 --
Payment of financing costs and mortgage financing deposits -- (947)
Deferred financing costs and mortgage deposits, net of deposits refunded 854 --
Distributions paid to minority partners (399) --
Scheduled payments of mortgage principal (1,795) (90)
Dividends paid (20,443) (2,112)
Purchase of treasury stock (1,227) --
--------- ---------
Net cash provided by financing activities 229,120 401,230
--------- ---------
Effect of exchange rate changes on cash (775) (15)
--------- ---------
Net (decrease) increase in cash and cash equivalents (86,229) 155,561
Cash and cash equivalents, beginning of period 217,310 170
--------- ---------
Cash and cash equivalents, end of period $ 131,081 $ 155,731
========= =========
(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 September 30, 2005
and 2004, the amount due to the Company's advisor for such costs were
$2,233 and $2,811, respectively.
(b) The cost basis of real estate investments acquired during the nine-month
periods ended September 30, 2005 and 2004 also includes deferred
acquisition fees payable of $8,577 and $6,748, respectively.
(c) Net of $2,325 retained by mortgage lenders during the nine-month period
ended September 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. BUSINESS:
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. The primary
source of the Company's revenue is earned from leasing real estate, primarily on
a net lease basis. The Company was formed in 2003 and is managed by a
wholly-owned subsidiary of W. P. Carey & Co. LLC. As a REIT, the Company is not
subject to federal income taxation as long as it satisfies certain requirements
relating to the nature of the Company's income, the level of the Company's
distributions and other factors.
NOTE 2. BASIS OF PRESENTATION:
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, Europe, Mexico, Thailand
and the United Kingdom. These investments accounted for lease revenues (rental
income and interest income from direct financing leases) of $2,034 and $697 for
the three months ended September 30, 2005 and 2004, respectively, lease revenues
of $5,371 and $1,038 for the nine months ended September 30, 2005 and 2004,
respectively, income from equity investments of $886 and $275 for the three
months ended September 30, 2005 and 2004, respectively, and income from equity
investments of $1,906 and $300 for the nine months ended September 30, 2005 and
2004, respectively. As of September 30, 2005 and December 31, 2004, long-lived
assets related to international investments were $165,397 and $92,798,
respectively.
RECLASSIFICATION
Certain prior period amounts have been reclassified to conform to current period
presentation. For the period ended September 30, 2004, the Company purchased and
sold auction-rate securities. As a result, certain amounts were reclassified in
the accompanying statements of cash flows for the period ended September 30,
2004 to conform to the current period presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2005, the Financial Accounting Standards Board ratified the Emerging
Issues Task Force ("EITF") Consensus on Issue No. 04-5, "Determining Whether a
General Partner, or the General Partners as a Group, Controls a Limited
Partnership or Similar Entity When the Limited Partners Have Certain Rights."
The EITF agreed on a framework for evaluating when a general partner controls,
and should consolidate, a limited partnership or a similar entity. The EITF is
effective after June 29, 2005, for all newly formed limited partnerships and for
any pre-existing limited partnerships that modify their partnership agreements
after that date. General partners of all other limited partnerships must apply
the consensus no later than the first reporting period in fiscal years beginning
after December 15, 2005. The adoption of EITF 04-5 is not expected to have a
material impact on the Company's financial position or results of operations.
NOTE 3. 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 the W. P. Carey & Co. LLC, 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
6
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands except share and per share amounts)
remained unissued as of March 8, 2005, excluding 50,000,000 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 4. TRANSACTIONS WITH RELATED PARTIES:
Pursuant to an advisory agreement between the Company and a wholly-owned
subsidiary of W. P. Carey & Co. LLC (the "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 September 30, 2005, the non-compounded cumulative
distribution return was 5.25%. 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 at net asset value. 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 operations of the Company. For
the three months ended September 30, 2005 and 2004, the Company incurred asset
management fees of $1,063 and $315, respectively and $2,569 and $426 for the
nine months ended September 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 months ended September 30, 2005
and 2004, the Company incurred personnel reimbursements of $183 and $15,
respectively and $361 and $15 for the nine months ended September 30, 2005 and
2004, respectively, which are included in general and administrative expenses in
the accompanying financial statements.
