Toggle SGML Header (+)


Section 1: 10-Q (10-Q)

Document


 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended March 31, 2017
 
 
 
or
 
 
 
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the transition period from                     to                       

Commission File Number: 000-54970
2000543032_cpa18logoa01a01a23.jpg
CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
(Exact name of registrant as specified in its charter)
Maryland
 
90-0885534
(State of incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
50 Rockefeller Plaza
 
 
New York, New York
 
10020
(Address of principal executive offices)
 
(Zip Code)
Investor Relations (212) 492-8920
(212) 492-1100
(Registrant’s telephone numbers, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ
 
 
(Do not check if a smaller reporting company)
 
 
 
Smaller reporting company o
Emerging growth company o
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Registrant has 109,753,546 shares of Class A common stock, $0.001 par value, and 31,100,527 shares of Class C common stock, $0.001 par value, outstanding at May 5, 2017.





INDEX
 
 
Page No.
PART I – FINANCIAL INFORMATION
 
Item 1. Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
PART II – OTHER INFORMATION
 
Item 6. Exhibits

Forward-Looking Statements

This Quarterly Report on Form 10-Q, or this Report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of Part I of this Report, contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. It is important to note that our actual results could be materially different from those projected in such forward-looking statements. You should exercise caution in relying on forward-looking statements as they involve known and unknown risks, uncertainties, and other factors that may materially affect our future results, performance, achievements, or transactions. Information on factors that could impact actual results and cause them to differ from what is anticipated in the forward-looking statements contained herein is included in this Report as well as in our other filings with the Securities and Exchange Commission, or the SEC, including but not limited to those described in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC on March 14, 2017, or the 2016 Annual Report. Except as required by federal securities laws and the rules and regulations of the SEC, we do not undertake to revise or update any forward-looking statements.

All references to “Notes” throughout the document refer to the footnotes to the consolidated financial statements of the registrant in Part I, Item 1. Financial Statements (Unaudited).



CPA®:18 – Global 3/31/2017 10-Q 1


PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
 
March 31, 2017
 
December 31, 2016
Assets
 
 
 
Investments in real estate:
 
 
 
Real estate, at cost
$
1,003,601

 
$
990,810

Operating real estate, at cost
609,884

 
606,558

Accumulated depreciation
(93,996
)
 
(82,917
)
Net investments in properties
1,519,489

 
1,514,451

Real estate under construction
209,795

 
182,612

Notes receivable
66,500

 
66,500

Net investments in direct financing leases
39,147

 
49,596

Net investments in real estate
1,834,931

 
1,813,159

Equity investment in real estate
20,651

 
14,694

Cash and cash equivalents
61,510

 
72,028

In-place lease intangible assets, net
172,026

 
177,438

Other intangible assets, net
29,056

 
29,056

Goodwill
23,713

 
23,526

Other assets, net
77,393

 
79,545

Total assets
$
2,219,280

 
$
2,209,446

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Non-recourse debt, net
$
1,041,583

 
$
1,019,158

Bonds payable, net
139,376

 
138,253

Accounts payable, accrued expenses and other liabilities
65,300

 
69,006

Due to affiliate
50,603

 
53,711

Deferred income taxes
42,813

 
42,419

Distributions payable
21,214

 
20,995

Total liabilities
1,360,889

 
1,343,542

Commitments and contingencies (Note 10)

 

Equity:
 
 
 
CPA®:18 – Global stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value; 50,000,000 shares authorized; none issued

 

Class A common stock, $0.001 par value; 320,000,000 shares authorized; 108,573,552 and 107,460,081 shares, respectively, issued and outstanding
108

 
107

Class C common stock, $0.001 par value; 80,000,000 shares authorized; 30,756,572 and 30,469,144 shares, respectively, issued and outstanding
30

 
30

Additional paid-in capital
1,233,240

 
1,222,139

Distributions and accumulated losses
(381,267
)
 
(360,673
)
Accumulated other comprehensive loss
(58,535
)
 
(61,704
)
Total CPA®:18 – Global stockholders’ equity
793,576

 
799,899

Noncontrolling interests
64,815

 
66,005

Total equity
858,391

 
865,904

Total liabilities and equity
$
2,219,280

 
$
2,209,446


See Notes to Consolidated Financial Statements.


CPA®:18 – Global 3/31/2017 10-Q 2


CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except share and per share amounts)
 
Three Months Ended March 31,
 
2017

2016
Revenues
 
 
 
Lease revenues:
 
 
 
Rental income
$
23,360

 
$
23,293

Interest income from direct financing leases
974

 
1,171

Total lease revenues
24,334

 
24,464

Other real estate income
19,380

 
15,637

Other operating income
3,017

 
2,987

Other interest income
1,749

 
710

 
48,480


43,798

Operating Expenses
 
 
 
Depreciation and amortization
18,952

 
20,503

Other real estate expenses
8,033

 
6,790

Property expenses
8,209

 
6,259

General and administrative
1,729

 
2,036

Acquisition and other expenses
53

 
1,895

 
36,976

 
37,483

Other Income and Expenses
 
 
 
Interest expense
(11,452
)
 
(10,360
)
Other income and (expenses)
2,662

 
3,985

Equity in losses of equity method investment in real estate
(99
)
 

 
(8,889
)
 
(6,375
)
Income (loss) before income taxes and loss on sale of real estate
2,615

 
(60
)
Provision for income taxes
(70
)
 
(333
)
Income (loss) before loss on sale of real estate
2,545

 
(393
)
Loss on sale of real estate, net of tax

 
(63
)
Net Income (Loss)
2,545

 
(456
)
Net income attributable to noncontrolling interests (inclusive of Available Cash Distributions to a related party of $1,675 and $1,277, respectively)
(1,925
)
 
(1,741
)
Net Income (Loss) Attributable to CPA®:18 – Global
$
620


$
(2,197
)
Class A Common Stock
 
 
 
Net income (loss) attributable to CPA®:18 – Global
$
579

 
$
(1,606
)
Basic and diluted weighted-average shares outstanding
108,457,137

 
103,972,011

Basic and diluted income (loss) per share
$
0.01

 
$
(0.02
)
Distributions Declared Per Share
$
0.1563

 
$
0.1563

 
 
 
 
Class C Common Stock
 
 
 
Net income (loss) attributable to CPA®:18 – Global
$
41

 
$
(591
)
Basic and diluted weighted-average shares outstanding
30,764,145

 
29,757,726

Basic and diluted income (loss) per share
$

 
$
(0.02
)
Distributions Declared Per Share
$
0.1380

 
$
0.1337


See Notes to Consolidated Financial Statements.


CPA®:18 – Global 3/31/2017 10-Q 3


CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
 
Three Months Ended March 31,
 
2017
 
2016
Net Income (Loss)
$
2,545

 
$
(456
)
Other Comprehensive Income
 
 
 
Foreign currency translation adjustments
4,155

 
16,564

Change in net unrealized loss on derivative instruments
(457
)
 
(3,845
)
 
3,698

 
12,719

Comprehensive Income
6,243

 
12,263

 
 
 
 
Amounts Attributable to Noncontrolling Interests
 
 
 
Net income
(1,925
)
 
(1,741
)
Foreign currency translation adjustments
(529
)
 
(2,670
)
Comprehensive income attributable to noncontrolling interests
(2,454
)
 
(4,411
)
Comprehensive Income Attributable to CPA®:18 – Global
$
3,789

 
$
7,852

 
See Notes to Consolidated Financial Statements.



CPA®:18 – Global 3/31/2017 10-Q 4


CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
Three Months Ended March 31, 2017 and 2016
(in thousands, except share and per share amounts)
 
CPA®:18 – Global Stockholders
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional Paid-In Capital
 
Distributions
and
Accumulated
Losses
 
Accumulated
Other Comprehensive Loss
 
Total CPA®:18 – Global Stockholders
 
Noncontrolling Interests
 
 
 
Common Stock
 
 
 
 
 
 
 
 
Class A
 
Class C
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
Total
Balance at January 1, 2017
107,460,081

 
$
107

 
30,469,144

 
$
30

 
$
1,222,139

 
$
(360,673
)
 
$
(61,704
)
 
$
799,899

 
$
66,005

 
$
865,904

Shares issued, net of offering costs
1,063,682

 
1

 
343,249

 

 
11,135

 
 
 
 
 
11,136

 

 
11,136

Shares issued to affiliate
338,062

 

 
 
 
 
 
2,670

 
 
 
 
 
2,670

 

 
2,670

Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
840

 
840

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
(4,484
)
 
(4,484
)
Distributions declared ($0.1563 and $0.1380 per share to Class A and Class C, respectively)
 
 
 
 
 
 
 
 
 
 
(21,214
)
 
 
 
(21,214
)
 
 
 
(21,214
)
Net income
 
 
 
 
 
 
 
 
 
 
620

 
 
 
620

 
1,925

 
2,545

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 

Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
 
 
3,626

 
3,626

 
529

 
4,155

Change in net unrealized loss on derivative instruments
 
 
 
 
 
 
 
 
 
 
 
 
(457
)
 
(457
)
 
 
 
(457
)
Repurchase of shares
(288,273
)
 

 
(55,821
)
 

 
(2,704
)
 
 
 
 
 
(2,704
)
 
 
 
(2,704
)
Balance at March 31, 2017
108,573,552

 
$
108

 
30,756,572

 
$
30

 
$
1,233,240

 
$
(381,267
)
 
$
(58,535
)
 
$
793,576

 
$
64,815

 
$
858,391

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2016
103,214,083

 
$
103

 
29,536,899

 
$
30

 
$
1,178,990

 
$
(247,995
)
 
