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, 2019
 
 
 
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
397877024_cpa18logoa01a01a32.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 every Interactive Data File required to be submitted 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
 
 
 
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 116,459,494 shares of Class A common stock, $0.001 par value, and 32,134,311 shares of Class C common stock, $0.001 par value, outstanding at May 3, 2019.





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 (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. These forward-looking statements include, but are not limited to, statements regarding: our corporate strategy and underlying assumptions about our portfolio (e.g. occupancy rate, lease terms, and tenant credit quality, including our expectations about tenant bankruptcies and interest coverage), possible new acquisitions and dispositions, and our international exposure; our future capital expenditure levels, including any plans to fund our future liquidity needs, and future leverage and debt service obligations; statements that we make regarding our ability to remain qualified for taxation as a real estate investment trust (“REIT”); the impact of recently issued accounting pronouncements and regulatory activity; and the general economic outlook. It is important to note that our actual results could be materially different from those projected in such forward-looking statements. Other unknown or unpredictable factors could also have material adverse effects on our business, financial condition, liquidity, results of operations, Modified funds from operations (“MFFO”), and prospects. 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 (“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, 2018, as filed with the SEC on March 13, 2019 (the “2018 Annual Report”). Moreover, because we operate in a very competitive and rapidly changing environment, new risks are likely to emerge from time to time. Given these risks and uncertainties, shareholders are cautioned not to place undue reliance on these forward-looking statements as a prediction of future results, which speak only as of the date of this Report, unless noted otherwise. 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 condensed consolidated financial statements of the registrant in Part I, Item 1. Financial Statements (Unaudited).



CPA:18 – Global 3/31/2019 10-Q 1


PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
 
March 31, 2019
 
December 31, 2018
Assets
 
 
 
Investments in real estate:
 
 
 
Real estate — Land, buildings and improvements
$
1,200,507

 
$
1,210,776

Operating real estate — Land, buildings and improvements
507,071

 
503,149

Real estate under construction
180,558

 
152,106

Net investments in direct financing leases
41,829

 
41,745

In-place lease intangible assets
250,765

 
252,316

Right-of-use and other intangible assets
47,200

 
33,144

Investments in real estate
2,227,930

 
2,193,236

Accumulated depreciation and amortization
(292,718
)
 
(280,608
)
Assets held for sale, net

 
23,608

Net investments in real estate
1,935,212

 
1,936,236

Cash and cash equivalents
140,142

 
170,914

Accounts receivable and other assets, net
192,233

 
197,403

Total assets
$
2,267,587

 
$
2,304,553

Liabilities and Equity
 
 
 
Debt:
 
 
 
Non-recourse mortgages, net, including debt attributable to Assets held for sale (Note 4)
$
1,061,243

 
$
1,098,281

Bonds payable, net
140,750

 
139,146

Debt, net
1,201,993

 
1,237,427

Accounts payable, accrued expenses and other liabilities
139,736

 
132,065

Due to affiliates
12,890

 
16,827

Distributions payable
22,416

 
22,264

Total liabilities
1,377,035

 
1,408,583

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; 115,444,107 and 114,589,333 shares, respectively, issued and outstanding
115

 
114

Class C common stock, $0.001 par value; 80,000,000 shares authorized; 31,840,141 and 31,641,265 shares, respectively, issued and outstanding
32

 
32

Additional paid-in capital
1,300,223

 
1,290,888

Distributions and accumulated losses
(420,161
)
 
(411,464
)
Accumulated other comprehensive loss
(54,915
)
 
(50,593
)
Total stockholders’ equity
825,294

 
828,977

Noncontrolling interests
65,258

 
66,993

Total equity
890,552

 
895,970

Total liabilities and equity
$
2,267,587

 
$
2,304,553


See Notes to Condensed Consolidated Financial Statements.


CPA:18 – Global 3/31/2019 10-Q 2


CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except share and per share amounts)
 
Three Months Ended March 31,
 
2019

2018
Revenues
 
 
 
Lease revenues — net-leased
$
30,914

 
$
32,797

Lease revenues — operating real estate
17,265

 
19,033

Other operating and interest income
2,115

 
2,605

 
50,294


54,435

Operating Expenses
 
 
 
Depreciation and amortization
15,372

 
17,632

Property expenses
8,675

 
9,834

Operating real estate expenses
6,466

 
8,159

General and administrative
1,759

 
1,645

 
32,272

 
37,270

Other Income and Expenses
 
 
 
Gain on sale of real estate, net
15,408

 

Interest expense
(12,357
)
 