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 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 nine months ended September 30, 2005, current and
deferred acquisition fees were $10,721 and $8,577, respectively, and were paid
or payable to the Advisor. For transactions that were completed during the nine
months ended September 30, 2004, current and deferred acquisition fees were
$8,227 and $6,748, respectively, and were paid or payable to the Advisor subject
to subordination to the preferred return. 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 nine months ended September 30, 2005 and
2004, the allowance was $2,528 and $1,686, respectively.
The Company owns interests in entities which range from 25% to 50%, with the
remaining interests held by affiliates. The Company has significant influence
in these investments, which are, therefore, accounted for under the equity
method of accounting (see Note 5).
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.
Summarized financial information of the limited partnership is as follows:
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------ -----------------
Assets (primarily real estate) $ 322,862 $ 350,882
Liabilities (primarily mortgage notes payable) (198,204) (219,753)
--------- ---------
Partners' and members' equity $ 124,658 $ 131,129
========= =========
Company's share of equity investees' net assets $ 38,587 $ 40,596
========= =========
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2005 2004
---- ----
Revenues (primarily rental income) $ 21,426 $ 12,065
Expenses (primarily interest on mortgages and depreciation) (14,167) (8,478)
--------- ---------
Net income $ 7,259 $ 3,587
========= =========
Company's share of net income from equity investments $ 2,216 $ 1,094
========= =========
7
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands except share and per share amounts)
The Company also owns interests in single-tenant net leased properties leased to
corporations through non-controlling 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,
Hellweg Die Profi-Baumarkte GmbH & Co. KG, Pohjola Non-Life Insurance Company,
Police Prefecture (French Government), Thales S.A. and TietoEnator Plc. The
interests in Pohjola, Hellweg and the Police Prefecture were acquired during the
nine months ended September 30, 2005 (see Note 6).
Summarized financial information of the above mentioned equity investees are as
follows:
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------ -----------------
Assets (primarily real estate) $ 546,206 $ 249,920
Liabilities (primarily mortgage notes payable) (434,188) (185,665)
--------- ---------
Partners' and members' equity $ 112,018 $ 64,255
========= =========
Company's share of equity investees' net assets $ 59,523 $ 25,368
========= =========
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2005 2004
---- ----
Revenues (primarily rental income and interest income from direct financing leases) $ 27,573 $ 4,461
Expenses (primarily interest on mortgages and depreciation) (21,750) (3,182)
--------- ---------
Net income $ 5,823 $ 1,279
========= =========
Company's share of net income from equity investments $ 1,906 $ 300
========= =========
NOTE 6. ACQUISITIONS OF REAL ESTATE-RELATED INVESTMENTS:
REAL ESTATE AND REAL ESTATE INVESTMENTS ACQUIRED
During the nine months ended September 30, 2005, the Company completed 15
investments, at a total cost of $379,514, which is based upon the applicable
exchange rate at the date of acquisition where appropriate. In connection with
these investments, $209,807 in limited recourse mortgage financing was obtained
with a weighted average interest rate and term of approximately 5.9% and 13.9
years, respectively. Included in the total cost of investments is an amount of
$116,459 representing an investment in certain office/retail facilities located
in Piscataway, New Jersey. In connection with this investment, the Company
obtained limited recourse mortgage financing of $79,686 at a fixed interest
rate of 5.49% for a term of 10 years.
During the nine-month period ended September 30, 2005, the Company, together
with an affiliate, also completed three equity investments in entities where
the Company's ownership interests are 50% or less. The Company is accounting
for these investments under the equity method of accounting as the Company does
not have a controlling interest. The Company's proportionate share of cost and
limited recourse mortgage financing in these investments is $137,321 and
$99,749, respectively. The weighted average interest rate and term of the
limited recourse mortgage financing are approximately 4.5% and 10 years,
respectively.
For the comparative nine-month period ended September 30, 2004, the Company
completed seven investments, at a total cost of $197,986, which is based upon
the applicable exchange rate at the date of acquisition where appropriate. In
connection with these investments, a total of $123,160 in limited recourse
mortgage financing was obtained with a weighted average interest rate and term
of approximately 6.0% and 13.4 years, respectively.