$
(50,316
)
 
$
880,812

 
$
71,896

 
$
952,708

Shares issued, net of offering costs
816,289

 
1

 
272,546

 

 
10,710

 
 
 
 
 
10,711

 
 
 
10,711

Shares issued to affiliate
282,339

 

 

 

 
2,401

 
 
 
 
 
2,401

 
 
 
2,401

Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
18

 
18

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
(2,721
)
 
(2,721
)
Distributions declared ($0.1563 and $0.1337 per share to Class A and Class C, respectively)
 
 
 
 
 
 
 
 
 
 
(20,251
)
 
 
 
(20,251
)
 
 
 
(20,251
)
Net loss
 
 
 
 
 
 
 
 
 
 
(2,197
)
 
 
 
(2,197
)
 
1,741

 
(456
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 

Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
 
 
13,894

 
13,894

 
2,670

 
16,564

Change in net unrealized loss on derivative instruments
 
 
 
 
 
 
 
 
 
 
 
 
(3,845
)
 
(3,845
)
 
 
 
(3,845
)
Repurchase of shares
(115,466
)
 

 
(150,833
)
 

 
(2,205
)
 
 
 
 
 
(2,205
)
 
 
 
(2,205
)
Balance at March 31, 2016
104,197,245

 
$
104

 
29,658,612

 
$
30

 
$
1,189,896

 
$
(270,443
)
 
$
(40,267
)
 
$
879,320

 
$
73,604

 
$
952,924


See Notes to Consolidated Financial Statements.


CPA®:18 – Global 3/31/2017 10-Q 5


CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Three Months Ended March 31,
 
2017
 
2016
Cash Flows — Operating Activities

 
 
Net Cash Provided by Operating Activities
$
19,329

 
$
18,556

Cash Flows — Investing Activities
 
 
 
Funding and advances for build-to-suit projects
(16,765
)
 
(24,764
)
Acquisitions of real estate and direct financing leases, net of cash acquired
(9,995
)
 
(26,072
)
Capital contributions to equity investment
(5,591
)
 
(57
)
Change in investing restricted cash
4,540

 
79

Payment of deferred acquisition fees to an affiliate
(1,565
)
 
(2,016
)
Value added taxes paid in connection with acquisition of real estate
(1,185
)
 
(1,822
)
Capital expenditures on real estate
(1,067
)
 
(1,461
)
Value added taxes refunded in connection with acquisition of real estate
1,033

 
579

Distributions received from equity investments in excess of earnings

 
2,168

Proceeds from sale of real estate

 
40

Net Cash Used in Investing Activities
(30,595
)
 
(53,326
)
Cash Flows — Financing Activities
 
 
 
Distributions paid
(20,995
)
 
(20,078
)
Proceeds from mortgage financing
19,846

 
63,000

Proceeds from issuance of shares, net of issuance costs
10,578

 
10,042

Distributions to noncontrolling interests
(4,484
)
 
(2,721
)
Repurchase of shares
(2,704
)
 
(2,205
)
Scheduled payments and prepayments of mortgage principal
(1,520
)
 
(733
)
Payment of deferred financing costs and mortgage deposits
(264
)
 
(155
)
Change in financing restricted cash
(194
)
 
4,179

Contributions from noncontrolling interests
62

 
18

Net Cash Provided by Financing Activities
325

 
51,347

Change in Cash and Cash Equivalents During the Period
 
 
 
Effect of exchange rate changes on cash and cash equivalents
423

 
1,397

Net (decrease) increase in cash and cash equivalents
(10,518
)
 
17,974

Cash and cash equivalents, beginning of period
72,028

 
117,453

Cash and cash equivalents, end of period
$
61,510

 
$
135,427


See Notes to Consolidated Financial Statements.


CPA®:18 – Global 3/31/2017 10-Q 6


CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Organization

Organization

Corporate Property Associates 18 – Global Incorporated, or CPA®:18 – Global, and, together with its consolidated subsidiaries, we, us, or our, is a publicly owned, non-traded real estate investment trust, or REIT, that invests primarily in a diversified portfolio of income-producing commercial real estate properties leased to companies and other real estate related assets, both domestically and internationally. We were formed in 2012 and are managed by W. P. Carey Inc., or WPC, through one of its subsidiaries, or collectively, our Advisor. As a REIT, we are not subject to U.S. federal income taxation as long as we satisfy certain requirements, principally relating to the nature of our income and the level of our distributions, among other factors. We earn revenue primarily by leasing the properties we own to single corporate tenants, predominantly on a triple-net lease basis, which requires the tenant to pay substantially all of the costs associated with operating and maintaining the property. Revenue is subject to fluctuation due to the timing of new lease transactions, lease terminations, lease expirations, contractual rent adjustments, tenant defaults, sales of properties, and changes in foreign currency exchange rates.

Substantially all of our assets and liabilities are held by CPA®:18 Limited Partnership, or the Operating Partnership, and at March 31, 2017 we owned 99.97% of general and limited partnership interests in the Operating Partnership. The remaining interest in the Operating Partnership is held by a subsidiary of WPC.

At March 31, 2017, our portfolio was comprised of full or partial ownership interests in 59 properties, the majority of which were fully-occupied and triple-net leased to 103 tenants totaling 9.7 million square feet. The remainder of our portfolio was comprised of our full or partial ownership interests in 69 self-storage properties and nine multi-family properties totaling 6.7 million square feet.

We operate in three reportable business segments: Net Lease, Self Storage, and Multi Family. Our Net Lease segment includes our investments in net-leased properties, whether they are accounted for as operating leases or direct financing leases. Our Self Storage segment is comprised of our investments in self-storage properties. Our Multi Family segment is comprised of our investments in multi-family residential properties and student-housing developments. In addition, we have an All Other category that includes our notes receivable investments (Note 12). Our reportable business segments and All Other category are the same as our reporting units.

We raised aggregate gross proceeds in our initial public offering of approximately $1.2 billion through April 2, 2015, which is the date we closed our offering. We have fully invested the proceeds from our initial public offering. In addition, from inception through March 31, 2017, $91.6 million and $23.7 million of distributions to our shareholders were reinvested in our Class A and Class C common stock, respectively, through our Distribution Reinvestment Plan, or DRIP.

Note 2. Basis of Presentation

Basis of Presentation

Our interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of our consolidated financial position, results of operations, and cash flows in accordance with generally accepted accounting principles in the United States, or GAAP.
 
In the opinion of management, the unaudited financial information for the interim periods presented in this Report reflects all normal and recurring adjustments necessary for a fair statement of financial position, results of operations, and cash flows. Our interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 2016, which are included in the 2016 Annual Report, as certain disclosures that would substantially duplicate those contained in the audited consolidated financial statements have not been included in this Report. Operating results for interim periods are not necessarily indicative of operating results for an entire year.
 


CPA®:18 – Global 3/31/2017 10-Q 7


Notes to Consolidated Financial Statements (Unaudited)


The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.

Basis of Consolidation

Our consolidated financial statements reflect all of our accounts, including those of our controlled subsidiaries. The portions of equity in consolidated subsidiaries that are not attributable, directly or indirectly, to us are presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated.

When we obtain an economic interest in an entity, we evaluate the entity to determine if it should be deemed a variable interest entity, or VIE, and, if so, whether we are the primary beneficiary and are therefore required to consolidate the entity. We apply accounting guidance for consolidation of VIEs to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Fixed price purchase and renewal options within a lease, as well as certain decision-making rights within a loan or joint-venture agreement, can cause us to consider an entity a VIE. Limited partnerships and other similar entities that operate as a partnership will be considered a VIE unless the limited partners hold substantive kick-out rights or participation rights. Significant judgment is required to determine whether a VIE should be consolidated. We review the contractual arrangements provided for in the partnership agreement or other related contracts to determine whether the entity is considered a VIE and to establish whether we have any variable interests in the VIE. We then compare our variable interests, if any, to those of the other variable interest holders to determine which party is the primary beneficiary of the VIE based on whether the entity (i) has the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The liabilities of these VIEs are non-recourse to us and can only be satisfied from each VIE’s respective assets.

At March 31, 2017, we considered 14 entities VIEs, 13 of which we consolidated as we are considered the primary beneficiary. The following table presents a summary of selected financial data of the consolidated VIEs included in the consolidated balance sheets (in thousands):
 
March 31, 2017
 
December 31, 2016
Net investments in properties
$
403,936

 
$
394,920

Real estate under construction
186,470

 
162,371

Net investments in direct financing leases

 
10,516

Cash and cash equivalents
10,749

 
15,260

In-place lease intangible assets, net
66,941

 
66,209

Other intangible assets, net
21,106

 
20,966

Other assets, net
39,637

 
41,975

Total assets
$
728,839

 
$
712,217

 
 
 
 
Non-recourse debt, net
$
246,286

 
$
235,425

Bonds payable, net
57,924

 
57,615

Deferred income taxes
20,663

 
20,437

Accounts payable, accrued expenses and other liabilities
22,649

 
30,946

Total liabilities
$
347,522

 
$
344,423


At both March 31, 2017 and December 31, 2016, we had one unconsolidated VIE, which we account for under the equity method of accounting. We do not consolidate this entity because we are not the primary beneficiary and the nature of our involvement in the activities of the entity allows us to exercise significant influence on, but does not give us power over, decisions that significantly affect the economic performance of the entity. As of March 31, 2017 and December 31, 2016, the net carrying amount of our equity investment was $20.7 million and $14.7 million, respectively, and our maximum exposure to loss in this entity is limited to our investment. 



