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Section 1: 10-Q (10-Q)

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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 September 30, 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
391081770_cpa18logoa01a01a25.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 111,470,894 shares of Class A common stock, $0.001 par value, and 31,562,434 shares of Class C common stock, $0.001 par value, outstanding at November 10, 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 9/30/2017 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)
 
September 30, 2017
 
December 31, 2016
Assets
 
 
 
Investments in real estate:
 
 
 
Real estate — Land, buildings and improvements
$
1,246,813

 
$
990,810

Operating real estate — Land, buildings and improvements
617,490

 
606,558

Real estate under construction
102,413

 
182,612

Net investments in direct financing leases
39,285

 
49,596

In-place lease intangible assets
274,174

 
260,469

Other intangible assets
35,378

 
32,082

Investments in real estate
2,315,553

 
2,122,127

Accumulated depreciation and amortization
(233,418
)
 
(168,974
)
Net investments in real estate
2,082,135

 
1,953,153

Notes receivable
66,500

 
66,500

Equity investment in real estate
21,159

 
14,694

Cash and cash equivalents
74,714

 
72,028

Other assets, net
79,570

 
79,545

Goodwill
26,447

 
23,526

Total assets
$
2,350,525

 
$
2,209,446

Liabilities and Equity
 
 
 
Debt:
 
 
 
Non-recourse mortgages, net
$
1,115,677

 
$
1,019,158

Bonds payable, net
149,765

 
138,253

Debt, net
1,265,442

 
1,157,411

Accounts payable, accrued expenses and other liabilities
97,282

 
69,006

Due to affiliate
29,263

 
53,711

Deferred income taxes
61,342

 
42,419

Distributions payable
21,569

 
20,995

Total liabilities
1,474,898

 
1,343,542

Commitments and contingencies (Note 10)

 

 
 
 
 
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; 110,334,936 and 107,460,081 shares, respectively, issued and outstanding
110

 
107

Class C common stock, $0.001 par value; 80,000,000 shares authorized; 31,240,440 and 30,469,144 shares, respectively, issued and outstanding
31

 
30

Additional paid-in capital
1,250,980

 
1,222,139

Distributions and accumulated losses
(408,629
)
 
(360,673
)
Accumulated other comprehensive loss
(35,195
)
 
(61,704
)
Total stockholders’ equity
807,297

 
799,899

Noncontrolling interests
68,330

 
66,005

Total equity
875,627

 
865,904

Total liabilities and equity
$
2,350,525

 
$
2,209,446


See Notes to Consolidated Financial Statements.


CPA®:18 – Global 9/30/2017 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 September 30,
 
Nine Months Ended September 30,
 
2017

2016
 
2017
 
2016
Revenues
 
 
 
 
 
 
 
Lease revenues:
 
 
 
 
 
 
 
Rental income
$
26,726

 
$
23,620

 
$
74,628

 
$
69,887

Interest income from direct financing leases
909

 
1,131

 
2,789

 
3,452

Total lease revenues
27,635

 
24,751

 
77,417

 
73,339

Other real estate income
20,649

 
18,711

 
60,345

 
52,190

Other operating income
3,103

 
3,112

 
9,545

 
9,138

Other interest income
1,814

 
710

 
5,346

 
2,130

 
53,201


47,284

 
152,653

 
136,797

Operating Expenses
 
 
 
 
 
 
 
Depreciation and amortization
18,926

 
20,876

 
56,606

 
62,771

Other real estate expenses
8,593

 
8,634

 
25,074

 
23,261

Property expenses
7,728

 
6,946

 
26,147

 
19,676

General and administrative
1,856

 
1,601

 
5,337

 
5,151

Acquisition and other expenses

 
36

 
46

 
4,747

 
37,103

 
38,093

 
113,210

 
115,606

Other Income and Expenses
 
 
 
 
 
 
 
Interest expense
(12,430
)
 
(11,025
)
 
(35,673
)
 
(31,705
)
Other income and (expenses)
5,963

 
156

 
18,084

 
1,189

Equity in losses of equity method investment in real estate
(341
)
 
(69
)
 
(694
)
 
(69
)
 
(6,808
)
 
(10,938
)
 
(18,283
)
 
(30,585
)
Income (loss) before income taxes and loss on sale of real estate
9,290

 
(1,747
)
 
21,160

 
(9,394
)
Benefit from (provision for) income taxes
2,825

 
(103
)
 
1,632

 
(303
)
Income (loss) before loss on sale of real estate
12,115

 
(1,850
)
 
22,792

 
(9,697
)
Loss on sale of real estate, net of tax

 

 

 
(63
)
Net Income (Loss)
12,115

 
(1,850
)
 
22,792

 
(9,760
)
Net income attributable to noncontrolling interests (inclusive of Available Cash Distributions to a related party of $2,196, $1,662, $6,057, and $5,319, respectively)
(2,294
)
 
(2,231
)
 
(6,568
)
 
(6,730
)
Net Income (Loss) Attributable to CPA®:18 – Global
$
9,821


$
(4,081
)
 