Also during the nine months ended September 30, 2004, the Company, together
with affiliates, completed four equity investments in entities where the
Company's ownership interests are 50% or less. The Company is accounting for
these investments under the equity method of accounting as the Company does not
have a controlling interest. The Company's proportionate share of cost and
limited recourse mortgage financing in these investments is $179,744 and
$117,064, respectively. The weighted average interest rate and term of the
limited recourse mortgage financing obtained on the Company's equity
investments are approximately 5.8% and 9.3 years, respectively. Included in
this total is $96,139 representing an investment in 78 self-storage facilities
that operate under the U-Haul brand name. The Company's proportionate share of
limited recourse mortgage financing on this investment is $56,309 at a fixed
interest rate of 6.449% for a term of 10 years. 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 $387 and $979 for the three and nine months ended September
30, 2005, respectively. No such costs were incurred in the three and nine months
ended September 30, 2004. These costs are included in general and administrative
expenses in the accompanying financial statements.
MORTGAGE NOTES RECEIVABLE ACQUIRED
In January 2005, the Company originated a $54,000 mortgage collateralized by the
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.
8
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands except share and per share amounts)
NOTE 7. INTANGIBLES:
In connection with its acquisition of properties, the Company has recorded net
intangibles of $59,055, 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:
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------ -----------------
Lease intangibles
In-place lease $ 42,926 $ 3,822
Tenant relationship 12,290 1,568
Above-market rent 12,768 347
Less: accumulated amortization (1,951) (123)
------------ ---------
$ 66,033 $ 5,614
------------ ---------
Below-market rent $ (8,929) $ (938)
Less: accumulated amortization 295 22
------------ ---------
$ (8,634) $ (916)
============ =========
Net amortization of intangibles, including the effect of foreign currency
translation, was $711 and $1,555 for the three and nine months ended September
30, 2005, respectively. Net amortization for the three and nine months ended
September 30, 2004 was $43 and $45, respectively. Based on the intangibles
recorded through September 30, 2005, annual net amortization of intangibles for
each of the next five years is expected to be $3,072.
NOTE 8. 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 $9,600, 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 $875;
CPA(R):12 paid in excess of $2,455; CPA(R):14 paid in excess of $4,990; and
CPA(R):15 paid in excess of $1,240. 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
9
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands except share and per share amounts)
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
and its subsidiaries in connection with offerings of the Company's securities
were $14,823 through September 30, 2005, of which the Company has reimbursed
$12,831. Unpaid costs are included in due to affiliates in the accompanying
financial statements.
NOTE 9. PRO FORMA FINANCIAL INFORMATION:
The following consolidated pro forma financial information has been presented as
if the Company's acquisitions made during the nine month period ended September
30, 2005 had occurred on January 1, 2005 and 2004 for the three month and nine
month periods ended September 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 SEPTEMBER 30,
--------------------------------
2005 2004
---------------- -------------
Pro forma total revenues $ 12,902 $ 12,385
Pro forma net income 4,993 3,838
Pro forma earnings per share:
Basic and diluted $ .09 $ .07
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2005 2004
---------------- ------------
Pro forma total revenues $ 38,823 $ 37,239
Pro forma net income 16,804 11,635
Pro forma earnings per share:
Basic and diluted $ .30 $ .21
The pro forma net income and earnings per share figures for the three and
nine-month periods ended September 30, 2005 presented above include losses on
foreign currency transactions of $1,154 and $1,366, respectively. Losses on
foreign currency transactions totaled $197 for the three months and nine months
ended September 30, 2004. No such losses on foreign currency transactions were
incurred in the three and nine-month periods ended September 30, 2004. The pro
forma weighted average shares outstanding for the three and nine month periods
ended September 30, 2005 and 2004 were determined as if all shares issued since
the inception of the Company were issued on January 1, 2004.
NOTE 10. SUBSEQUENT EVENTS:
In October 2005, the Company completed an investment in Europe for approximately
$10,000 (based on the exchange rate of the Euro as of the date of acquisition).
In connection with this investment, the Company obtained limited recourse
mortgage financing of $5,500 with a fixed interest rate of 4.36% and a 10-year
term.
Also in October 2005, the Company obtained limited recourse mortgage financing
on a build-to-suit project that was completed in September 2005. The financing
totaled $26,600 and has a fixed interest rate of 6.20% and a 17-year term. A
balloon payment will be payable at maturity.
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 September 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 are a real estate investment trust ("REIT") that invests in commercial and
industrial properties leased to companies domestically and internationally. The
primary source of our revenue is earned from leasing real estate, primarily on a
net lease basis. We were formed in 2003 and are managed by a wholly-owned
subsidiary of W. P. Carey & Co. LLC (the "Advisor").