CPA®:18 – Global 3/31/2017 10-Q 8


Notes to Consolidated Financial Statements (Unaudited)


At times, the carrying value of our equity investment may fall below zero for certain investments. We intend to fund our share of the jointly owned investment’s future operating deficits should the need arise. However, we have no legal obligation to pay for any of the liabilities of such investments nor do we have any legal obligation to fund the operating deficits. At March 31, 2017, our sole equity investment did not have a carrying value below zero.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 does not apply to our lease revenues, which constitute a majority of our revenues, but will apply to reimbursed tenant costs and revenues generated from our operating properties. We will adopt this guidance for our annual and interim periods beginning January 1, 2018 using one of two methods: retrospective restatement for each reporting period presented at the time of adoption, or retrospectively with the cumulative effect of initially applying this guidance recognized at the date of initial application. We have not decided which method of adoption we will use. We are evaluating the impact of the new standard and have not yet determined if it will have a material impact on our business or our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 outlines a new model for accounting by lessees, whereby their rights and obligations under substantially all leases, existing and new, would be capitalized and recorded on the balance sheet. For lessors, however, the accounting remains largely unchanged from the current model, with the distinction between operating and financing leases retained, but updated to align with certain changes to the lessee model and the new revenue recognition standard. The new standard also replaces existing sale-leaseback guidance with a new model applicable to both lessees and lessors. Additionally, the new standard requires extensive quantitative and qualitative disclosures. ASU 2016-02 is effective for U.S. GAAP public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years; for all other entities, the final lease standard will be effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early application will be permitted for all entities. The new standard must be adopted using a modified retrospective transition of the new guidance and provides for certain practical expedients. Transition will require application of the new model at the beginning of the earliest comparative period presented. The ASU is expected to impact our consolidated financial statements as we have certain operating office and land lease arrangements for which we are the lessee. We are evaluating the impact of the new standard and have not yet determined if it will have a material impact on our business or our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses. ASU 2016-13 introduces a new model for estimating credit losses based on current expected credit losses for certain types of financial instruments, including loans receivable, held-to-maturity debt securities and net investments in direct financing leases, amongst other financial instruments. ASU 2016-13 also modifies the impairment model for available-for-sale debt securities and expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for losses. ASU 2016-13 will be effective for public business entities in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early application of the guidance permitted. We are in the process of evaluating the impact of adopting ASU 2016-13 on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 intends to reduce diversity in practice for certain cash flow classifications, including, but not limited to (i) debt prepayment or debt extinguishment costs, (ii) contingent consideration payments made after a business combination, (iii) proceeds from the settlement of insurance claims, and (iv) distributions received from equity method investees. ASU 2016-15 will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early application of the guidance permitted. We are in the process of evaluating the impact of adopting ASU 2016-15 on our consolidated financial statements, and will adopt the standard for the fiscal year beginning January 1, 2018.



CPA®:18 – Global 3/31/2017 10-Q 9


Notes to Consolidated Financial Statements (Unaudited)


In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control. ASU 2016-17 changes how a reporting entity that is a decision maker should consider indirect interests in a VIE held through an entity under common control. If a decision maker must evaluate whether it is the primary beneficiary of a VIE, it will only need to consider its proportionate indirect interest in the VIE held through a common control party. ASU 2016-17 amends ASU 2015-02, which we adopted on January 1, 2016, and which currently directs the decision maker to treat the common control party’s interest in the VIE as if the decision maker held the interest itself. ASU 2016-17 is effective for public business entities in fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We adopted ASU 2016-17 as of January 1, 2017 on a prospective basis. The adoption of this standard did not have a material impact on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 intends to reduce diversity in practice for the classification and presentation of changes in restricted cash on the statement of cash flows. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We are in the process of evaluating the impact of adopting ASU 2016-18 on our consolidated financial statements, and will adopt the standard for the fiscal year beginning January 1, 2018.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 intends to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business: inputs, processes, and outputs. While an integrated set of assets and activities, collectively referred to as a “set,” that is a business usually has outputs, outputs are not required to be present. ASU 2017-01 provides a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. ASU 2017-01 will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We elected to early adopt ASU 2017-01 on January 1, 2017 on a prospective basis. While our acquisitions have historically been classified as either business combinations or asset acquisitions, certain acquisitions that were classified as business combinations by us likely would have been considered asset acquisitions under the new standard. As a result, transaction costs are more likely to be capitalized since we expect most of our future acquisitions to be classified as asset acquisitions under this new standard. In addition, goodwill that was previously allocated to businesses that were sold or held for sale will no longer be allocated and written off upon sale if future sales were deemed to be sales of assets and not businesses.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 removes step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. ASU 2017-04 will be effective for public business entities in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years in which a goodwill impairment test is performed, with early adoption permitted. We are in the process of evaluating the impact of adopting ASU 2017-04 on our consolidated financial statements.

In February 2017, the FASB issued ASU 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20). ASU 2017-05 clarifies that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. The amendments define the term “in substance nonfinancial asset,” in part, as a financial asset promised to a counterparty in a contract if substantially all of the fair value of the assets (recognized and unrecognized) that are promised to the counterparty in the contract is concentrated in nonfinancial assets. If substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets, then all of the financial assets promised to the counterparty are in substance nonfinancial assets within the scope of Subtopic 610-20. This amendment also clarifies that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. For example, a parent company may transfer control of nonfinancial assets by transferring ownership interests in a consolidated subsidiary. ASU 2017-05 is effective for periods beginning after December 15, 2017, with early application permitted for fiscal years beginning after December 15, 2016. We are currently evaluating the impact of ASU 2017-05 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard.


CPA®:18 – Global 3/31/2017 10-Q 10


Notes to Consolidated Financial Statements (Unaudited)



Note 3. Agreements and Transactions with Related Parties

Transactions with Our Advisor

We have an advisory agreement with our Advisor whereby our Advisor performs certain services for us under a fee arrangement, including the identification, evaluation, negotiation, purchase, and disposition of real estate and related assets and mortgage loans; day-to-day management; and the performance of certain administrative duties. We also reimburse our Advisor for general and administrative duties performed on our behalf. The advisory agreement has a term of one year and may be renewed for successive one-year periods. We may terminate the advisory agreement upon 60 days’ written notice without cause or penalty.

The following tables present a summary of fees we paid, expenses we reimbursed, and distributions we made to our Advisor and other affiliates in accordance with the terms of the relevant agreements (in thousands):
 
Three Months Ended March 31,
 
2017
 
2016
Amounts Included in the Consolidated Statements of Operations
 
 
 
Asset management fees
$
2,709

 
$
2,409

Available Cash Distributions
1,675

 
1,277

Personnel and overhead reimbursements
782

 
869

Interest expense on deferred acquisition fees and accretion of interest on annual distribution and shareholder servicing fee
301

 
240

Director compensation
53

 
53

Acquisition expenses

 
1,162

 
$
5,520

 
$
6,010

 
 
 
 
Acquisition Fees Capitalized
 
 
 
Current acquisition fees
$
1,393

 
$
1,369

Deferred acquisition fees
1,114

 
1,095

Personnel and overhead reimbursements
182

 
175

 
$
2,689

 
$
2,639


The following table presents a summary of amounts included in Due to affiliate in the consolidated financial statements (in thousands):
 
March 31, 2017
 
December 31, 2016
Due to Affiliate
 
 
 
Loan from WPC, including interest
$
27,707

 
$
27,580

Deferred acquisition fees, including interest
11,425

 
15,305

Shareholder servicing fee liability
6,987

 
7,422

Accounts payable and other
2,614

 
2,454

Current acquisition fees
965

 
84

Asset management fees payable
905

 
866

 
$
50,603

 
$
53,711


Loans from WPC

In July 2016, our board of directors and the board of directors of WPC approved unsecured loans from WPC to us, at the sole discretion of WPC’s management, of up to $50.0 million in the aggregate, at a rate equal to the rate at which WPC can borrow funds under its senior credit facility, for acquisition funding purposes.



CPA®:18 – Global 3/31/2017 10-Q 11


Notes to Consolidated Financial Statements (Unaudited)


On October 31, 2016, we borrowed $27.5 million from WPC to partially finance a new investment, and that amount remained outstanding at both March 31, 2017 and December 31, 2016. The annual interest rate equaled London Interbank Offered Rate, or LIBOR, as of the loan date plus 1.1% through February 22, 2017. After that date, the annual interest rate equals LIBOR plus 1.0%, reflecting the lower rate available under WPC’s amended senior credit facility. The scheduled maturity date of the loan is October 31, 2017.

We did not borrow any funds from WPC during the three months ended March 31, 2017.

Asset Management Fees

Pursuant to the advisory agreement, our Advisor is entitled to an annual asset management fee ranging from 0.5% to 1.5%, depending on the type of investment and based on the average market value or average equity value, as applicable, of our investments. Asset management fees are payable in cash and/or shares of our Class A common stock at our option, after consultation with our Advisor. If our Advisor receives all or a portion of its fees in shares, the number of shares issued is determined by dividing the dollar amount of fees by our most recently published estimated net asset value per share, or NAV, per Class A share which was $7.90 as of December 31, 2016. For the three months ended March 31, 2017, our Advisor received its asset management fees in shares of our Class A common stock. At March 31, 2017, our Advisor owned 2,567,259 shares, or 1.8%, of our Class A common stock outstanding. Asset management fees are included in Property expenses in the consolidated financial statements.