$
16,224

 
$
(16,490
)
Class A Common Stock
 
 
 
 
 
 
 
Net income (loss) attributable to CPA®:18 – Global
$
7,759

 
$
(3,083
)
 
$
12,936

 
$
(12,569
)
Basic and diluted weighted-average shares outstanding
110,507,579

 
106,279,055

 
109,507,006

 
105,148,891

Basic and diluted income (loss) per share
$
0.07

 
$
(0.03
)
 
$
0.12

 
$
(0.12
)
Distributions Declared Per Share
$
0.1563

 
$
0.1563

 
$
0.4689

 
$
0.4689

 
 
 
 
 
 
 
 
Class C Common Stock
 
 
 
 
 
 
 
Net income (loss) attributable to CPA®:18 – Global
$
2,062

 
$
(998
)
 
$
3,288

 
$
(3,921
)
Basic and diluted weighted-average shares outstanding
31,322,341

 
30,205,326

 
31,041,072

 
29,964,756

Basic and diluted income (loss) per share
$
0.07

 
$
(0.03
)
 
$
0.11

 
$
(0.13
)
Distributions Declared Per Share
$
0.1384

 
$
0.1376

 
$
0.4146

 
$
0.4089

See Notes to Consolidated Financial Statements.


CPA®:18 – Global 9/30/2017 10-Q 3


CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net Income (Loss)
$
12,115

 
$
(1,850
)
 
$
22,792

 
$
(9,760
)
Other Comprehensive Income
 
 
 
 
 
 
 
Foreign currency translation adjustments
13,839

 
2,963

 
37,534

 
8,739

Realized and unrealized loss on derivative instruments
(2,145
)
 
(928
)
 
(6,426
)
 
(4,678
)
 
11,694

 
2,035

 
31,108

 
4,061

Comprehensive Income (Loss)
23,809

 
185

 
53,900

 
(5,699
)
 
 
 
 
 
 
 
 
Amounts Attributable to Noncontrolling Interests
 
 
 
 
 
 
 
Net income
(2,294
)
 
(2,231
)
 
(6,568
)
 
(6,730
)
Foreign currency translation adjustments
(1,806
)
 
(813
)
 
(4,599
)
 
(2,290
)
Comprehensive income attributable to noncontrolling interests
(4,100
)
 
(3,044
)
 
(11,167
)
 
(9,020
)
Comprehensive Income (Loss) Attributable to
CPA®:18 – Global
$
19,709

 
$
(2,859
)
 
$
42,733

 
$
(14,719
)
 
See Notes to Consolidated Financial Statements.



CPA®:18 – Global 9/30/2017 10-Q 4


CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
Nine Months Ended September 30, 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
3,198,924

 
3

 
1,034,160

 
1

 
33,431

 
 
 
 
 
33,435

 

 
33,435

Shares issued to affiliate
1,037,527

 
1

 
 
 
 
 
8,275

 
 
 
 
 
8,276

 

 
8,276

Shares issued to directors
12,658

 

 
 
 
 
 
100

 
 
 
 
 
100

 
 
 
100

Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
3,143

 
3,143

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
(11,985
)
 
(11,985
)
Distributions declared ($0.4689 and $0.4146 per share to Class A and Class C, respectively)
 
 
 
 
 
 
 
 
 
 
(64,180
)
 
 
 
(64,180
)
 
 
 
(64,180
)
Net income
 
 
 
 
 
 
 
 
 
 
16,224

 
 
 
16,224

 
6,568

 
22,792

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 

Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
 
 
32,935

 
32,935

 
4,599

 
37,534

Realized and unrealized loss on derivative instruments
 
 
 
 
 
 
 
 
 
 
 
 
(6,426
)
 
(6,426
)
 
 
 
(6,426
)
Repurchase of shares
(1,374,254
)
 
(1
)
 
(262,864
)
 

 
(12,965
)
 
 
 
 
 
(12,966
)
 
 
 
(12,966
)
Balance at September 30, 2017
110,334,936

 
$
110

 
31,240,440

 
$
31

 
$
1,250,980

 
$
(408,629
)
 
$
(35,195
)
 
$
807,297

 
$
68,330

 
$
875,627

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
2,900,565

 
3

 
939,990

 

 
32,450

 
 
 
 
 
32,453

 
 
 
32,453

Shares issued to affiliate
913,907

 
1

 
 
 
 
 
7,390

 
 
 
 
 
7,391

 
 
 
7,391

Shares issued to directors
12,658

 

 
 
 
 
 
100

 
 
 
 
 
100

 
 
 
100

Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
41

 
41

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
(11,588
)
 
(11,588
)
Distributions declared ($0.4689 and $0.4089 per share to Class A and Class C, respectively)
 
 
 
 
 
 
 
 
 
 
(61,599
)
 
 
 
(61,599
)
 
 
 
(61,599
)
Net loss
 
 
 
 
 
 
 
 
 
 
(16,490
)
 
 
 
(16,490
)
 
6,730

 
(9,760
)
Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 

Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
 
 
6,449

 
6,449

 
2,290

 
8,739

Realized and unrealized loss on derivative instruments
 
 
 
 
 
 
 
 
 
 
 
 
(4,678
)
 
(4,678
)
 
 
 
(4,678
)
Repurchase of shares
(705,234
)
 
(1
)
 
(286,874
)
 

 
(7,895
)
 
 
 
 
 
(7,896
)
 
 
 
(7,896
)
Balance at September 30, 2016
106,335,979

 
$
106

 
30,190,015

 
$
30

 
$
1,211,035

 
$
(326,084
)
 
$
(48,545
)
 
$
836,542

 
$
69,369

 
$
905,911


See Notes to Consolidated Financial Statements.