CURRENT DEVELOPMENTS AND TRENDS
ACQUISITIONS - Our Advisor is continuing to evaluate investments to utilize our
existing cash balances raised from our initial public offering. During the
quarter ended September 30, 2005, we completed five investments at a total cost
of $97,515, which is based upon the applicable exchange rate at the date of
acquisition where appropriate, and reflects the Company's proportionate share of
cost, under the equity method of accounting, for investments made jointly with
related parties where the Company does not have a controlling interest. One of
these investments includes a build-to-suit commitment of up to $12,500. In
connection with these investments, a total of $46,924, based upon the applicable
exchange rate at the date of financing where appropriate, in limited recourse
mortgage financing has been obtained. Of the five properties acquired, two are
in Europe, two are in the U.S. and one is in Mexico.
LEASE ACTIVITY - In September 2005, we substantially completed a build-to-suit
project. The lease provides for initial annual rent of approximately $3,545. In
October 2005, we obtained limited recourse mortgage financing on this property
(see Subsequent Events below).
One of our tenants, Foss Manufacturing Company, Inc., filed for Chapter 11
bankruptcy in September 2005. The initial annual rent under our lease with Foss
approximates $3,195. Since filing for bankruptcy, Foss has been making partial
payments of rent and as of September 30, 2005 owes us $543.
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. While we currently anticipate that our second offering may
commence before the end of 2005, the offering may be delayed or suspended based
upon a number of factors, which may include among others obtaining regulatory
approvals, negotiation of satisfactory agreements with selected dealers, and our
analysis of market conditions and other factors affecting the offering.
DIVIDEND - In September 2005, our board of directors approved and increased the
third quarter dividend to $0.15 per share payable in October 2005 to
shareholders of record as of September 30, 2005.
SARBANES OXLEY - We will not be performing compliance testing in accordance with
the Sarbanes-Oxley Act for 2005 as, pursuant to recently clarified SEC
interpretations, we are not considered an accelerated filer. As a
non-accelerated filer we are not required to perform compliance testing until
2007.
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 TRENDS INCLUDE:
We continue to see increased competition for net leased properties as capital
continues to flow into real estate, in general, and net leased real estate, in
particular. We believe that the low long-term treasury rate has created greater
investor demand for yield-based investments, such as net leased real estate,
thus creating increased capital flows and a more competitive investment
environment.
We believe that several factors may provide us with continued investment
opportunities both domestically and internationally including increased merger
and acquisition activity, which may provide additional sale-leaseback
opportunities as a source of funding, a continued desire of corporations to
divest themselves of real estate holdings and increasing opportunities for
sale-leaseback transactions in the international market, which continues to make
up a large portion of our investment opportunities.
We currently expect international commercial real estate to comprise a
significant portion of the investments we make. Financing terms for
international transactions are generally more favorable as they provide for
lower interest rates and greater flexibility to finance the underlying property.
These benefits are partially offset by shorter financing maturities and
increased exposure to fluctuations in foreign currency exchange rates.
Increases in long term interest rates would likely cause the value of our real
estate assets to decrease. Increases in interest rates may also have an impact
on the credit quality of certain tenants. Rising interest rates would likely
cause an increase in inflation and a corresponding increase in the Consumer
Price Index ("CPI"). To the extent that the CPI increases, additional rental
income streams may be generated for leases with CPI adjustment triggers. In
addition, we constantly evaluate our debt exposure and to the extent that
opportunities exist to refinance and lock in lower interest rates over a longer
term, we may be able to reduce our exposure to short term interest rate
fluctuation.
We have foreign operations and as such are subject to risk from the effects of
exchange rate movements in foreign currencies. We benefit from a weaker U.S.
dollar and are adversely affected by a stronger U.S. dollar relative to foreign
currencies. Since December 31, 2004, the U.S. dollar has strengthened which
has had an adverse impact on our results of operations and will continue to
have such an impact while such strengthening continues.
For the nine months ended September 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 September 30, 2005, we had $131,081 in cash and cash equivalents as well
as $6,728 in short-term instruments and $6,112 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 (see Fund Raising Activity above). 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.