Annual Distribution and Shareholder Servicing Fee

Carey Financial LLC, or Carey Financial, the broker-dealer subsidiary of our Advisor, receives an annual distribution and shareholder servicing fee in connection with our Class C common stock, which it may re-allow to selected dealers. The amount of the annual distribution and shareholder servicing fee is 1.0% of the most recently published NAV of our Class C common stock. The annual distribution and shareholder servicing fee accrues daily and is payable quarterly in arrears. We will no longer incur the annual distribution and shareholder servicing fee beginning on the date at which, in the aggregate, underwriting compensation from all sources, including the annual distribution and shareholder servicing fee, any organizational and offering fee paid for underwriting and underwriting compensation paid by WPC and its affiliates, reaches 10.0% of the gross proceeds from our initial public offering, which it has not yet reached. At March 31, 2017 and December 31, 2016, we recorded a liability of $7.0 million and $7.4 million, respectively, within Due to affiliate in the consolidated financial statements to reflect the present value of the estimated future payments that we expect to pay Carey Financial.

Acquisition and Disposition Fees

Our Advisor receives acquisition fees, a portion of which is payable upon acquisition, while the remaining portion is subordinated to a preferred return of a non-compounded cumulative distribution of 5.0% per annum (based initially on our invested capital). The initial acquisition fee and subordinated acquisition fee are 2.5% and 2.0%, respectively, of the aggregate total cost of our portion of each investment for all investments, other than those in readily marketable real estate securities purchased in the secondary market, for which our Advisor will not receive any acquisition fees. Deferred acquisition fees are scheduled to be paid in three equal annual installments following the quarter in which a property was purchased and are subject to the preferred return described above. The preferred return was achieved as of the periods ended March 31, 2017 and December 31, 2016. Unpaid deferred acquisition fees are included in Due to affiliate in the consolidated financial statements and bear interest at an annual rate of 2.0%. The cumulative total acquisition costs, including acquisition fees paid to the advisor, may not exceed 6.0% of the aggregate contract purchase price of all investments, which is measured at the end of each year.

In addition, pursuant to the advisory agreement, our Advisor may be entitled to receive a disposition fee equal to the lesser of (i) 50.0% of the competitive real estate commission (as defined in the advisory agreement) or (ii) 3.0% of the contract sales price of the investment being sold. These fees are paid at the discretion of our board of directors.

Personnel and Overhead Reimbursements

Under the terms of the advisory agreement, our Advisor allocates a portion of its personnel and overhead expenses to us and the other entities that are managed by WPC and its affiliates, including Corporate Property Associates 17 – Global, or CPA®:17 – Global; Carey Watermark Investors Incorporated, or CWI 1; Carey Watermark Investors 2 Incorporated, or CWI 2; Carey Credit Income Fund, or CCIF; and Carey European Housing Fund I L.P., or CESH I; which are collectively referred to as the Managed Programs. Our Advisor allocates these expenses to us on the basis of our trailing four quarters of reported revenues and those of WPC and other entities managed by WPC and its affiliates.


CPA®:18 – Global 3/31/2017 10-Q 12


Notes to Consolidated Financial Statements (Unaudited)



We reimburse our Advisor for various expenses it incurs in the course of providing services to us. We reimburse certain third-party expenses paid by our Advisor on our behalf, including property-specific costs, professional fees, office expenses, and business development expenses. In addition, we reimburse our Advisor for the allocated costs of personnel and overhead in managing our day-to-day operations, including accounting services, stockholder services, corporate management, and property management and operations. We do not reimburse our Advisor for the cost of personnel if these personnel provide services for transactions for which our Advisor receives a transaction fee, such as for acquisitions and dispositions. Under the advisory agreement currently in place, the amount of applicable personnel costs allocated to us was capped at 2.2% for 2016 of pro rata lease revenues for the year. Beginning in 2017, the cap decreases to 2.0% of pro rata lease revenues for the year. Costs related to our Advisor’s legal transactions group are based on a schedule of expenses relating to services performed for different types of transactions, such as financing, lease amendments, and dispositions, among other categories, and includes 0.25% of the total investment cost of an acquisition. In general, personnel and overhead reimbursements are included in General and administrative expenses in the consolidated financial statements. However, we capitalize certain of the costs related to our Advisor’s legal transactions group if the costs relate to a transaction that is not considered to be a business combination.

Excess Operating Expenses
 
Our Advisor is obligated to reimburse us for the amount by which our operating expenses exceeds the “2%/25% guidelines” (the greater of 2% of average invested assets or 25% of net income) as defined in the advisory agreement for any 12-month period, subject to certain conditions. For the most recent four trailing quarters, our operating expenses were below this threshold.

Available Cash Distributions

WPC’s interest in the Operating Partnership entitles it to receive distributions of 10.0% of the available cash generated by the Operating Partnership, referred to as the Available Cash Distribution, which is defined as cash generated from operations, excluding capital proceeds, as reduced by operating expenses and debt service, excluding prepayments and balloon payments. Available Cash Distributions are included in Net (income) loss attributable to noncontrolling interests in the consolidated financial statements.

Jointly Owned Investments and Other Transactions with our Affiliates

At March 31, 2017, we owned interests ranging from 50% to 97% in jointly owned investments, with the remaining interests held by affiliates or by third parties. We consolidate all of these joint ventures with exception to our sole equity investment (Note 4), which we account for under the equity method of accounting. Additionally, no other parties hold any rights that overcome our control. We account for the minority share of these investments as noncontrolling interests.

Note 4. Net Investments in Properties, Real Estate Under Construction, and Equity Investment in Real Estate

Real Estate

Real estate, which consists of land and buildings leased to others, at cost, and which are subject to operating leases, is summarized as follows (in thousands):
 
March 31, 2017
 
December 31, 2016
Land
$
174,815

 
$
173,184

Buildings and improvements
828,787

 
817,626

Less: Accumulated depreciation
(62,612
)
 
(55,980
)
 
$
940,990

 
$
934,830


The carrying value of our Real estate increased by $6.4 million from December 31, 2016 to March 31, 2017, due to the weakening of the U.S. dollar relative to foreign currencies (primarily the euro) during the period.

Depreciation expense, including the effect of foreign currency translation, on our real estate was $6.3 million and $6.4 million for the three months ended March 31, 2017 and 2016, respectively.



CPA®:18 – Global 3/31/2017 10-Q 13


Notes to Consolidated Financial Statements (Unaudited)


Acquisition of Real Estate During 2017

On March 14, 2017, we acquired a 90% controlling interest in a warehouse facility in Iowa City, Iowa, which was deemed to be an asset acquisition, at a total cost of $8.2 million, including net lease intangibles of $1.6 million (Note 6) and acquisition-related costs of $0.4 million that were capitalized. The seller retained a 10% interest in the property, which is the equivalent of $0.8 million of the purchase price.

Operating Real Estate
 
Operating real estate, which consists of our self-storage and multi-family properties, at cost, is summarized as follows (in thousands):
 
March 31, 2017
 
December 31, 2016
Land
$
105,735

 
$
105,631

Buildings and improvements
504,148

 
500,927

Less: Accumulated depreciation
(31,384
)
 
(26,937
)
 
$
578,499

 
$
579,621


Depreciation expense, including the effect of foreign currency translation, on our operating real estate was $4.4 million and $3.7 million for the three months ended March 31, 2017 and 2016, respectively.

Real Estate Under Construction

The following table provides the activity of our Real estate under construction (in thousands):
 
Three Months Ended March 31, 2017
Beginning balance
$
182,612

Capitalized funds
25,026

Foreign currency translation adjustments
2,215

Placed into service
(1,602
)
Capitalized interest
1,544

Ending balance
$
209,795


Capitalized Funds

During the three months ended March 31, 2017, construction commenced on one of our previously acquired build-to-suit investments (Note 5). The net investment of $10.7 million was reclassified to Real estate under construction from Net investments in direct financing leases during the three months ended March 31, 2017.

Ghana — On February 19, 2016, we invested in a build-to-suit joint venture with a third party for a university complex development site located in Accra, Ghana. As of March 31, 2017, total capitalized funds related to this investment were $29.4 million, inclusive of accrued construction costs of $3.1 million.

On the same date, the joint venture obtained third-party financing in an amount up to $41.0 million from the Overseas Private Investment Corporation (“OPIC”), a financial institution of the U.S. Government, with an estimated interest rate based on the U.S. Treasury rate plus 300 basis points. Funding of this loan is subject to the tenant obtaining a letter of credit, which to date has not occurred. Because the tenant has not yet obtained the required letter of credit, it is in default under its concession agreement with us, and we are currently unable to estimate when this project will be completed, if at all. As a result, as of March 31, 2017, we had no amount outstanding under this financing arrangement. If the project is completed, our total investment is expected to be approximately $65.7 million.



CPA®:18 – Global 3/31/2017 10-Q 14


Notes to Consolidated Financial Statements (Unaudited)


We have evaluated this investment for impairment and probability-weighted different possible scenarios in estimating future undiscounted cash flows, including payment from the tenant or through the insurance policy that we have with regard to the completion of this project. Because we believe there is a high probability that we will recover the full amount we have invested, we have not recorded any impairment charge in connection with this investment as of March 31, 2017. We will continue to monitor the investment for impairment.

During the three months ended March 31, 2017, total capitalized funds primarily related to our build-to-suit projects, which were comprised primarily of initial funding of $1.3 million and construction draws of $13.0 million. Capitalized funds include accrued costs of $4.7 million, which are a non-cash investing activity.

Capitalized Interest

Capitalized interest includes amortization of the mortgage discount and deferred financing costs and interest incurred during construction, which totaled $1.5 million during the three months ended March 31, 2017 and is a non-cash investing activity.

Placed into Service

During the three months ended March 31, 2017, we placed into service a partially completed student housing development totaling $1.6 million, which is a non-cash investing activity.