CPA®:18 – Global 9/30/2017 10-Q 5


CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Nine Months Ended September 30,
 
2017
 
2016
Cash Flows — Operating Activities

 
 
Net Cash Provided by Operating Activities
$
67,777

 
$
56,005

Cash Flows — Investing Activities
 
 
 
Funding and advances for build-to-suit projects
(40,770
)
 
(81,119
)
Acquisitions of real estate and direct financing leases
(27,924
)
 
(55,307
)
Value added taxes refunded in connection with acquisitions of real estate
12,414

 
4,224

Capital contributions to equity investment
(5,616
)
 
(3,850
)
Capital expenditures on real estate
(4,640
)
 
(5,363
)
Value added taxes paid in connection with acquisition of real estate
(3,667
)
 
(7,994
)
Payment of deferred acquisition fees to an affiliate
(3,650
)
 
(4,476
)
Deposits for investments
(716
)
 
4,000

Return of capital from equity investments
246

 
2,243

Change in investing restricted cash
29

 
340

Other investing activities, net
(26
)
 
47

Proceeds from sale of real estate

 
40

Net Cash Used in Investing Activities
(74,320
)
 
(147,215
)
Cash Flows — Financing Activities
 
 
 
Proceeds from mortgage financing
72,415

 
106,601

Distributions paid
(63,606
)
 
(60,900
)
Proceeds from issuance of shares
31,778

 
30,588

Repayment of notes payable to affiliate
(19,696
)
 

Distributions to noncontrolling interests
(11,985
)
 
(11,588
)
Proceeds from notes payable to affiliate
11,196

 

Scheduled payments and prepayments of mortgage principal
(9,105
)
 
(3,641
)
Repurchase of shares
(7,349
)
 
(7,896
)
Contributions from noncontrolling interests
2,339

 
41

Payment of deferred financing costs and mortgage deposits
(588
)
 
(796
)
Other financing activities, net
(13
)
 

Change in financing restricted cash
(8
)
 
5,171

Net Cash Provided by Financing Activities
5,378

 
57,580

Change in Cash and Cash Equivalents During the Period
 
 
 
Effect of exchange rate changes on cash and cash equivalents
3,851

 
952

Net increase (decrease) in cash and cash equivalents
2,686

 
(32,678
)
Cash and cash equivalents, beginning of period
72,028

 
117,453

Cash and cash equivalents, end of period
$
74,714

 
$
84,775


See Notes to Consolidated Financial Statements.


CPA®:18 – Global 9/30/2017 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, together with its consolidated subsidiaries, 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 September 30, 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 September 30, 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 99 tenants totaling 10.1 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 6.8 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 September 30, 2017, $108.4 million and $29.2 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 9/30/2017 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 September 30, 2017, we considered 13 entities to be VIEs, 12 of which we consolidated as we are considered the primary beneficiary. We previously determined that a build-to-suit project in Eindhoven, the Netherlands was a VIE. In May 2017, we made our final payment to the developer for this project and now own 100% of the voting rights (Note 4). As such, we no longer determine it to be a VIE. The following table presents a summary of selected financial data of the consolidated VIEs included in the consolidated balance sheets (in thousands):
 
September 30, 2017
 
December 31, 2016
Real estate — Land, buildings and improvements
$
456,786

 
$
371,385

Operating real estate — Land, buildings and improvements
51,165

 
43,948

Real estate under construction
102,413

 
162,371

Net investments in direct financing leases

 
10,516

In-place lease intangible assets
89,510

 
81,798

Other intangible assets
25,062

 
22,376

Accumulated depreciation and amortization
(53,360
)
 
(37,412
)
Cash and cash equivalents
11,150

 
15,260

Other assets, net
31,044

 
41,975

Total assets
713,770

 
712,217

 
 
 
 
Non-recourse mortgages, net
$
226,426

 
$
235,425

Bonds payable, net
62,330

 
57,615

Deferred income taxes
28,033

 
20,437

Accounts payable, accrued expenses and other liabilities
27,033

 
30,946

Total liabilities
343,822

 
344,423




CPA®:18 – Global 9/30/2017 10-Q 8


Notes to Consolidated Financial Statements (Unaudited)


At both September 30, 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 September 30, 2017 and December 31, 2016, the net carrying amount of this equity investment was $21.2 million and $14.7 million, respectively, and our maximum exposure to loss in this entity is limited to our investment. 

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 September 30, 2017, our sole equity investment did not have a carrying value below zero.