(12,930
)
Equity in losses of equity method investment in real estate
(648
)
 
(324
)
Other gains and (losses)
172

 
7,992

 
2,575

 
(5,262
)
Income before income taxes
20,597

 
11,903

(Provision for) benefit from income taxes
(924
)
 
415

Net Income
19,673

 
12,318

Net income attributable to noncontrolling interests (inclusive of Available Cash Distributions to a related party of $1,848 and $1,905, respectively)
(4,846
)
 
(1,991
)
Net Income Attributable to CPA:18 – Global
$
14,827


$
10,327

Class A Common Stock
 
 
 
Net income attributable to CPA:18 – Global
$
11,654

 
$
8,110

Basic and diluted weighted-average shares outstanding
115,497,094

 
112,113,960

Basic and diluted earnings per share
$
0.10

 
$
0.07

Class C Common Stock
 
 
 
Net income attributable to CPA:18 – Global
$
3,173

 
$
2,217

Basic and diluted weighted-average shares outstanding
31,879,027

 
31,441,399

Basic and diluted earnings per share
$
0.10

 
$
0.07


See Notes to Condensed Consolidated Financial Statements.


CPA:18 – Global 3/31/2019 10-Q 3


CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
 
Three Months Ended March 31,
 
2019
 
2018
Net Income
$
19,673

 
$
12,318

Other Comprehensive (Loss) Income
 
 
 
Foreign currency translation adjustments
(4,242
)
 
11,577

Unrealized loss on derivative instruments
(238
)
 
(659
)
 
(4,480
)
 
10,918

Comprehensive Income
15,193

 
23,236

 
 
 
 
Amounts Attributable to Noncontrolling Interests
 
 
 
Net income
(4,846
)
 
(1,991
)
Foreign currency translation adjustments
158

 
(1,617
)
Comprehensive income attributable to noncontrolling interests
(4,688
)
 
(3,608
)
Comprehensive Income Attributable to CPA:18 – Global
$
10,505

 
$
19,628

 
See Notes to Condensed Consolidated Financial Statements.



CPA:18 – Global 3/31/2019 10-Q 4


CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
Three Months Ended March 31, 2019 and 2018
(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, 2019
114,589,333

 
$
114

 
31,641,265

 
$
32

 
$
1,290,888

 
$
(411,464
)
 
$
(50,593
)
 
$
828,977

 
$
66,993

 
$
895,970

Cumulative-effect adjustment for the adoption of new accounting pronouncements (Note 2)
 
 
 
 
 
 
 
 
 
 
(1,108
)
 
 
 
(1,108
)
 
 
 
(1,108
)
Shares issued
965,197

 
1

 
297,063

 

 
11,018

 
 
 
 
 
11,019

 

 
11,019

Shares issued to affiliate
220,238

 

 
 
 
 
 
1,922

 
 
 
 
 
1,922

 

 
1,922

Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
2,520

 
2,520

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
(8,943
)
 
(8,943
)
Distributions declared ($0.1563 and $0.1373 per share to Class A and Class C, respectively)
 
 
 
 
 
 
 
 
 
 
(22,416
)
 
 
 
(22,416
)
 
 
 
(22,416
)
Net income
 
 
 
 
 
 
 
 
 
 
14,827

 
 
 
14,827

 
4,846

 
19,673

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 

Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
 
 
(4,084
)
 
(4,084
)
 
(158
)
 
(4,242
)
Unrealized loss on derivative instruments
 
 
 
 
 
 
 
 
 
 
 
 
(238
)
 
(238
)
 
 
 
(238
)
Repurchase of shares
(330,661
)
 

 
(98,187
)
 

 
(3,605
)
 
 
 
 
 
(3,605
)
 
 
 
(3,605
)
Balance at March 31, 2019
115,444,107

 
$
115

 
31,840,141

 
$
32

 
$
1,300,223

 
$
(420,161
)
 
$
(54,915
)
 
$
825,294

 
$
65,258

 
$
890,552

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
111,193,651

 
$
110

 
31,189,137

 
$
31

 
$
1,257,840

 
$
(420,005
)
 
$
(33,212
)
 
$
804,764

 
$
67,301

 
$
872,065

Shares issued
1,003,893

 
1

 
313,417

 

 
11,011

 
 
 
 
 
11,012

 
 
 
11,012

Shares issued to affiliate
345,221

 

 
 
 
 
 
2,886

 
 
 
 
 
2,886

 
 
 
2,886

Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
171

 
171

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
(3,596
)
 
(3,596
)
Distributions declared ($0.1563 and $0.1375 per share to Class A and Class C, respectively)
 