Ending Balance

At March 31, 2017, we had six open build-to-suit projects and one open build-to-suit expansion project with aggregate unfunded commitments of approximately $150.9 million.

Equity Investment in Real Estate


We have an interest in an unconsolidated investment in our Self Storage segment that relates to a joint venture for the development of 
four self-storage facilities in Canada. This investment is jointly owned with a third party, which is also the general partner. Our ownership interest in the joint venture is 90%; the joint-venture partner is funding its equity interest with the distributions they are eligible to receive upon the properties being placed into service. As of March 31, 2017, the joint-venture partner has not funded their 10% equity interest. We do not consolidate this entity because we are not the primary beneficiary and the nature of our involvement in the activities of the entity allows us to exercise significant influence but does not give us power over decisions that significantly affect the economic performance of the entity.

On January 26, 2017, the joint venture purchased a vacant parcel of land in Toronto, Ontario for $5.1 million, which is based on the exchange rate of the Canadian dollar at the date of acquisition. This parcel of land will be the site of our fourth self-storage development in Canada as a part of this joint venture.

During the three months ended March 31, 2017, we commenced operations in one Canadian self-storage facility upon the completion of a distinct phase of the overall development, and as a result, $9.3 million of the total project was placed into service. Two of the three original phases remain in the development phase. During the three months ended March 31, 2017, we incurred losses of less than $0.1 million relating to this project, which is included in Equity in losses of equity method investment in real estate on our consolidated financial statements.

At March 31, 2017 and December 31, 2016, our total equity investment balance for these properties was $20.7 million and $14.7 million, respectively, and the joint venture had total third-party recourse debt of $15.8 million and $13.8 million, respectively. At March 31, 2017, the unfunded commitments for the build-to-suit projects totaled approximately $28.1 million and was related to our equity investment.



CPA®:18 – Global 3/31/2017 10-Q 15


Notes to Consolidated Financial Statements (Unaudited)


Note 5. Finance Receivables

Assets representing rights to receive money on demand or at fixed or determinable dates are referred to as finance receivables. Our finance receivables portfolio consists of our Notes receivable and our Net investments in direct financing leases. Operating leases are not included in finance receivables as such amounts are not recognized as an asset in the consolidated financial statements.

Notes Receivable

Our Notes receivable consist of a $28.0 million mezzanine tranche of 10-year commercial mortgage-backed securities on the Cipriani banquet halls in New York, New York and a $38.5 million mezzanine loan collateralized by 27 retail stores in Minnesota, Wisconsin and Iowa, leased to Mills Fleet Farm Group LLC. We receive interest-only payments on each of these loans through maturity in July 2024 and October 2018, respectively. As a result, the balance for the receivables at March 31, 2017 was $28.0 million and $38.5 million, respectively.

Net Investments in Direct Financing Leases

Interest income from direct financing leases was $1.0 million and $1.2 million for the three months ended March 31, 2017 and 2016, respectively.

In 2015, we invested in a joint venture with a third party for an office building located in Cardiff, United Kingdom. The investment was expected to be redeveloped upon the existing tenant vacating the building, which occurred on January 31, 2017. Upon lease termination, construction commenced, and the net investment of $10.7 million was reclassified to Real estate under construction during the three months ended March 31, 2017 (Note 4).

Credit Quality of Finance Receivables

We generally seek investments in facilities that we believe are critical to a tenant’s business and that we believe have a low risk of tenant default. At both March 31, 2017 and December 31, 2016, we had no significant finance receivable balances that were past due and we had not established any allowances for credit losses. Additionally, there were no modifications of finance receivables during the three months ended March 31, 2017. We evaluate the credit quality of our finance receivables utilizing an internal five-point credit rating scale, with one representing the highest credit quality and five representing the lowest. The credit quality evaluation of our finance receivables was last updated in the first quarter of 2017.

A summary of our finance receivables by internal credit quality rating is as follows (dollars in thousands):
 
 
Number of Tenants/Obligors at
 
Carrying Value at
Internal Credit Quality Indicator
 
March 31, 2017
 
December 31, 2016
 
March 31, 2017
 
December 31, 2016
1
 
 
1
 
$

 
$
10,516

2
 
1
 
1
 
9,174

 
9,154

3
 
2
 
2
 
29,689

 
29,679

4
 
3
 
3
 
66,784

 
66,747

5
 
 
 

 

 
 
0
 
 
 
$
105,647

 
$
116,096


Note 6. Intangible Assets and Liabilities

In connection with our investment activity (Note 4) during the three months ended March 31, 2017, we recorded In-place lease intangibles of $1.6 million that are being amortized over 14.4 years. In-place lease intangibles are included in In-place lease intangible assets, net in the consolidated financial statements. Below-market ground lease intangibles and above-market rent intangibles are included in Other intangible assets, net in the consolidated financial statements. Below-market rent intangibles and above-market ground lease intangibles are included in Accounts payable, accrued expenses and other liabilities in the consolidated financial statements.



CPA®:18 – Global 3/31/2017 10-Q 16


Notes to Consolidated Financial Statements (Unaudited)


Goodwill is included in the consolidated financial statements. The following table presents a reconciliation of our goodwill, which is included in our Net Lease reporting unit (in thousands):
 
Three Months Ended
March 31, 2017
Balance at January 1, 2017
$
23,526

Foreign currency translation
187

Balance at March 31, 2017
$
23,713


Intangible assets and liabilities are summarized as follows (in thousands):
 
 
 
March 31, 2017
 
December 31, 2016
 
Amortization Period (Years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Finite-Lived Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
In-place lease
1 - 23
 
$
263,487

 
$
(91,461
)
 
$
172,026

 
$
260,469

 
$
(83,031
)
 
$
177,438

Below-market ground lease
15 - 99
 
20,521

 
(813
)
 
19,708

 
20,236

 
(706
)
 
19,530

Above-market rent
2 - 30
 
11,949

 
(2,601
)
 
9,348

 
11,846

 
(2,320
)
 
9,526

 
 
 
295,957

 
(94,875
)
 
201,082

 
292,551

 
(86,057
)
 
206,494

Indefinite-Lived Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill
 
 
23,713

 

 
23,713

 
23,526

 

 
23,526

Total intangible assets
 
 
$
319,670

 
$
(94,875
)
 
$
224,795

 
$
316,077

 
$
(86,057
)
 
$
230,020

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finite-lived Intangible Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Below-market rent
1 - 30
 
$
(15,275
)
 
$
3,545

 
$
(11,730
)
 
(15,192
)
 
3,234

 
$
(11,958
)
Above-market ground lease
81
 
(102
)
 
3

 
(99
)
 
(101
)
 
3

 
(98
)
Total intangible liabilities
 
 
$
(15,377
)
 
$
3,548

 
$
(11,829
)
 
$
(15,293
)
 
$
3,237

 
$
(12,056
)

Net amortization of intangibles, including the effect of foreign currency translation, was $8.1 million and $10.1 million for the three months ended March 31, 2017 and 2016, respectively. Amortization of below-market and above-market rent intangibles is recorded as an adjustment to Rental income; amortization of below-market and above-market ground lease intangibles is included in Property expenses; and amortization of in-place lease intangibles is included in Depreciation and amortization expense in the consolidated financial statements.

Note 7. Fair Value Measurements
 
The fair value of an asset is defined as the exit price, which is the amount that would either be received when an asset is sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a three-tier fair value hierarchy based on the inputs used in measuring fair value. These tiers are: Level 1, for which quoted market prices for identical instruments are available in active markets, such as money market funds, equity securities, and U.S. Treasury securities; Level 2, for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument, such as certain derivative instruments including interest rate caps, interest rate swaps, foreign currency forward contracts and foreign currency collars; and Level 3, for securities that do not fall into Level 1 or Level 2 and for which little or no market data exists, therefore requiring us to develop our own assumptions.

Items Measured at Fair Value on a Recurring Basis

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



CPA®:18 – Global 3/31/2017 10-Q 17


Notes to Consolidated Financial Statements (Unaudited)


Derivative Assets — Our derivative assets, which are included in Other assets, net in the consolidated financial statements, are comprised of foreign currency forward contracts, interest rate swaps, interest rate caps, and foreign currency collars (Note 8). These derivative instruments were measured at fair value using readily observable market inputs, such as quotations on interest rates, and were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market.

Derivative Liabilities — Our derivative liabilities, which are included in Accounts payable, accrued expenses and other liabilities in the consolidated financial statements, are comprised of interest rate swaps and foreign currency collars (Note 8). These derivative instruments were measured at fair value using readily observable market inputs, such as quotations on interest rates, and were classified as Level 2 because they are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market.

Rent Guarantees — Our rent guarantees, which are included in Other assets, net in the consolidated financial statements, are related to three of our international investments. These rent guarantees were measured at fair value using a discounted cash flow model, and were classified as Level 3 because the model uses unobservable inputs. At March 31, 2017 and December 31, 2016, our rent guarantees had a fair value of $0.3 million and $0.5 million, respectively. We determined the fair value of the rent guarantees based on an estimate of discounted cash flows using a discount rate that ranged from 7% to 9% and a growth rate that ranged from 1% to 2%, which are considered significant unobservable inputs. Significant increases or decreases to these inputs in isolation would result in a significant change in the fair value measurement. During the three months ended March 31, 2017, we recognized $0.1 million of mark-to-market gains related to these rent guarantees within Other income and (expenses) on our consolidated financial statements.
 
We did not have any transfers into or out of Level 1, Level 2, and Level 3 measurements during the three months ended March 31, 2017 and 2016. Gains and losses (realized and unrealized) included in earnings are reported within Other income and (expenses) on our consolidated financial statements.
 