Out-of-Period Adjustments

During the third quarter of 2017, we identified and recorded out-of-period adjustments related to the accounting for deferred foreign income taxes. We concluded that these adjustments were not material to our consolidated financial statements for any of the current or prior periods presented. The net adjustment is reflected as a $1.2 million and $0.8 million increase of our Benefit from income taxes in the consolidated statements of income for the three and nine months ended September 30, 2017, respectively.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

In the second quarter of 2017, we reclassified in-place lease intangible assets, net and other intangible assets, net to be included within Net investments in real estate in our consolidated balance sheets. The accumulated amortization on these assets is now included in Accumulated depreciation and amortization in our consolidated balance sheets. Prior period balances have been reclassified to conform to the current period presentation.

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 primarily apply to revenues generated from our operating properties. We will adopt this guidance for our interim and annual 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. In addition, it also requires lessors to record gross revenues and expenses associated with activities that do not transfer services to lessee (such as real estate taxes and insurance). Additionally, the new standard requires extensive quantitative and qualitative disclosures. 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. We will adopt this guidance for our interim and annual periods beginning January 1, 2019. The ASU is expected to impact our consolidated financial statements as we have 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.



CPA®:18 – Global 9/30/2017 10-Q 9


Notes to Consolidated Financial Statements (Unaudited)


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 retrospectively adopt the standard for the fiscal year beginning January 1, 2018.

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 retrospectively 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.



CPA®:18 – Global 9/30/2017 10-Q 10


Notes to Consolidated Financial Statements (Unaudited)


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 adopted ASU 2017-04 as of April 1, 2017 on a prospective basis. The adoption of this standard did not have a material impact 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 in the process of evaluating the impact of ASU 2017-05 on our consolidated financial statements and will adopt the standard for the fiscal year beginning January 1, 2018.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 will make more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess hedge effectiveness. It is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. ASU 2017-12 will be effective in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We are in the process of evaluating the impact of adopting ASU 2017-12 on our consolidated financial statements.

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.



CPA®:18 – Global 9/30/2017 10-Q 11


Notes to Consolidated Financial Statements (Unaudited)


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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Amounts Included in the Consolidated Statements of Operations
 
 
 
 
 
 
 
Asset management fees
$
2,902

 
$
2,547

 
$
8,378

 
$
7,424

Available Cash Distributions
2,196

 
1,662

 
6,057

 
5,319

Personnel and overhead reimbursements
768

 
601

 
2,337

 
2,210

Interest expense on deferred acquisition fees, interfund loan, and accretion of interest on annual distribution and shareholder servicing fee
163

 
203

 
783

 
631

Director compensation
152

 
152

 
258

 
259

Acquisition expenses

 

 

 
3,484

 
$
6,181

 
$
5,165

 
$
17,813

 
$
19,327

 
 
 
 
 
 
 
 
Acquisition Fees Capitalized
 
 
 
 
 
 
 
Current acquisition fees
$
250

 
$
1,166

 
$
1,643

 
$
2,987

Deferred acquisition fees
200

 
933

 
1,314

 
2,390

Personnel and overhead reimbursements
196

 
35

 
380

 
283

 
$
646

 
$
2,134

 
$
3,337

 
$
5,660


The following table presents a summary of amounts included in Due to affiliate in the consolidated financial statements (in thousands):
 
September 30, 2017
 
December 31, 2016
Due to Affiliate
 
 
 
Loan from WPC, including accrued interest
$
19,508

 
$
27,580

Deferred acquisition fees, including accrued interest
5,944

 
15,305

Accounts payable and other
2,596

 
2,454

Asset management fees payable
967

 
866

Current acquisition fees
248

 
84

Shareholder servicing fee liability

 
7,422

 
$
29,263

 
$
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.

On October 31, 2016, we borrowed $27.5 million from WPC to partially finance a new investment, and that amount remained outstanding at 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 equaled LIBOR plus 1.0%, reflecting the lower rate available under WPC’s amended and restated senior credit facility. The scheduled maturity date of the loan was October 31, 2017.

On May 15, 2017, we borrowed an additional $11.2 million from WPC to partially finance the final payment to the developer for a build-to-suit project in Eindhoven, the Netherlands (Note 4). The scheduled maturity date of the loan is May 15, 2018.



CPA®:18 – Global 9/30/2017 10-Q 12


Notes to Consolidated Financial Statements (Unaudited)


During the nine months ended September 30, 2017, we repaid $19.7 million to WPC, and as a result, a total of $19.5 million remained outstanding, including accrued interest, to WPC at September 30, 2017. Subsequent to September 30, 2017, we repaid the remaining $19.5 million of loans outstanding to WPC, including accrued interest (Note 13).
 