REIT QUALIFICATIONS
We filed our 2004 Federal tax return as a REIT under the Internal Revenue Code
of 1986 (the "Code"). Under the Code, REITs are subject to numerous
organizational and operational requirements including limitations on certain
types of gross income. As a REIT, we generally will not be subject to U.S.
federal income tax on income that we distribute to our shareholders as long as
we meet such requirements and distribute at least 90% of our taxable income
(excluding net capital gains) on an annual basis. In order for distributions to
be counted towards our distribution requirement, they must not be "preferential
dividends." A dividend is not a preferential dividend if it is pro rata among
all outstanding shares of stock within a particular class. Beginning with our
April 2004 distribution, we permitted shareholders who maintained financial
advisory or "wrap" accounts for which the shareholders were charged fees by
their financial advisors to reinvest their distributions under our distribution
reinvestment and share purchase plan at the same price as other shareholders
participating in the plan, less an amount equal to the 5% selling commissions
that would otherwise have been payable by us to selected dealers who do not
receive financial advisory or wrap fees directly from their customers. Although
the amount of additional shares issued at the lower price was de minimis, upon
being advised that such issuances might be construed to be preferential
dividends, we promptly notified the IRS and submitted a request for a closing
agreement. Under the proposed closing agreement, the IRS would agree that such
dividends would not be treated as preferential and we would agree to treat all
shareholders similarly with respect to future distributions of shares under our
distribution reinvestment plan. Although we expect that, given the technical
nature of the issue and the de minimis number of shares involved, the IRS will
view our request favorably, no assurance can be given that the IRS will grant
our request for a closing agreement with respect to this issue. Even if the IRS
grants our request, it is likely that we would be required to pay a monetary
penalty, the amount of which has not been determined. If we fail to qualify for
taxation as a REIT for any taxable year, our income will be taxed at regular
corporate rates, and we may not be able to qualify for treatment as a REIT for
that year and the next four years. Even if we qualify as a REIT for U.S.
federal income tax purposes, we may be subject to federal, state, local and
foreign taxes on our income and property and to income and excise taxes on our
U.S. undistributed income.
12
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)
HOW MANAGEMENT EVALUATES RESULTS OF OPERATIONS
Management evaluates our results of operations 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
non-cash 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 non-cash 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 September 30, 2005 and annual cash flow expected from each
investment.
RESULTS OF OPERATIONS
We commenced real estate operations in 2004, and our results of operations for
the three and nine months ended September 30, 2004 reflect the limited nature of
our operations during those periods. Through September 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 September 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 Canada, Europe, Mexico,
Thailand and the United Kingdom and as such, results of operations are subject
to fluctuations in foreign currency exchange rates.
REAL ESTATE INVESTMENTS
Our real estate portfolio as of September 30, 2005 is expected to generate
annual cash flow (annual contractual rent less annual property level debt
service) of $25,794 from our direct ownership of real estate as follows:
13
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)
ANNUAL ESTIMATED
CONTRACTUAL ANNUAL ANNUAL
LEASE OBLIGOR RENT DEBT SERVICE CASH FLOW
------------- ---- ------------ ---------
2005 ACQUISITIONS
Telcordia Technologies, Inc. (1) $ 8,913 $ 4,436 $ 4,477
Huntsman International LLC (3) (8) 3,545 -- 3,545
Bob's Discount Furniture, LLC (3) 2,173 -- 2,173
The Talaria Company (Hinckley) (6) 5,162 3,072 2,090
MetoKote Corporation, MetoKote Canada Limited and MetoKote de Mexico (2) (3) (5) 3,731 2,200 1,531
Finisar Corporation 2,951 1,457 1,494
Precise Technology Group, Inc. 1,448 -- 1,448
HMS Healthcare, Inc. (4) 1,228 643 585
LFD Manufacturing Limited and IDS Logistics (Thailand) Limited (2) 1,403 845 558
Advanced Circuits, Inc. (3) 483 -- 483
John McGavigan Limited (Pressac Decorative Systems) (2) (3) 997 532 465
PolyPipe, Inc. 787 447 340
Clean Earth Kentucky, LLC 711 393 318
MetalsAmerica, Inc. 651 339 312
Career Education Corp. (7) 475 480 (5)
2004 ACQUISITIONS
Ply Gem Industries, Inc. (2) 3,572 1,819 1,753
Foss Manufacturing Company, Inc. 3,195 1,533 1,662
Polestar Petty Ltd. (2) 2,079 1,331 748
Plantagen Finland Oy and Plantagen Sverige AB (2) 1,903 1,219 684
Xpedite Systems, Inc. 1,395 820 575
Castle Rock Industries, Inc. 1,328 770 558
------- ------- --------
$48,130 $22,336 $ 25,794
======= ======= ========
(1) Annual debt service increases to $5,578 in year three.