 
 
 
 
 
 
 
 
 
(21,834
)
 
 
 
(21,834
)
 
 
 
(21,834
)
Net income
 
 
 
 
 
 
 
 
 
 
10,327

 
 
 
10,327

 
1,991

 
12,318

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 

Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
 
 
9,960

 
9,960

 
1,617

 
11,577

Unrealized loss on derivative instruments
 
 
 
 
 
 
 
 
 
 
 
 
(659
)
 
(659
)
 
 
 
(659
)
Repurchase of shares
(443,204
)
 

 
(133,781
)
 

 
(4,738
)
 
 
 
 
 
(4,738
)
 
 
 
(4,738
)
Balance at March 31, 2018
112,099,561

 
$
111

 
31,368,773

 
$
31

 
$
1,266,999

 
$
(431,512
)
 
$
(23,911
)
 
$
811,718

 
$
67,484

 
$
879,202


See Notes to Condensed Consolidated Financial Statements.


CPA:18 – Global 3/31/2019 10-Q 5


CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Three Months Ended March 31,
 
2019
 
2018
Cash Flows — Operating Activities

 
 
Net Cash Provided by Operating Activities
$
21,859

 
$
26,729

Cash Flows — Investing Activities
 
 
 
Funding and advances for build-to-suit and development projects
(20,313
)
 
(24,103
)
Proceeds from sale of real estate
16,404

 
771

Acquisitions of real estate, build-to-suit and development projects
(12,095
)
 
(8,785
)
Value added taxes paid in connection with acquisitions of real estate
(2,926
)
 
(2,282
)
Payment of deferred acquisition fees to an affiliate
(2,252
)
 
(1,683
)
Value added taxes refunded in connection with acquisitions of real estate
1,006

 
1,166

Capital expenditures on real estate
(750
)
 
(4,271
)
Proceeds from insurance settlements

 
4,972

Proceeds from repayment of notes receivable

 
2,546

Capital contributions to equity investment

 
(3
)
Net Cash Used in Investing Activities
(20,926
)
 
(31,672
)
Cash Flows — Financing Activities
 
 
 
Distributions paid
(22,264
)
 
(21,686
)
Scheduled payments and prepayments of mortgage principal
(16,423
)
 
(4,489
)
Proceeds from issuance of shares
10,487

 
10,486

Proceeds from mortgage financing
7,582

 
77,920

Distributions to noncontrolling interests
(7,112
)
 
(3,596
)
Repurchase of shares
(3,605
)
 
(4,738
)
Contributions from noncontrolling interests
2,520

 
171

Other financing activities, net
(368
)
 
498

Payment of deferred financing costs and mortgage deposits
(348
)
 
(728
)
Net Cash (Used in) Provided by Financing Activities
(29,531
)
 
53,838

Change in Cash and Cash Equivalents and Restricted Cash During the Period
 
 
 
Effect of exchange rate changes on cash and cash equivalents and restricted cash
(441
)
 
1,407

Net (decrease) increase in cash and cash equivalents and restricted cash
(29,039
)
 
50,302

Cash and cash equivalents and restricted cash, beginning of period
190,838

 
90,183

Cash and cash equivalents and restricted cash, end of period
$
161,799

 
$
140,485


See Notes to Condensed Consolidated Financial Statements.


CPA:18 – Global 3/31/2019 10-Q 6


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

Note 1. Organization

Organization

Corporate Property Associates 18 – Global Incorporated (“CPA:18 – Global”), is a publicly owned, non-traded 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. In addition, our portfolio includes self-storage and student housing investments. We were formed in 2012 and are managed by W. P. Carey Inc. (“WPC”) through one of its subsidiaries (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 (the “Operating Partnership”), and as of March 31, 2019 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.

As of March 31, 2019, our net lease portfolio was comprised of full or partial ownership interests in 56 properties, substantially all of which were fully-occupied and triple-net leased to 90 tenants totaling 10.0 million square feet. The remainder of our portfolio was comprised of our full or partial ownership interests in 69 self-storage properties and 15 multi-family properties (which includes 13 student housing development projects and two student housing operating properties) totaling 5.5 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 student housing development projects, student housing operating properties and multi-family residential properties. In addition, we have an All Other category that includes our notes receivable investments (Note 13). 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, 2019, $158.8 million and $44.8 million of distributions to our shareholders were reinvested in our Class A and Class C common stock, respectively, through our Distribution Reinvestment Plan (“DRIP”).