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 $8.24 as of June 30, 2017. For the three and nine months ended September 30, 2017, our Advisor received its asset management fees in shares of our Class A common stock. At September 30, 2017, our Advisor owned 3,266,723 shares, or 2.3%, 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 former broker-dealer subsidiary of our Advisor, received an annual distribution and shareholder servicing fee from us in connection with our Class C common stock, which it may have re-allowed 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 had not yet reached as of September 30, 2017. At December 31, 2016, the liability balance related to this fee was $7.4 million and was recorded within Due to affiliate in the consolidated financial statements to reflect the present value of the estimated future payments of the annual distribution and shareholder servicing fee. Beginning with the payment for the third quarter of 2017, paid during the first month of the fourth quarter, the annual distribution and shareholder servicing fees will be paid directly to selected dealers rather than through Carey Financial. There is no change in the amount of the distribution and shareholder servicing fees that we incur. As of September 30, 2017, the remaining liability balance of $6.1 million was due directly to the selected dealers and accordingly, we have reclassified the balance from Due to affiliate to Accounts payable, accrued expenses and other liabilities in the consolidated financial statements.

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 September 30, 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.



CPA®:18 – Global 9/30/2017 10-Q 13


Notes to Consolidated Financial Statements (Unaudited)


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, Carey Watermark Investors Incorporated, Carey Watermark Investors 2 Incorporated, and Carey European Housing Fund I L.P., which are collectively referred to as the Managed Programs. Prior to September 11, 2017, our Advisor also allocated a portion of its personnel and overhead expenses to Carey Credit Income Fund (now known as Guggenheim Credit Income Fund). Our Advisor allocates these expenses to us on the basis of our trailing four quarters of reported revenues in comparison to those of WPC and other entities managed by WPC and its affiliates.

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% and 2.0% of pro rata lease revenues for 2016 and 2017, respectively. 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 up to 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 attributable to noncontrolling interests in the consolidated financial statements.

Jointly Owned Investments and Other Transactions with our Affiliates

At September 30, 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.



CPA®:18 – Global 9/30/2017 10-Q 14


Notes to Consolidated Financial Statements (Unaudited)


Note 4. Real Estate, Operating Real Estate, Real Estate Under Construction, and Equity Investment in Real Estate

Real Estate Land, Buildings and Improvements

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):
 
September 30, 2017
 
December 31, 2016
Land
$
203,918

 
$
173,184

Buildings and improvements
1,042,895

 
817,626

Less: Accumulated depreciation
(79,998
)
 
(55,980
)
 
$
1,166,815

 
$
934,830


During the nine months ended September 30, 2017, the U.S. dollar weakened against the euro, as the end-of-period rate for the U.S. dollar in relation to the euro increased by 12.0% to $1.1806 from $1.0541. As a result, the carrying value of our Real estate — land, buildings and improvements increased by $64.4 million from December 31, 2016 to September 30, 2017.

Depreciation expense, including the effect of foreign currency translation, on our real estate was $7.5 million and $6.5 million for the three months ended September 30, 2017 and 2016, respectively, and $20.5 million and $19.3 million for the nine months ended September 30, 2017 and 2016, respectively.

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 Land, Buildings and Improvements
 
Operating real estate, which consists of our self-storage and multi-family properties, at cost, is summarized as follows (in thousands):
 
September 30, 2017
 
December 31, 2016
Land
$
106,279

 
$
105,631

Buildings and improvements
511,211

 
500,927

Less: Accumulated depreciation
(40,485
)
 
(26,937
)
 
$
577,005

 
$
579,621


The carrying value of our Operating real estate — land, buildings and improvements increased by $4.0 million from December 31, 2016 to September 30, 2017, due to the weakening of the U.S. dollar relative to foreign currencies during the period.

Depreciation expense, including the effect of foreign currency translation, on our operating real estate was $4.6 million and $4.1 million for the three months ended September 30, 2017 and 2016, respectively, and $13.5 million and $11.9 million for the nine months ended September 30, 2017 and 2016, respectively.



CPA®:18 – Global 9/30/2017 10-Q 15


Notes to Consolidated Financial Statements (Unaudited)


Real Estate Under Construction

The following table provides the activity of our Real estate under construction (in thousands):
 
Nine Months Ended September 30, 2017
Beginning balance
$
182,612

Placed into service
(185,397
)
Capitalized funds
84,637

Foreign currency translation adjustments
16,459

Capitalized interest
4,102

Ending balance
$
102,413


Capitalized Funds

On May 17, 2017, we made our final payment to the developer for the build-to-suit project located in Eindhoven, the Netherlands for $18.7 million, which was based on the exchange rate of the euro on the date of the acquisition. The payment was included in the expected total investment amount when the first draw of the build-to-suit was funded in March 2015. Additionally, we also recorded $9.4 million of deferred tax liabilities in connection with our investment in this project. Simultaneous with the payment to the developer, the project was completed and placed into service.

During the nine months ended September 30, 2017, construction commenced on one of our previous 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 nine months ended September 30, 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 September 30, 2017, total capitalized funds related to this investment were $32.5 million, inclusive of accrued construction costs of $3.1 million and the effect of recording deferred tax liabilities of $3.7 million.

At the time of the investment, 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 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 September 30, 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.

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 September 30, 2017, although recovery may take a period of time from the date on which a claim is filed. We will continue to monitor the investment for impairment.