(2) Based on the applicable exchange rate as of September 30, 2005. Amounts
are subject to fluctuations in foreign currency exchange rates.
(3) Represents investment or build-to-suit project completed during the
quarter ended September 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.
(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.
(8) Limited recourse mortgage financing was obtained on this property in
October 2005 (see Subsequent Events below).
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 September 30, 2005 is expected to
generate annual cash flow (annual contractual rent less annual property level
debt service) of $11,405 as follows:
ANNUAL ESTIMATED
CONTRACTUAL ANNUAL ANNUAL
LEASE OBLIGOR RENT DEBT SERVICE CASH FLOW
------------- ---- ------------ ---------
2005 ACQUISITIONS
Police Prefecture, French Government (1) (2) $ 3,249 $ 1,598 $ 1,651
Pohjola Non-Life Insurance Company (1) 2,892 1,523 1,369
Hellweg Die Profi-Baumarkte GmbH & Co. KG (1) 3,092 1,701 1,391
2004 ACQUISITIONS
U-Haul Moving Partners, Inc. and Mercury LP 8,782 4,541 4,241
Thales S.A. (1) 3,415 2,017 1,398
TietoEnator Plc. (1) 2,722 1,686 1,036
14
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)
Actuant Corporation (1) 787 468 319
------- ------- -------
$24,939 $13,534 $11,405
======= ======= =======
(1) Based on the applicable exchange rate as of September 30, 2005. Amounts
are subject to fluctuations in foreign currency exchange rates.
(2) Represents investment completed during the quarter ended September 30,
2005.
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 mortgage
financing and other sources (see Investing Activities below) to fund investments
totaling $381,753 for the nine months ended September 30, 2005. As a result, our
cash and cash equivalents decreased $86,229 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 cash flow from our equity distributions that are included in investing
activities. For the nine months ended September 30, 2005, cash flows from
operating activities and equity investments of $34,048 were sufficient to pay
distributions to shareholders of $20,443 and meet scheduled principal payment
installments on mortgage debt of $1,795. Annual operating cash flow is expected
to increase as a result of recent investment activity. Investments completed in
the nine month period ended September 30, 2005 are expected to generate annual
cash flow of approximately $19,814 (subject to fluctuations in foreign currency
exchange rates). In addition, the equity investments entered into during the
nine months ended September 30, 2005, are expected to generate annual cash flow
of approximately $4,411 (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 nine months ended September 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 limited resource mortgage financings, the
release of funds of $19,631 held in escrow and a portion of the proceeds from
the sale of marketable securities and the issuance of our stock. During the nine
months ended September 30, 2005, we had net sales (purchases less proceeds from
sale) of marketable securities of $63,800, which were used to fund investment
activity and for working capital needs.
FINANCING ACTIVITIES - In addition to paying distributions to shareholders and
making scheduled mortgage principal payments, we obtained $202,853 in mortgage
financing to fund investment activity and received $42,553 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.
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.
15
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)
CASH RESOURCES
As of September 30, 2005, we had $131,081 in cash and cash equivalents as well
as $6,728 in short-term instruments and $6,112 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 $64,104 as of
September 30, 2005 and any proceeds may be used to finance future real estate
purchases. In October 2005, we obtained limited recourse mortgage financing on
an existing property with a carrying value of $33,288 (see Subsequent Events
below).
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 $16,185 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.
AGGREGATE CONTRACTUAL AGREEMENTS
The table below summarizes our contractual obligations as of September 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) $477,586 $21,898 $46,582 $ 47,631 $361,475
Deferred acquisition fees due to affiliate (1) 18,203 3,287 11,701 3,215 --
Deposit held for future expansion (2) 71 71 -- -- --
Build-to-suit commitment (3) 16,185 16,185 -- -- --
Operating leases (4) 2,240 162 337 412 1,329
-------- ------- ------- -------- --------
$514,285 $41,603 $58,620 $ 51,258 $362,804
======== ======= ======= ======== ========
(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 three projects.