Note 2. Basis of Presentation

Basis of Presentation

Our interim condensed 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 condensed consolidated financial position, results of operations, and cash flows in accordance with generally accepted accounting principles in the United States (“GAAP”). The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by 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 condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 2018, which are included in the 2018 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 3/31/2019 10-Q 7


Notes to Condensed 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 condensed consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.

Basis of Consolidation

Our condensed 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 (“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 VIEs 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.

As of March 31, 2019, we considered 22 entities to be VIEs, 21 of which we consolidated as we are considered the primary beneficiary. As of December 31, 2018, we considered 21 entities to be VIEs, 20 of which we consolidated. The following table presents a summary of selected financial data of the consolidated VIEs included in the condensed consolidated balance sheets (in thousands):
 
March 31, 2019
 
December 31, 2018
Real estate — Land, buildings and improvements
$
360,902

 
$
362,536

Operating real estate — Land, buildings and improvements
114,144

 
110,543

Real estate under construction
179,943

 
151,479

In-place lease intangible assets
85,120

 
86,011

Right-of-use and other intangible assets
23,698

 
17,223

Accumulated depreciation and amortization
(71,687
)
 
(68,534
)
Cash and cash equivalents
13,307

 
18,092

Accounts receivable and other assets, net
22,393

 
27,625

Total assets
727,820

 
704,975

 
 
 
 
Non-recourse mortgages, net, including debt attributable to Assets held for sale
$
278,570

 
$
284,669

Bonds payable, net
57,872

 
57,253

Accounts payable, accrued expenses and other liabilities
51,861

 
50,061

Total liabilities
388,303

 
391,983


As of both March 31, 2019 and December 31, 2018, 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, 2019 and December 31, 2018, the net carrying amount of this equity investment was $18.3 million and $18.8 million, respectively, and our maximum exposure to loss in this entity is limited to our investment. 



CPA:18 – Global 3/31/2019 10-Q 8


Notes to Condensed Consolidated Financial Statements (Unaudited)


At times, the carrying value of our equity investment may fall below zero. 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. As of both March 31, 2019 and December 31, 2018, our sole equity investment did not have a carrying value below zero.

Reclassifications 

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

In accordance with the SEC’s adoption of certain rule and form amendments on August 17, 2018, we moved Gain on sale of real estate, net in the condensed consolidated statements of income to be included within Other Income and Expenses.

In connection with our adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), effective January 1, 2019, as described below in Recent Accounting Pronouncements, reimbursable tenant costs (revenues), which were previously included in Other operating income, are now included within Lease revenues — net-leased in the condensed consolidated statements of income. Additionally, we previously presented Interest income from direct financing leases separately on the condensed consolidated statements of income. We now present this item within Lease revenues — net-leased.

In addition, we previously presented Other operating income and Other interest income separately on the condensed consolidated statements of income. We currently present these items as Other operating and interest income as a result of the reclassifications related to the adoption of ASU 2016-02 previously discussed. Additionally, non-lease operating real estate income is now included in Other operating and interest income, which was previously included in Lease revenues — operating real estate in the condensed consolidated statements of income.

Lastly, we reclassified Acquisition and other expenses to be included in General and administrative in the condensed consolidated statements of income.

Restricted Cash

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the condensed consolidated statements of cash flows (in thousands):
 
March 31, 2019
 
December 31, 2018
Cash and cash equivalents
$
140,142

 
$
170,914

Restricted cash (a)
21,657

 
19,924

Total cash and cash equivalents and restricted cash
$
161,799

 
$
190,838

__________
(a)
Restricted cash is included within Accounts receivable and other assets, net on our condensed consolidated balance sheets.

Accounts Receivable and Other Assets, net

The following table presents a summary of amounts included in Accounts receivable and other assets, net in the condensed consolidated financial statements (in thousands):
 
March 31, 2019
 
December 31, 2018
Accounts receivable and other assets, net
 
 
 
Notes receivable (Note 5)
$
63,954

 
$
63,954

Accounts receivable, net
31,735

 
31,302

Goodwill (Note 6)
26,367

 
26,354

Restricted cash
21,657

 
19,924

Equity investment in real estate (Note 4)
18,316

 
18,764

Prepaid expenses
4,237

 
12,890

Other assets
25,967

 
24,215

 
$
192,233

 
$
197,403



CPA:18 – Global 3/31/2019 10-Q 9


Notes to Condensed Consolidated Financial Statements (Unaudited)



Accounts Payable, Accrued Expenses and Other Liabilities

The following table presents a summary of amounts included in Accounts payable, accrued expenses and other liabilities in the condensed consolidated financial statements (in thousands):
 