During the nine months ended September 30, 2017, total capitalized funds primarily related to our build-to-suit projects, which were comprised primarily of initial funding of $20.1 million and construction draws of $55.2 million. Capitalized funds include accrued costs of $3.4 million, which is 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 $4.1 million during the nine months ended September 30, 2017 and is a non-cash investing activity.



CPA®:18 – Global 9/30/2017 10-Q 16


Notes to Consolidated Financial Statements (Unaudited)


Placed into Service

During the nine months ended September 30, 2017, we placed into service a partially completed hotel, two build-to-suit projects, and the remaining portion of a substantially completed student-housing development, which we sold subsequent to September 30, 2017 (Note 13), totaling $185.4 million, which is a non-cash investing activity. Of that total, $182.5 million was reclassified to Real estate — land, buildings and improvements and $2.9 million to Operating real estate — land, buildings and improvements.

Ending Balance

At September 30, 2017, we had four open build-to-suit projects and one open build-to-suit expansion project with aggregate unfunded commitments of approximately $116.2 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 September 30, 2017, the joint-venture partner had 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 nine months ended September 30, 2017, we commenced operations in two Canadian self-storage facilities upon the completion of distinct phases of the overall development, and as a result, placed $9.3 million and $10.1 million of the total amounts for these projects into service. During the three and nine months ended September 30, 2017, we incurred losses of $0.3 million and $0.7 million, respectively, relating to these distinct phases of the projects, which are included in Equity in losses of equity method investment in real estate on our consolidated financial statements.

At September 30, 2017 and December 31, 2016, our total equity investment balance for these properties was $21.2 million and $14.7 million, respectively, and the joint venture had total third-party recourse debt of $20.3 million and $13.8 million, respectively. At September 30, 2017, the unfunded commitments for these build-to-suit projects totaled approximately $28.2 million.



CPA®:18 – Global 9/30/2017 10-Q 17


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 at both September 30, 2017 and December 31, 2016 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 have and will continue to 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 September 30, 2017 remained $28.0 million and $38.5 million, respectively.

Net Investments in Direct Financing Leases

Interest income from direct financing leases was $0.9 million and $1.1 million for the three months ended September 30, 2017 and 2016, respectively, and $2.8 million and $3.5 million for the nine months ended September 30, 2017 and 2016, respectively.

In 2015, we invested in a joint venture with a third party to purchase an office building located in Cardiff, United Kingdom to be redeveloped into student-housing. The existing tenant vacated the building 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 nine months ended September 30, 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 have a low risk of tenant default. At both September 30, 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 nine months ended September 30, 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 third 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
 
September 30, 2017
 
December 31, 2016
 
September 30, 2017
 
December 31, 2016
1
 
 
1
 
$

 
$
10,516

2
 
2
 
1
 
13,796

 
9,154

3
 
2
 
2
 
29,707

 
29,679

4
 
2
 
3
 
62,282

 
66,747

5
 
 
 

 

 
 
0
 
 
 
$
105,785

 
$
116,096


Note 6. Intangible Assets and Liabilities

In connection with our investment activity (Note 4) during the nine months ended September 30, 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 in the consolidated financial statements. Below-market ground lease intangibles and above-market rent intangibles are included in Other intangible assets 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 9/30/2017 10-Q 18


Notes to Consolidated Financial Statements (Unaudited)


The following table presents a reconciliation of our goodwill, which is included in our Net Lease reporting unit (in thousands):
 
Nine Months Ended September 30, 2017
Balance at January 1, 2017
$
23,526

Foreign currency translation
2,213

Other
708

Balance at September 30, 2017
$
26,447


Intangible assets and liabilities are summarized as follows (in thousands):
 
 
 
September 30, 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
 
$
274,174

 
$
(108,482
)
 
$
165,692

 
$
260,469

 
$
(83,031
)
 
$
177,438

Below-market ground lease
15 - 99
 
22,644

 
(1,110
)
 
21,534

 
20,236

 
(706
)
 
19,530

Above-market rent
3 - 30
 
12,734

 
(3,343
)
 
9,391

 
11,846

 
(2,320
)
 
9,526

 
 
 
309,552

 
(112,935
)
 
196,617

 
292,551

 
(86,057
)
 
206,494

Indefinite-Lived Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill
 
 
26,447

 

 
26,447

 
23,526

 

 
23,526

Total intangible assets
 
 
$
335,999

 
$
(112,935
)
 
$
223,064

 
$
316,077

 
$
(86,057
)
 
$
230,020

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finite-lived Intangible Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Below-market rent
4 - 30
 
$
(15,449
)
 
$
4,255

 
$
(11,194
)
 
$
(15,192
)
 
$
3,234

 
$
(11,958
)
Above-market ground lease
81
 
(109
)
 
4

 
(105
)
 
(101
)
 
3

 
(98
)
Total intangible liabilities
 
 
$
(15,558
)
 
$
4,259

 
$
(11,299
)
 
$
(15,293
)
 
$
3,237

 
$
(12,056
)

Net amortization of intangibles, including the effect of foreign currency translation, was $6.8 million and $10.3 million for the three months ended September 30, 2017 and 2016, respectively, and $22.4 million and $31.5 million for the nine months ended September 30, 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 9/30/2017 10-Q 19