Our other financial instruments had the following carrying values and fair values as of the dates shown (dollars in thousands):
 
 
 
March 31, 2017
 
December 31, 2016
 
Level
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Debt (a) (b)
3
 
$
1,180,959

 
$
1,205,796

 
$
1,157,411

 
$
1,177,409

Notes receivable (c)
3
 
66,500

 
68,450

 
66,500

 
68,450

___________
(a)
At March 31, 2017 and December 31, 2016, the carrying value of Non-recourse debt, net includes unamortized deferred financing costs of $7.9 million and $7.6 million, respectively. At both March 31, 2017 and December 31, 2016, the carrying value of Bonds payable, net includes unamortized deferred financing costs of $0.9 million (Note 9).
(b)
We determined the estimated fair value of our non-recourse debt and bonds payable using a discounted cash flow model that estimates the present value of the future loan payments by discounting such payments at current estimated market interest rates. The estimated market interest rates take into account interest rate risk and the value of the underlying collateral, which includes quality of the collateral, the credit quality of the tenant/obligor, and the time until maturity.
(c)
We determined the estimated fair value of our notes receivable using a discounted cash flow model with rates that take into account the credit of the tenant/obligor, order of payment tranches, and interest rate risk. We also considered the value of the underlying collateral, taking into account the quality of the collateral, the credit quality of the tenant/obligor, the time until maturity, and the current market interest rate.

We estimated that our other financial assets and liabilities (excluding net investments in direct financing leases) had fair values that approximated their carrying values at both March 31, 2017 and December 31, 2016.



CPA®:18 – Global 3/31/2017 10-Q 18


Notes to Consolidated Financial Statements (Unaudited)


Note 8. Risk Management and Use of Derivative Financial Instruments
 
Risk Management
 
In the normal course of our ongoing business operations, we encounter economic risk. There are four main components of economic risk that impact us: interest rate risk, credit risk, market risk, and foreign currency risk. We are primarily subject to interest rate risk on our interest-bearing liabilities. Credit risk is the risk of default on our operations and our tenants’ inability or unwillingness to make contractually required payments. Market risk includes changes in the value of our properties and related loans, as well as changes in the value of our other investments due to changes in interest rates or other market factors. We own international investments, primarily in Europe, and are subject to risks associated with fluctuating foreign currency exchange rates.
 
Derivative Financial Instruments
 
When we use derivative instruments, it is generally to reduce our exposure to fluctuations in interest rates and foreign currency exchange rate movements. We have not entered into, and do not plan to enter into financial instruments for trading or speculative purposes. In addition to entering into derivative instruments on our own behalf, we may also be a party to derivative instruments that are embedded in other contracts. The primary risks related to our use of derivative instruments include a counterparty to a hedging arrangement defaulting on its obligation and a downgrade in the credit quality of a counterparty to such an extent that our ability to sell or assign our side of the hedging transaction is impaired. While we seek to mitigate these risks by entering into hedging arrangements with large financial institutions that we deem to be creditworthy, it is possible that our hedging transactions, which are intended to limit losses, could adversely affect our earnings. Furthermore, if we terminate a hedging arrangement, we may be obligated to pay certain costs, such as transaction or breakage fees. We have established policies and procedures for risk assessment and the approval, reporting, and monitoring of derivative financial instrument activities.
 
We measure derivative instruments at fair value and record them as assets or liabilities, depending on our rights or obligations under the applicable derivative contract. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. For a derivative designated, and that qualified, as a cash flow hedge, the effective portion of the change in fair value of the derivative is recognized in Other comprehensive income until the hedged item is recognized in earnings. For a derivative designated, and that qualified, as a net investment hedge, the effective portion of the change in its fair value and/or the net settlement of the derivative is reported in Other comprehensive income as part of the cumulative foreign currency translation adjustment. The ineffective portion of the change in fair value of any derivative is immediately recognized in earnings.

All derivative transactions with an individual counterparty are governed by a master International Swap and Derivatives Association agreement, which can be considered as a master netting arrangement; however, we report all our derivative instruments on a gross basis on our consolidated financial statements. At both March 31, 2017 and December 31, 2016, no cash collateral had been posted or received for any of our derivative positions.

The following table sets forth certain information regarding our derivative instruments (in thousands):
Derivatives Designated as Hedging Instruments
 
Balance Sheet Location
 
Asset Derivatives Fair Value at
 
Liability Derivatives Fair Value at
 
 
March 31, 2017
 
December 31, 2016
 
March 31, 2017
 
December 31, 2016
Foreign currency forward contracts
 
Other assets, net
 
$
5,012

 
$
5,502

 
$

 
$

Foreign currency collars
 
Other assets, net
 
1,130

 
1,284

 
 
 
 
Interest rate swaps
 
Other assets, net
 
470

 
393

 
 
 
 
Interest rate caps
 
Other assets, net
 

 
1

 

 

Interest rate swaps
 
Accounts payable, accrued expenses and other liabilities
 

 

 
(1,029
)
 
(1,151
)
Foreign currency collars
 
Accounts payable, accrued expenses and other liabilities
 

 

 
(122
)
 
(33
)
Total
 
 
 
$
6,612

 
$
7,180

 
$
(1,151
)
 
$
(1,184
)



CPA®:18 – Global 3/31/2017 10-Q 19


Notes to Consolidated Financial Statements (Unaudited)


The following tables present the impact of our derivative instruments in the consolidated financial statements (in thousands):
 
 
Amount of Gain (Loss) Recognized on Derivatives in Other Comprehensive Income (Effective Portion)
 
 
Three Months Ended March 31,
Derivatives in Cash Flow Hedging Relationships 
 
2017
 
2016
Foreign currency forward contracts
 
$
(471
)
 
$
(1,269
)
Interest rate swaps
 
247

 
(1,481
)
Foreign currency collars
 
(235
)
 
(1,083
)
Interest rate caps
 
2

 
(12
)
Derivatives in Net Investment Hedging Relationship (a)
 
 
 
 
Foreign currency forward contracts
 
(19
)
 
(201
)
Foreign currency collars
 
(10
)
 
(15
)
Total
 
$
(486
)
 
$
(4,061
)
___________
(a)
The effective portion of the changes in fair value of these contracts are reported in the foreign currency translation adjustment section of Other comprehensive income.
 
 
 
 
Amount of Gain (Loss) on Derivatives Reclassified from
Other Comprehensive Income into Income (Effective Portion)
Derivatives in Cash Flow Hedging Relationships 
 
Location of Gain (Loss) Recognized in Income
 
Three Months Ended March 31,
 
 
2017
 
2016
Foreign currency forward contracts
 
Other income and (expenses)
 
$
356

 
$
332

Interest rate swaps
 
Interest expense
 
(211
)
 
(212
)
Foreign currency collars
 
Other income and (expenses)
 
92

 
40

Interest rate caps
 
Interest expense
 
(5
)
 

Total
 
 
 
$
232

 
$
160


Amounts reported in Other comprehensive income related to our interest rate swaps will be reclassified to Interest expense as interest payments are made on our variable-rate debt. Amounts reported in Other comprehensive income related to foreign currency derivative contracts will be reclassified to Other income and (expenses) when the hedged foreign currency contracts are settled. At March 31, 2017, we estimated that an additional $0.6 million and $1.8 million will be reclassified as Interest expense and other income and (expenses), respectively, during the next 12 months.

The following table presents the impact of our derivative instruments in the consolidated financial statements (in thousands):
 
 
 
 
Amount of Gain (Loss) on Derivatives Recognized in Income
Derivatives Not in Cash Flow Hedging Relationships 
 
Location of Gain (Loss)
Recognized in Income
 
Three Months Ended March 31,
 
 
2017
 
2016
Interest rate swaps
 
Interest expense
 
$
(48
)
 
$

Foreign currency collars
 
Other income and (expenses)
 
(20
)
 
(13
)
Derivatives in Cash Flow Hedging Relationships
 
 
 
 
 
 
Interest rate swaps (a)
 
Interest expense
 
3

 

Foreign currency collars
 
Other income and (expenses)
 
1

 

Total
 
 
 
$
(64
)
 
$
(13
)
__________
(a)
Relates to the ineffective portion of the hedging relationship.



CPA®:18 – Global 3/31/2017 10-Q 20


Notes to Consolidated Financial Statements (Unaudited)


Interest Rate Swaps and Caps

We are exposed to the impact of interest rate changes primarily through our borrowing activities. To limit this exposure, we attempt to obtain mortgage financing on a long-term, fixed-rate basis. However, from time to time, we or our investment partners may obtain non-recourse variable-rate mortgage loans and, as a result, may continue to enter into interest rate swap agreements or interest rate cap agreements with counterparties. Interest rate swaps, which effectively convert the variable-rate debt service obligations of a loan to a fixed rate, are agreements in which one party exchanges a stream of interest payments for a counterparty’s stream of cash flow over a specific period. The notional, or face, amount on which the swaps are based is not exchanged. Interest rate caps limit the effective borrowing rate of variable-rate debt obligations while allowing participants to share in downward shifts in interest rates. Our objective in using these derivatives is to limit our exposure to interest rate movements.
 
The interest rate swaps and caps that our consolidated subsidiaries had outstanding at March 31, 2017 are summarized as follows (currency in thousands):
Interest Rate Derivatives
 
Number of Instruments
 
Notional
Amount
 
Fair Value at
March 31, 2017 (a)
Interest rate swaps
 
8
 
61,631

USD
 
$
(513
)
Interest rate swap
 
1
 
10,627

EUR
 
(46
)
Interest rate caps
 
2
 
22,000

USD
 

 
 
 
 
 
 
 
$
(559
)
___________
(a)
Fair value amount is based on the exchange rate of the euro at March 31, 2017, as applicable.