March 31, 2019
 
December 31, 2018
Accounts payable, accrued expenses and other liabilities
 
 
 
Deferred income taxes
$
48,285

 
$
47,956

Accounts payable and accrued expenses
35,839

 
35,260

Deferred revenue
16,396

 
18,545

Lease liability (Note 4)
9,409

 

Intangible liabilities, net (Note 6)
9,310

 
9,757

Other liabilities
20,497

 
20,547

 
$
139,736

 
$
132,065


Recent Accounting Pronouncements

Pronouncements Adopted through March 31, 2019

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 modifies the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract: the lessee and the lessor. ASU 2016-02 provides new guidelines that change the accounting for leasing arrangements for lessees, whereby their rights and obligations under substantially all leases, existing and new, are capitalized and recorded on the balance sheet. For lessors, however, the new standard remains generally consistent with existing guidance, but has been updated to align with certain changes to the lessee model and ASU 2014-09, Revenue from Contracts with Customers (Topic 606).

We adopted this guidance for our interim and annual periods beginning January 1, 2019 using the modified retrospective method, applying the transition provisions at the beginning of the period of adoption rather than at the beginning of the earliest comparative period presented. We elected the package of practical expedients as permitted under the transition guidance, which allowed us to not reassess whether arrangements contain leases, lease classification, and initial direct costs. The adoption of the lease standard resulted in a cumulative effect adjustment recognized of $1.1 million in the opening balance of retained earnings as of January 1, 2019.

As a Lessee: we recognized $36.7 million of operating lease right-of-use (“ROU”) assets and $9.5 million of corresponding lease liabilities for certain operating land lease arrangements for which we were the lessee on January 1, 2019, which included reclassifying below market intangible assets, above market intangible liabilities, prepaid rent and deferred rent as a component of the ROU asset (a net reclassification of $27.2 million). See Note 4 for additional disclosures on the presentation of these amounts in our condensed consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments under the lease. We determine if an arrangement contains a lease at contract inception and determine the classification of the lease at commencement. Operating lease ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. We do not include renewal options in the lease term when calculating the lease liability unless we are reasonably certain we will exercise the option. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. Our variable lease payments consist of increases as a result of the Consumer Price Index (“CPI”) or other comparable indices, taxes and maintenance costs. Lease expense for lease payments is recognized on a straight-line basis over the term of the lease.



CPA:18 – Global 3/31/2019 10-Q 10


Notes to Condensed Consolidated Financial Statements (Unaudited)


The implicit rate within our operating leases is generally not determinable and, as a result, we use our incremental borrowing rate at the lease commencement date to determine the present value of lease payments. The determination of our incremental borrowing rate requires judgment. We determine our incremental borrowing rate for each lease using estimated baseline mortgage rates. These baseline rates are determined based on a review of current mortgage debt market activity for benchmark securities across domestic and international markets, utilizing a yield curve. The rates are then adjusted for various factors, including level of collateralization and lease term.

As a Lessor: a practical expedient allows lessors to combine non-lease components (lease arrangements that include common area maintenance services) with related lease components (lease revenues), if both the timing and pattern of transfer are the same for the non-lease component and related lease component, the lease component is the predominant component, and the lease component would otherwise be classified as an operating lease. We elected the practical expedient. For (i) operating lease arrangements involving real estate that include common area maintenance services and (ii) all real estate arrangements that include real estate taxes and insurance costs, we present these amounts within Lease revenues — net-leased in our condensed consolidated statements of income. We record amounts reimbursed by the lessee in the period that the applicable expenses are incurred.

Under ASU 2016-02, lessors are allowed to only capitalize incremental direct leasing costs. We generally have not capitalized internal legal leasing costs incurred, and, as a result, will not be materially impacted by this change.

In addition, if a lessor determines subsequent to the commencement date of the lease, that collectability of lease payments under an operating lease is not probable, the lessor is required to recognize the difference between income recognized up to that point and the income that would have been recognized on a cash basis as a reduction of current period lease income. This differs from the previous guidance, where the lessor would recognize the effects of a change in the assessment of collectability as an addition to the bad debt reserve for amounts accrued at the time the collectability assessment changed. As a result, we recorded $0.8 million of current period adjustments to Lease revenues — net-leased during the three months ended March 31, 2019 as opposed to property expenses, which is where they were previously recorded.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 makes more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and eliminates the requirements to separately measure and disclose 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. We adopted this guidance for our interim and annual periods beginning January 1, 2019. The adoption of this standard impacted our condensed consolidated financial statements for both cash flow and net investment hedges. Changes in the fair value of our hedging instruments are no longer separated into effective and ineffective portions. The entire change in the fair value of these hedging instruments included in the assessment of effectiveness is now recorded in Accumulated other comprehensive loss. The impact to our condensed consolidated financial statements as a result of these changes was not material.