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 September 30, 2017 and December 31, 2016, our rent guarantees had a fair value of $0.8 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 and nine months ended September 30, 2017, we recognized $0.4 million and $0.9 million, respectively, of mark-to-market gains related to these rent guarantees within Other income and (expenses) on our consolidated financial statements. During the three and nine months ended September 30, 2016, we recognized $0.3 million and $1.1 million, respectively, 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 and nine months ended September 30, 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):
 
 
 
September 30, 2017
 
December 31, 2016
 
Level
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Debt, net (a) (b)
3
 
$
1,265,442

 
$
1,292,328

 
$
1,157,411

 
$
1,177,409

Notes receivable (c)
3
 
66,500

 
68,450

 
66,500

 
68,450

___________
(a)
Debt, net consists of Non-recourse debt, net and Bonds payable, net. At both September 30, 2017 and December 31, 2016, the carrying value of Non-recourse debt, net includes unamortized deferred financing costs of $7.6 million. At both September 30, 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 September 30, 2017 and December 31, 2016.



CPA®:18 – Global 9/30/2017 10-Q 20


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 (loss) 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 (loss) 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 September 30, 2017 and December 31, 2016, no cash collateral had been posted or received for any of our derivative positions.



CPA®:18 – Global 9/30/2017 10-Q 21


Notes to Consolidated Financial Statements (Unaudited)


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
 
 
September 30, 2017
 
December 31, 2016
 
September 30, 2017
 
December 31, 2016
Foreign currency forward contracts
 
Other assets, net
 
$
2,721

 
$
5,502

 
$

 
$

Interest rate swaps
 
Other assets, net
 
329

 
393

 

 

Foreign currency collars
 
Other assets, net
 
111

 
1,284

 

 

Interest rate caps
 
Other assets, net
 
1

 
1

 

 

Foreign currency collars
 
Accounts payable, accrued expenses and other liabilities
 

 

 
(2,648
)
 
(33
)
Interest rate swaps
 
Accounts payable, accrued expenses and other liabilities
 

 

 
(1,104
)
 
(1,151
)
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
 
 
 
Foreign currency collars
 
Accounts payable, accrued expenses and other liabilities
 

 

 
(321
)
 

Total
 
 
 
$
3,162

 
$
7,180

 
$
(4,073
)
 
$
(1,184
)

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 (Loss) (Effective Portion)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Derivatives in Cash Flow Hedging Relationships 
 
2017
 
2016
 
2017
 
2016
Foreign currency collars
 
$
(1,376
)
 
$
(544
)
 
$
(3,990
)
 
$
(976
)
Foreign currency forward contracts
 
(819
)
 
(750
)
 
(2,452
)
 
(1,739
)
Interest rate swaps
 
42

 
366

 
12

 
(1,947
)
Interest rate caps
 
8

 

 
4

 
(16
)
Derivatives in Net Investment Hedging Relationship (a)
 
 
 
 
 
 
 
 
Foreign currency forward contracts
 
(87
)
 
(152
)
 
(55
)
 
(284
)
Foreign currency collars
 
(87
)
 
(14
)
 
(259
)
 
(22
)
Total
 
$
(2,319
)
 
$
(1,094
)
 
$
(6,740
)
 
$
(4,984
)
___________
(a)
The effective portion of the changes in fair value of these contracts is reported in the foreign currency translation adjustment section of Other comprehensive income (loss).

 
 
 
 
Amount of Gain (Loss) on Derivatives Reclassified from
Other Comprehensive Income (Loss) into Income (Effective Portion)
Derivatives in Cash Flow Hedging Relationships 
 
Location of Gain (Loss) Recognized in Income
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Foreign currency forward contracts
 
Other income and (expenses)
 
$
278

 
$
315

 
$
968

 
$
944

Interest rate swaps
 
Interest expense
 
(142
)
 
(230
)
 
(529
)
 
(660
)
Interest rate caps
 
Interest expense
 
(17
)
 
(1
)
 
(32
)
 
(1
)
Foreign currency collars
 
Other income and (expenses)
 
16

 
27

 
185

 
66

Total
 
 
 
$
135

 
$
111

 
$
592

 
$
349



CPA®:18 – Global 9/30/2017 10-Q 22


Notes to Consolidated Financial Statements (Unaudited)



Amounts reported in Other comprehensive income (loss) 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 (loss) related to foreign currency derivative contracts will be reclassified to Other income and (expenses) when the hedged foreign currency contracts are settled. At September 30, 2017, we estimated that an additional $0.6 million and $0.7 million will be reclassified as Interest expense and Other 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 September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Foreign currency collars
 
Other income and (expenses)
 
$
(193
)
 
$
(11
)
 
$
(238
)
 
$
(21
)
Interest rate swaps
 
Interest expense
 
(21
)
 

 
(44
)
 

Derivatives in Cash Flow Hedging Relationships
 
 
 
 
 
 
 
 
 
 
Interest rate swaps (a)
 
Interest expense
 
7

 
5

 
15

 
1

Foreign currency collars
 
Other income and (expenses)
 
(1
)
 

 
(5
)
 

Total
 
 
 
$
(208
)
 
$
(6
)
 
$
(272
)
 
$
(20
)
__________
(a)
Relates to the ineffective portion of the hedging relationship.