Foreign Currency Contracts and Collars
 
We are exposed to foreign currency exchange rate movements, primarily in the euro and, to a lesser extent, the Norwegian krone. We manage foreign currency exchange rate movements by generally placing our debt service obligation on an investment in the same currency as the tenant’s rental obligation to us. This reduces our overall exposure to the net cash flow from that investment. However, we are subject to foreign currency exchange rate movements to the extent that there is a difference in the timing and amount of the rental obligation and the debt service. Realized and unrealized gains and losses recognized in earnings related to foreign currency transactions are included in Other income and (expenses) in the consolidated financial statements.

In order to hedge certain of our foreign currency cash flow exposures, we enter into foreign currency forward contracts and collars. A foreign currency forward contract is a commitment to deliver a certain amount of currency at a certain price on a specific date in the future. By entering into forward contracts and holding them to maturity, we are locked into a future currency exchange rate for the term of the contract. A foreign currency collar consists of a written call option and a purchased put option to sell the foreign currency and guarantees that the exchange rate of the currency will not fluctuate beyond the range of the options’ strike prices. These instruments lock the range in which a foreign currency exchange rate may fluctuate. Our foreign currency forward contracts and foreign currency collars have maturities of 74 months or less.



CPA®:18 – Global 3/31/2017 10-Q 21


Notes to Consolidated Financial Statements (Unaudited)


The following table presents the foreign currency derivative contracts we had outstanding and their designations at March 31, 2017 (currency in thousands):
Foreign Currency Derivatives
 
Number of Instruments
 
Notional
Amount
 
Fair Value at
March 31, 2017
Designated as Cash Flow Hedging Instruments
 
 
 
 
 
 
 
Foreign currency forward contracts
 
29
 
11,175

EUR
 
$
3,398

Foreign currency forward contracts
 
23
 
36,473

NOK
 
1,259

Foreign currency collars
 
53
 
33,629

EUR
 
712

Foreign currency collars
 
22
 
52,270

NOK
 
325

Designated as Net Investment Hedging Instruments
 
 
 
 
 
 
 
Foreign currency collars
 
5
 
35,240

NOK
 
218

Foreign currency forward contracts
 
3
 
5,773

NOK
 
108

 
 
 
 
 
 
 
$
6,020


Credit Risk-Related Contingent Features

We measure our credit exposure on a counterparty basis as the net positive aggregate estimated fair value of our derivatives, net of any collateral received. No collateral was received as of March 31, 2017. At March 31, 2017, our total credit exposure was $6.4 million and the maximum exposure to any single counterparty was $3.8 million.

Some of the agreements we have with our derivative counterparties contain cross-default provisions that could trigger a declaration of default on our derivative obligations if we default, or are capable of being declared in default, on certain of our indebtedness. At March 31, 2017, we had not been declared in default on any of our derivative obligations. The estimated fair value of our derivatives in a net liability position was $1.2 million at both March 31, 2017 and December 31, 2016, which included accrued interest and any nonperformance risk adjustments. If we had breached any of these provisions at both March 31, 2017 or December 31, 2016, we could have been required to settle our obligations under these agreements at their aggregate termination value of $1.3 million.

Note 9. Non-Recourse Debt and Bonds Payable

At March 31, 2017, our debt bore interest at fixed annual rates ranging from 1.6% to 5.8% and variable contractual annual rates ranging from 1.6% to 5.1%, with maturity dates from 2017 to 2039.

Financing Activity During 2017

During the three months ended March 31, 2017, we obtained three non-recourse mortgage financings totaling $17.0 million, with a weighted-average annual interest rate of 5.1% and term to maturity of 5.9 years, respectively. In addition, we refinanced one non-recourse mortgage loan for $11.3 million, with an annual interest rate of 1.6%, term to maturity of 5.0 years, and for the same principal amount. We had an additional draw down of $3.0 million (based on the exchange rate of the euro at the date of the draw down) on our senior construction-to-term mortgage loan related to the development of an office building located in Eindhoven, the Netherlands. The loan bears an interest rate of Euro Interbank Offered Rate, or EURIBOR, plus 2.5% for each draw down unless EURIBOR is below zero, in which case the margin of 2.5% plus the liquidity spread of 0.7% for a total interest rate of 3.2% will be applied. Upon the completion of the development project, this loan will be converted to a seven-year term loan, at which time it will bear a fixed interest rate of 1.8%.





CPA®:18 – Global 3/31/2017 10-Q 22


Notes to Consolidated Financial Statements (Unaudited)


Scheduled Debt Principal Payments
 
Scheduled debt principal payments during the remainder of 2017, each of the next four calendar years following December 31, 2017, and thereafter are as follows (in thousands):
Years Ending December 31,
 
Total
2017 (remainder)
 
$
7,925

2018
 
28,276

2019
 
6,634

2020
 
112,085

2021
 
162,927

Thereafter through 2039
 
870,998

 
 
1,188,845

Deferred financing costs
 
(8,844
)
Unamortized premium, net
 
958

Total
 
$
1,180,959


Certain amounts in the table above are based on the applicable foreign currency exchange rate at March 31, 2017.

The carrying value of our Non-recourse debt, net and Bonds payable, net increased by $4.5 million from December 31, 2016 to March 31, 2017, reflecting the impact of the weakening of the U.S. dollar relative to certain foreign currencies (primarily the euro) during the same period.

Note 10. Commitments and Contingencies

At March 31, 2017, we were not involved in any material litigation. Various claims and lawsuits arising in the normal course of business are pending against us. The results of these proceedings are not expected to have a material adverse effect on our consolidated financial position or results of operations. See Note 4 for unfunded construction commitments.

Note 11. Net Income (Loss) Per Share and Equity

Basic and Diluted Income (Loss) Per Share

The following table presents net income (loss) per share (in thousands, except share and per share amounts):
 
Three Months Ended March 31, 2017
 
Three Months Ended March 31, 2016
 
Basic and Diluted Weighted-Average
Shares Outstanding 
 
Allocation of Net Income
 
Basic and Diluted Net Income
Per Share 
 
Basic and Diluted Weighted-Average
Shares Outstanding 
 
Allocation of Net Loss
 
Basic and Diluted Net Loss
Per Share 
Class A common stock
108,457,137

 
$
579

 
$
0.01

 
103,972,011

 
$
(1,606
)
 
$
(0.02
)
Class C common stock
30,764,145

 
41

 

 
29,757,726

 
(591
)
 
(0.02
)
Net income (loss) attributable to CPA®:18 – Global
 
 
$
620

 
 
 
 
 
$
(2,197
)
 
 

The allocation of Net income (loss) attributable to CPA®:18 – Global is calculated based on the basic and diluted weighted-average shares outstanding for Class A and Class C common stock for each respective period. For both the three months ended March 31, 2017 and 2016, the allocation for Class A common stock excludes $0.1 million of interest expense related to the accretion of interest on our annual distribution and shareholder servicing fee liability, which is only applicable to Class C common stock (Note 3).



CPA®:18 – Global 3/31/2017 10-Q 23


Notes to Consolidated Financial Statements (Unaudited)


Distributions

Distributions are declared at the discretion of our board of directors and are not guaranteed. During the three months ended March 31, 2017, our board of directors declared quarterly distributions of $0.1563 per share for our Class A common stock and $0.1380 per share for our Class C common stock. Distributions in the aggregate amount of $21.2 million were paid on April 17, 2017 to stockholders of record on March 31, 2017.

Reclassifications Out of Accumulated Other Comprehensive Loss

The following tables present a reconciliation of changes in Accumulated other comprehensive loss by component for the periods presented (in thousands):
 
Three Months Ended March 31, 2017
 
Gains and Losses
on Derivative Instruments
 
Foreign Currency Translation Adjustments
 
Total
Beginning balance
$
5,587

 
$
(67,291
)
 
$
(61,704
)
Other comprehensive income before reclassifications
(225
)
 
4,155

 
3,930

Amounts reclassified from accumulated other comprehensive loss to:
 
 
 
 
 
Interest expense
216

 

 
216

Other income and (expenses)
(448
)
 

 
(448
)
Net current-period Other comprehensive income
(457
)
 
4,155

 
3,698

Net current-period Other comprehensive income attributable to noncontrolling interests

 
(529
)
 
(529
)
Ending balance
$
5,130

 
$
(63,665
)
 
$
(58,535
)

 
Three Months Ended March 31, 2016
 
Gains and Losses
on Derivative Instruments
 
Foreign Currency Translation Adjustments
 
Total
Beginning balance
$
5,360

 
$
(55,676
)
 
$
(50,316
)
Other comprehensive income before reclassifications
(3,685
)
 
16,564

 
12,879

Amounts reclassified from accumulated other comprehensive loss to:
 
 
 
 
 
Interest expense
212

 

 
212

Other income and (expenses)
(372
)
 

 
(372
)
Net current-period Other comprehensive income
(3,845
)
 
16,564

 
12,719

Net current-period Other comprehensive income attributable to noncontrolling interests

 
(2,670
)
 
(2,670
)
Ending balance
$
1,515

 
$
(41,782
)
 
$
(40,267
)



CPA®:18 – Global 3/31/2017 10-Q 24


Notes to Consolidated Financial Statements (Unaudited)