Pronouncements to be Adopted after March 31, 2019

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses. ASU 2016-13 introduces a new model for estimating 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. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. 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 condensed consolidated financial statements.



CPA:18 – Global 3/31/2019 10-Q 11


Notes to Condensed 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. 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 (which excludes the annual distribution and shareholder servicing fee that impacts equity as further disclosed below the tables) in accordance with the terms of the relevant agreements (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Amounts Included in the Condensed Consolidated Statements of Income
 
 
 
Asset management fees
$
2,868

 
$
2,874

Available Cash Distributions
1,848

 
1,905

Disposition fees
1,117

 

Personnel and overhead reimbursements
798

 
717

Interest expense on deferred acquisition fees and external joint venture loans
127

 
(62
)
Director compensation
55

 
40

 
$
6,813

 
$
5,474

 
 
 
 
Acquisition Fees Capitalized
 
 
 
Current acquisition fees
$
695

 
$
721

Deferred acquisition fees
555

 
577

Capitalized personnel and overhead reimbursements
89

 
112

 
$
1,339

 
$
1,410


The following table presents a summary of amounts included in Due to affiliates in the condensed consolidated financial statements (in thousands):
 
March 31, 2019
 
December 31, 2018
Due to Affiliates (a)
 
 
 
Deferred acquisition fees, including accrued interest
$
6,728

 
$
8,720

Accounts payable and other
5,179

 
5,070

Asset management fees payable
967

 
972

Current acquisition fees
16

 
2,065

 
$
12,890

 
$
16,827

__________
(a)
This table excludes outstanding receivables from our Advisor totaling $0.5 million and $0.4 million as of March 31, 2019 and December 31, 2018, respectively, which was included within Accounts receivable and other assets, net in our condensed consolidated financial statements.



CPA:18 – Global 3/31/2019 10-Q 12


Notes to Condensed Consolidated Financial Statements (Unaudited)


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.

As of March 31, 2019 and December 31, 2018, no such loans were outstanding.

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 (“NAV”) per Class A share, which was $8.73 as of December 31, 2018. Effective January 1, 2019, our Advisor elected to receive 50% of the asset management fees in shares of our Class A common stock and 50% in cash. During the year ended December 31, 2018, all asset management fees paid to our Advisor were in shares of our Class A common stock. As of March 31, 2019, our Advisor owned 5,259,524 shares, or 3.6%, of our outstanding Class A common stock. Asset management fees are included in Property expenses in the condensed consolidated financial statements.

Annual Distribution and Shareholder Servicing Fee

In connection with our Class C common stock, selected dealers are entitled to receive an annual distribution and shareholder servicing fee from us. 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, which was $8.73 as of December 31, 2018. 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 reaches 10.0% of the gross proceeds from our initial public offering, which it had not yet reached as of March 31, 2019. As of March 31, 2019 and December 31, 2018, we recorded a liability for the annual distribution and shareholder servicing fee of $3.3 million and $3.8 million, respectively, within Accounts payable, accrued expenses and other liabilities in the condensed 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 March 31, 2019 and December 31, 2018. Unpaid installments of deferred acquisition fees are included in Due to affiliates in the condensed 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, 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. During the period ended March 31, 2019, a total of $1.1 million of disposition fees were approved and paid in connection with certain 2018 and 2019 dispositions, and are included in Gain on sale of real estate, net in the condensed consolidated financial statements.



CPA:18 – Global 3/31/2019 10-Q 13


Notes to Condensed 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, which as of March 31, 2019 included Carey Watermark Investors Incorporated, Carey Watermark Investors 2 Incorporated, and Carey European Housing Fund I L.P. (collectively with us, the “Managed Programs”). Our Advisor also allocated a portion of its personnel and overhead expenses to Corporate Property Associates 17 – Global Incorporated prior to October 31, 2018, the date at which that fund merged into a wholly-owned subsidiary of WPC. 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 salaries and benefits paid to our named executive officers or for the cost of personnel that provide services for transactions for where our Advisor receives a fee (such as for acquisitions and dispositions). Under the advisory agreement, the amount of applicable personnel costs allocated to us is capped at 1.0% of pro rata total revenues for each of 2019 and 2018. 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 condensed 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 trailing four 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 (“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 condensed consolidated financial statements.