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 September 30, 2017 are summarized as follows (currency in thousands):
Interest Rate Derivatives
 
Number of Instruments
 
Notional
Amount
 
Fair Value at
September 30, 2017 (a)
Interest rate swaps
 
8
 
61,144

USD
 
$
(747
)
Interest rate swap
 
1
 
10,386

EUR
 
(28
)
Interest rate caps
 
3
 
27,700

USD
 
1

 
 
 
 
 
 
 
$
(774
)
___________
(a)
Fair value amount is based on the exchange rate of the euro at September 30, 2017, as applicable.



CPA®:18 – Global 9/30/2017 10-Q 23


Notes to Consolidated Financial Statements (Unaudited)


Foreign Currency Contracts
 
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 guarantees that the exchange rate of the currency will not fluctuate beyond the range of the options’ strike prices. Our foreign currency forward contracts and foreign currency collars have maturities of 74 months or less.

The following table presents the foreign currency derivative contracts we had outstanding and their designations at September 30, 2017 (currency in thousands):
Foreign Currency Derivatives
 
Number of Instruments
 
Notional
Amount
 
Fair Value at
September 30, 2017
Designated as Cash Flow Hedging Instruments
 
 
 
 
 
 
 
Foreign currency collars
 
52
 
33,215

EUR
 
$
(2,420
)
Foreign currency forward contracts
 
25
 
9,670

EUR
 
1,915

Foreign currency forward contracts
 
19
 
30,010

NOK
 
762

Foreign currency collars
 
20
 
47,670

NOK
 
(141
)
Not Designated as Hedging Instruments
 
 
 
 
 
 
 
Foreign currency collars
 
2
 
3,000

EUR
 
(321
)
Designated as Net Investment Hedging Instruments
 
 
 
 
 
 
 
Foreign currency forward contracts
 
2
 
4,504

NOK
 
44

Foreign currency collars
 
4
 
24,740

NOK
 
24

 
 
 
 
 
 
 
$
(137
)

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 September 30, 2017. At September 30, 2017, our total credit exposure was $1.8 million and the maximum exposure to any single counterparty was $1.5 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 September 30, 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 $4.1 million and $1.2 million at September 30, 2017 and December 31, 2016, respectively, which included accrued interest and any nonperformance risk adjustments. If we had breached any of these provisions at September 30, 2017 or December 31, 2016, we could have been required to settle our obligations under these agreements at their aggregate termination value of $4.3 million and $1.3 million, respectively.

Note 9. Non-Recourse Mortgages and Bonds Payable

At September 30, 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 2018 to 2039.



CPA®:18 – Global 9/30/2017 10-Q 24


Notes to Consolidated Financial Statements (Unaudited)


Financing Activity During 2017

During the nine months ended September 30, 2017, we obtained four non-recourse mortgage financings totaling $23.2 million, with a weighted-average annual interest rate of 5.2% and term to maturity of 5.7 years. In addition, we refinanced two non-recourse mortgage loans for a total of $17.0 million with a weighted-average interest rate of 2.6% and term to maturity of 4.5 years. We had an additional drawdown of $3.9 million (based on the exchange rate of the euro at the date of the drawdown) on a senior construction-to-term mortgage loan related to the development of an office building located in Eindhoven, the Netherlands. Through August 31, 2017, the loan bore an interest rate of Euro Interbank Offered Rate, or EURIBOR, plus 2.5%, except when EURIBOR was below zero, in which case, each draw bore a rate of 2.5% plus the liquidity spread of 0.7% (for a total interest rate of 3.2%). In the third quarter of 2017, the loan was converted to a seven-year term loan and now bears a fixed interest rate of 1.8%. Upon conversion of the loan, we drew down on the remaining $22.0 million available balance.

In addition, during the nine months ended September 30, 2017, we drew down $17.9 million (based on the exchange rate of the euro at the date of the drawdown) on the third-party non-recourse financing related to our build-to-suit investment in Hamburg, Germany. The loan bears a fixed interest rate of 2.1% with a term to maturity of seven years.

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)
 
$
1,765

2018
 
28,450

2019
 
7,147

2020
 
126,611

2021
 
174,007

Thereafter through 2039
 
935,043

 
 
1,273,023

Unamortized deferred financing costs
 
(8,506
)
Unamortized premium, net
 
925

Total
 
$
1,265,442


Certain amounts in the table above are based on the applicable foreign currency exchange rate at September 30, 2017.

The carrying value of our Non-recourse mortgages, net and Bonds payable, net increased by $43.3 million in the aggregate from December 31, 2016 to September 30, 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 September 30, 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.



CPA®:18 – Global 9/30/2017 10-Q 25


Notes to Consolidated Financial Statements (Unaudited)


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

Basic and Diluted Income (Loss) Per Share