Commitments include a project in Woodlands, Texas where estimated total
construction costs are currently projected to total $36,925, of which
$35,204 was funded as of September 30, 2005; a project in Thailand where
estimated total construction costs are currently projected to total
approximately $5,245 (subject to fluctuations in foreign currency exchange
rates), of which $275 was funded as of September 30, 2005; and a project
in Norwich, Connecticut where estimated total construction costs are
currently projected to total up to $12,500, of which $3,006 has been
funded as of September 30, 2005.
(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 September 30, 2005.
SUBSEQUENT EVENTS
In October 2005, we completed an investment in Europe for approximately $10,000
(based on the exchange rate of the Euro as of the date of acquisition). In
connection with this investment, we obtained limited recourse mortgage financing
of $5,500 with a fixed interest rate of 4.36% and ten-year term.
Also in October 2005, we obtained limited recourse mortgage financing on a
build-to-suit project that was completed in September 2005. The financing
totaled $26,600 and has a fixed interest rate of 6.20% and a 17-year term. A
balloon payment will be payable at maturity.
16
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, 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 September 30, 2005 ranged from 4.81% to 7.15%.
2005 2006 2007 2008 2009 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed rate debt $ 1,044 $ 4,612 $ 5,990 $ 6,958 $ 7,460 $ 270,869 $ 296,933 $ 291,487
Weighted average interest rate 6.01% 6.04% 5.88% 5.93% 5.93% 5.88%
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 September 30, 2005
by approximately $20,066.
At September 30, 2005, we own $6,112 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 Canada, Europe, Thailand and the United Kingdom
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. A significant
portion 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 $1,365 are included in the
accompanying financial statements for the quarter ended September 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. To manage foreign currency fluctuations, we have obtained
limited recourse mortgage financing at fixed rates of interest in the given
local currencies. 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.
17
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 September 30, 2005.
Based upon this evaluation, our Chief Executive Officer and acting Chief
Financial Officer have concluded that our disclosure controls and procedures (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.
18
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
PART II
ITEM 2. - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) For the quarter ended September 30, 2005, 100,886 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 pursuant
to our Registration Statement on Form S-11 (File #333-106838) is as
follows as of September 30, 2005:
Shares registered: 110,000,000
Aggregate price of offering amount registered: $1,100,000,000
Shares sold: 56,773,984
Aggregated offering price of amount sold: $ 567,739,840
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: $ 512,561,824
Purchases of real estate, mortgage notes receivable, and equity investments: $ 512,561,824
The offering was terminated on March 8, 2005 by the filing of an Amendment to
the Registration Statement to deregister 54,646,636 shares of our common stock
that remained unissued as of March 8, 2005, excluding sales issuable under our
Distribution Reinvestment and Share Purchase Plan.
(c) Issuer Purchases of Equity Securities
TOTAL NUMBER OF SHARES PURCHASED
TOTAL NUMBER OF AVERAGE PRICE AS PART OF PUBLICLY ANMOUNCED
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
July 1, 2005 - July 31, 2005 -- -- N/A
August 1, 2005 - August 31, 2005 -- -- N/A
September 1, 2005 - September 30, 2005 63,210 9.30 N/A
--------
Total 131,980
=======
(1) All shares were purchased pursuant to our redemption plan. In December
2003, we announced a redemption plan under which we may elect to redeem
shares subject to certain conditions and limitations. 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 our Board of Directors. However, at no
time during a 12-month period may the number of shares redeemed by us
exceed 5% of the number of shares of our outstanding common stock at the
beginning of such period. The redemption plan will terminate if and when
our shares are listed on a national securities exchange or included for
quotation on Nasdaq.
ITEM 6. - EXHIBITS:
10.1 Second Amended and Restated Advisory Agreement, dated as of
September 30, 2005, between Corporate Property Associates 16 -
Global Incorporated and Carey Asset Management Corp. (incorporated
by reference to Exhibit 10.5 to the Company's Post-effective
Amendment No. 8 to the Registration Statement on Form S-11
(333-10638) filed with the SEC on November 3, 2005)
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
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
19
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
11/14/2005 By: /s/ Claude Fernandez
---------------------------------------
Claude Fernandez
Date Managing Director and
acting Chief Financial Officer
(acting Principal Financial Officer)
11/14/2005 By: /s/ Michael D. Roberts
---------------------------------------
Michael D. Roberts
Date Executive Director and Controller
(acting Principal Accounting Officer)
20