Jointly Owned Investments and Other Transactions with our Affiliates

As of March 31, 2019, we owned interests ranging from 50% to 99% in jointly owned investments, with the remaining interests held by affiliates or by third parties. Since no other parties hold any rights that supersede our control, we consolidate all of these joint ventures, with the exception of our sole equity investment (Note 4), which we account for under the equity method of accounting. We account for the minority share of these investments as noncontrolling interests.



CPA:18 – Global 3/31/2019 10-Q 14


Notes to Condensed 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, which are subject to operating leases, is summarized as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
Land
$
194,592

 
$
195,275

Buildings and improvements
1,005,915

 
1,015,501

Less: Accumulated depreciation
(118,667
)
 
(112,061
)
 
$
1,081,840

 
$
1,098,715


During the three months ended March 31, 2019, the U.S. dollar strengthened against the euro, as the end-of-period rate for the U.S. dollar in relation to the euro decreased by 1.9% to $1.1235 from $1.1450. Additionally, during the current period, the U.S. dollar weakened against the Norwegian krone, as the end-of-period rate for the U.S. dollar in relation to the Norwegian krone increased by 1.0% from $0.1151 to $0.1163. Lastly, the U.S. dollar weakened against the British pound sterling, as the end-of-period rate for the U.S. dollar in relation to the British pound sterling increased by 2.3% from $1.2800 to $1.3090. As a result, the carrying value of our Real Estate — Land, buildings and improvements decreased by $6.6 million from December 31, 2018 to March 31, 2019.

Depreciation expense, including the effect of foreign currency translation, on our real estate was $7.5 million and $7.9 million for the three months ended March 31, 2019 and 2018, respectively.

Dispositions of Real Estate

During the three months ended March 31, 2019, we sold a retail building located in Edinburgh, United Kingdom. As a result, the carrying value of our real estate properties decreased by $2.8 million from December 31, 2018 to March 31, 2019 (Note 12).

Leases

Operating Lease Income

Lease income related to operating leases recognized and included within Lease revenues — net-leased and Lease revenues — operating real estate in the condensed consolidated statements of income is as follows (in thousands):
 
Three Months Ended March 31, 2019
Lease income — fixed
$
42,028

Lease income — variable (a)
5,186

Total operating lease income (b)
$
47,214

___________
(a)
Includes (i) rent increases based on changes in the CPI and other comparable indices and (ii) reimbursements for property taxes, insurance, and common area maintenance services.
(b)
Excludes $1.0 million of interest income from direct financing leases that is included in Lease revenues — net-leased in the condensed consolidated statements of income.



CPA:18 – Global 3/31/2019 10-Q 15


Notes to Condensed Consolidated Financial Statements (Unaudited)


Scheduled Future Lease Payments
 
Scheduled future lease payments (exclusive of renewal options that are determined to be reasonably certain of exercise, expenses paid by tenants, percentage rents, and future CPI-based adjustments) under non-cancelable operating leases at March 31, 2019 are as follows (in thousands): 
Years Ending December 31, 
 
Total
2019 (remainder)
 
$
72,365

2020
 
95,113

2021
 
94,844

2022
 
95,054

2023
 
88,505

Thereafter
 
576,362

Total
 
$
1,022,243


Scheduled future lease payments (exclusive of renewal options that are determined to be reasonably certain of exercise, expenses paid by tenants, percentage rents, and future CPI-based adjustments) under non-cancelable operating leases at December 31, 2018 are as follows (in thousands): 
Years Ending December 31, 
 
Total
2019
 
$
101,618

2020
 
101,413

2021
 
101,261

2022
 
101,535

2023
 
94,502

Thereafter
 
590,636

Total
 
$
1,090,965


Lease Obligations

We recognize an operating ROU asset and a corresponding lease liability for ten land lease arrangements for which we are the lessee. Our leases have remaining lease terms ranging from less than seven years to 984 years (excluding extension options not reasonably certain of being exercised).

Lease Cost

Certain information related to the total lease cost for operating leases for the three months ended March 31, 2019 is as follows (in thousands):
 
Three Months Ended March 31, 2019
Fixed lease cost
$
278

Total lease cost
$
278


During the three months ended March 31, 2019, we recognized reimbursable ground rent totaling approximately $0.2 million, which is included in Lease revenues — net-leased in the condensed consolidated statements of income.