Note 12. Segment Reporting

We operate in three reportable business segments: Net Lease, Self Storage, and Multi Family. Our Net Lease segment includes our investments in net-leased properties, whether they are accounted for as operating leases or direct financing leases. Our Self Storage segment is comprised of our investments in self-storage properties. Our Multi Family segment is comprised of our investments in multi-family residential properties and student-housing developments. In addition, we have an All Other category that includes our notes receivable investments (Note 1). The following tables present a summary of comparative results and assets for these business segments (in thousands):
 
Three Months Ended March 31,
 
2017
 
2016 (a)
Net Lease
 
 
 
Revenues (b)
$
27,370

 
$
27,462

Operating expenses
(16,035
)
 
(15,284
)
Interest expense
(6,993
)
 
(7,317
)
Other income and expenses, excluding interest expense
205

 
71

Benefit from (provision for) income taxes
66

 
(179
)
Loss on sale of real estate, net of tax

 
(63
)
Net income attributable to noncontrolling interests
(239
)
 
(459
)
Net income attributable to CPA®:18 – Global
$
4,374

 
$
4,231

Self Storage
 
 
 
Revenues
$
13,194

 
$
10,309

Operating expenses
(12,090
)
 
(13,748
)
Interest expense
(3,006
)
 
(2,261
)
Other income and expenses, excluding interest expense (c)
(99
)
 
(8
)
Provision for income taxes
(77
)
 
(35
)
Net loss attributable to CPA®:18 – Global
$
(2,078
)
 
$
(5,743
)
Multi Family
 
 
 
Revenues
$
6,167

 
$
5,316

Operating expenses
(4,326
)
 
(3,917
)
Interest expense
(1,152
)
 
(1,208
)
Other income and expenses, excluding interest expense
1

 

Provision for income taxes
(27
)
 
(28
)
Net loss attributable to noncontrolling interests
(11
)
 
(5
)
Net income attributable to CPA®:18 – Global
$
652

 
$
158

All Other
 
 
 
Revenues
$
1,749

 
$
711

Operating expenses
(9
)
 

Net income attributable to CPA®:18 – Global
$
1,740

 
$
711

Corporate
 
 
 
Unallocated Corporate Overhead (d)
$
(2,393
)
 
$
(277
)
Net income attributable to noncontrolling interests – Available Cash Distributions
$
(1,675
)
 
$
(1,277
)
Total Company
 
 
 
Revenues
$
48,480

 
$
43,798

Operating expenses
(36,976
)
 
(37,483
)
Interest expense
(11,452
)
 
(10,360
)
Other income and expenses, excluding interest expense
2,563

 
3,985

Provision for income taxes
(70
)
 
(333
)
Loss on sale of real estate, net of tax

 
(63
)
Net income attributable to noncontrolling interests
(1,925
)
 
(1,741
)
Net income (loss) attributable to CPA®:18 – Global
$
620

 
$
(2,197
)



CPA®:18 – Global 3/31/2017 10-Q 25


Notes to Consolidated Financial Statements (Unaudited)


 
Total Long-Lived Assets (e)
 
Total Assets
 
March 31, 2017
 
December 31, 2016
 
March 31, 2017
 
December 31, 2016
Net Lease
$
1,173,105

 
$
1,152,653

 
$
1,474,880

 
$
1,453,148

Self Storage
389,541

 
386,099

 
411,063

 
410,781

Multi Family
226,436

 
222,600

 
235,357

 
230,509

All Other
66,500

 
66,501

 
66,941

 
66,936

Corporate

 

 
31,039

 
48,072

Total Company
$
1,855,582

 
$
1,827,853

 
$
2,219,280

 
$
2,209,446

__________
(a)
Amounts for the three months ended March 31, 2016 are presented to conform to the three reportable business segment presentation for the current period.
(b)
During the three months ended March 31, 2017 and 2016, we recognized straight-line rent adjustments of $1.0 million and $1.1 million, respectively, which increased Lease revenues within our consolidated financial statements for each period.
(c)
Includes Equity in losses of equity method investment in real estate.
(d)
Included in unallocated corporate overhead are asset management fees and general and administrative expenses. These expenses are calculated and reported at the portfolio level and not evaluated as part of any segment’s operating performance.
(e)
Includes Net investments in real estate and Equity investment in real estate.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide the reader with information that will assist in understanding our financial statements and the reasons for changes in certain key components of our financial statements from period to period. Management’s Discussion and Analysis of Financial Condition and Results of Operations also provides the reader with our perspective on our financial position and liquidity, as well as certain other factors that may affect our future results. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the 2016 Annual Report and subsequent reports filed under the Securities Exchange Act of 1934.

Business Overview

As described in more detail in Item 1 of the 2016 Annual Report, we are a publicly owned, non-traded REIT that invests primarily in commercial properties leased to companies domestically and internationally. As opportunities arise, we also make other types of real estate-related investments, which includes our self-storage and multi-family investments. As a REIT, we are not subject to U.S. federal income taxation as long as we satisfy certain requirements, principally relating to the nature of our income, the level of our distributions, and other factors. We earn revenue principally by leasing the properties we own to single corporate tenants, primarily on a triple-net lease basis, which requires the tenant to pay substantially all of the costs associated with operating and maintaining the property. Revenue is subject to fluctuation because of the timing of new lease transactions, lease terminations, lease expirations, contractual rent adjustments, tenant defaults, sales of properties, and foreign currency exchange rates. We commenced operations and fundraising in May 2013 and are managed by our Advisor. We hold substantially all of our assets and conduct substantially all of our business through our Operating Partnership. We are the general partner of, and own 99.97% of the interests in, the Operating Partnership. The remaining interest in the Operating Partnership is held by a subsidiary of WPC.

Significant Developments

Management Changes

On March 28, 2017, we announced that Ms. Mallika Sinha was appointed as our chief financial officer, succeeding Ms. ToniAnn Sanzone, who resigned from that position, effective as of that same date. Ms. Sanzone remains the chief financial officer of WPC. Ms. Sinha served as the Company’s Executive Director – Corporate Finance from January 2016 to March 2017, having served as Senior Vice President – Corporate Finance from April 2013 to December 2015.



CPA®:18 – Global 3/31/2017 10-Q 26




Net Asset Value

Our Advisor calculated our quarterly NAVs as of December 31, 2016 in accordance with our valuation policies and on March 20, 2017, we announced that our Advisor had determined that the quarterly NAV for both our Class A and Class C common stock was $7.90, unchanged from September 30, 2016. Our Advisor calculated our NAVs by relying in part on a prior appraisal of the fair market value of our real estate portfolio as of December 31, 2015, an updated appraisal of the fair market value of approximately an additional 25% of our real estate portfolio as of September 30, 2016, an updated appraisal of the fair market value of approximately 25% of our real estate portfolio as of December 31, 2016 and updated estimates of the fair market value of debt as of December 31, 2016, all provided by an independent third party, as described below. Our Advisor then updated the prior appraisal and the updated appraisals of our real estate portfolio and adjusted the resulting net equity of our real estate portfolio for certain items. Our NAVs are based on a number of variables, including individual tenant credits, lease terms, lending credit spreads, foreign currency exchange rates, share counts, tenant defaults, and development projects that are not yet generating income, among others. We do not control all of these variables and, as such, cannot predict how they will change in the future. The majority of our costs associated with development projects, which are not yet generating income, is included in Real estate under construction in our consolidated financial statements and was approximately $209.8 million as of March 31, 2017. For additional information on our calculation of our quarterly NAVs at December 31, 2016, please see our Current Report on Form 8-K dated March 20, 2017. Our Advisor currently intends to determine our NAVs as of March 31, 2017 during the second quarter of 2017.

Beginning with our quarterly NAVs as of September 30, 2016, we obtain a rolling appraisal of the fair market value of our real estate portfolio, whereby approximately 25% of our real estate assets (based on asset value) is appraised each quarter and continue to obtain estimates of the fair market value of our debt as of the respective balance sheet date, both to be provided by an independent third party. Since the quarterly NAV estimates are not based on a full appraisal of the entire portfolio, to the extent any estimated NAV per share adjustments are within +/- 1% of the previously disclosed NAV per share, the quarterly NAV per share will remain unchanged. We monitor properties not appraised during the quarter to identify ones that may have experienced a significant event and obtain updated third-party appraisals for such properties.

The accrued distribution and shareholder servicing fee payable has been valued using a hypothetical liquidation value and, as a result, the NAVs do not reflect any obligation to pay future distribution and shareholder servicing fees. At March 31, 2017, the accrual for the distribution and shareholder servicing fee was $7.0 million.

Acquisition and Financing Activity

During the three months ended March 31, 2017, we acquired one new investment for an aggregate amount of $8.2 million and purchased a vacant parcel of land for a self-storage development project as part of our joint venture with a third party for $5.1 million, which is based on the exchange rate of the Canadian dollar at the date of acquisition. During the three months ended March 31, 2017, we obtained mortgage financing totaling $17.0 million and refinanced a non-recourse mortgage loan totaling $11.3 million. In addition, we had an additional draw down of $3.0 million (based on the exchange rate of the euro at the date of the draw down) on our senior construction-to-term mortgage loan.



CPA®:18 – Global 3/31/2017 10-Q 27




Portfolio Overview

We intend to continue to acquire a diversified portfolio of income-producing commercial real estate properties and other real estate-related assets. We expect to make these investments both domestically and internationally. Portfolio information is provided on a consolidated basis to facilitate the review of our accompanying consolidated financial statements. In addition, we provide selected information on a pro rata basis to better illustrate the economic impact of our various net-leased, jointly owned investments. See Terms and Definitions below for a description of pro rata amounts.

Portfolio Summary
 
March 31, 2017
 
December 31, 2016
Number of net-leased properties (a)
59

 
59

Number of operating properties (b)
78

 
76