CPA:18 – Global 3/31/2019 10-Q 16


Notes to Condensed Consolidated Financial Statements (Unaudited)


Other Information

Supplemental balance sheet information related to ROU assets and lease liabilities is as follows (dollars in thousands):
 
Location on Condensed Consolidated Balance Sheets
 
March 31, 2019
Operating ROU assets — ground leases
Right-of-use and other intangible assets
 
$
36,226

 
 
 
 
Operating lease liabilities — ground leases
Accounts payable, accrued expenses and other liabilities
 
$
9,409

 
 
 
 
Weighted-average remaining lease term — operating leases
 
 
47.2 years

Weighted-average discount rate — operating leases
 
 
7.0
%

Cash paid for operating lease liabilities included in the Net cash provided by operating activities for the three months ended March 31, 2019 was $0.1 million. There are no land finance leases for which we are the lessee, therefore there are no related ROU assets or lease liabilities.

Undiscounted Cash Flows

A reconciliation of the undiscounted cash flows for operating leases recorded on the condensed consolidated balance sheet within Accounts payable, accrued expenses and other liabilities as of March 31, 2019 is as follows (in thousands):
Years Ending December 31, 
 
Total
2019 (remainder)
 
$
614

2020
 
742

2021
 
742

2022
 
742

2023
 
742

Thereafter
 
28,835

Total lease payments
 
32,417

Less: amount of lease payments representing interest
 
(23,008
)
Present value of future lease payments/lease obligations
 
$
9,409


Scheduled future lease payments (excluding amounts paid directly by tenants) for the five succeeding years subsequent to the year ended December 31, 2018 are $0.3 million each year, respectively, and $8.8 million thereafter.

Operating Real Estate Land, Buildings and Improvements
 
Operating real estate, which consists of our self-storage, student housing, and multi-family residential properties, is summarized as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
Land
$
78,168

 
$
77,984

Buildings and improvements
428,903

 
425,165

Less: Accumulated depreciation
(45,800
)
 
(41,969
)
 
$
461,271

 
$
461,180


The carrying value of our Operating real estate — land, buildings and improvements increased by $2.5 million from December 31, 2018 to March 31, 2019, due to the weakening of the U.S. dollar relative to the British pound sterling during the period.



CPA:18 – Global 3/31/2019 10-Q 17


Notes to Condensed Consolidated Financial Statements (Unaudited)


Depreciation expense on our operating real estate was $3.8 million and $4.4 million for the three months ended March 31, 2019 and 2018, respectively.

For the three months ended March 31, 2019, Lease revenues — operating real estate totaling $17.3 million was comprised of lease revenues from 69 consolidated self-storage properties, two consolidated student housing operating properties and one multi-family residential property (which was sold during the period). For the three months ended March 31, 2018, Lease revenues — operating real estate totaling $19.0 million was comprised of lease revenues from 69 consolidated self-storage properties and six multi-family residential properties. We derive self-storage revenue from rents received from customers who rent storage space primarily under month-to-month leases for personal or business use. We derive student housing and multi-family residential revenue primarily from leases of one year or less with the individual students and tenants, respectively.

Dispositions of Operating Real Estate

During the three months ended March 31, 2019, we sold our last multi-family residential property, which was previously classified as held for sale at December 31, 2018. As a result, the carrying value of Assets held for sale, net decreased by $23.6 million from December 31, 2018 to March 31, 2019 (Note 12).

Real Estate Under Construction

The following table provides the activity of our Real estate under construction (in thousands):
 
Three Months Ended March 31, 2019
Beginning balance
$
152,106

Capitalized funds
30,142

Foreign currency translation adjustments
(2,087
)
Capitalized interest
1,562

Placed into service
(1,165
)
Ending balance
$
180,558


Capitalized Funds

On February 8, 2019, we entered into a student housing development project located in Pamplona, Spain at a total cost of $11.1 million (amount is based on the exchange rate of the euro on the date of acquisition). This property is under construction and is currently projected to be completed in September 2021, at which point, our total investment is expected to be approximately $29.7 million. As there is insufficient equity at risk, the investment is considered to be a VIE (Note 2).

During the three months ended March 31, 2019, total capitalized funds primarily related to our student housing development projects, which were comprised principally of initial funding of $11.1 million and construction draws of $19.0 million. Capitalized funds include accrued costs of $0.5 million, which is a non-cash investing activity.

Capitalized Interest

Capitalized interest includes interest incurred during construction as well as amortization of the mortgage discount and deferred financing costs, which totaled $1.6 million during the three months ended March 31, 2019, which is a non-cash investing activity.

Placed into Service

During the three months ended March 31, 2019, a total of $1.2 million was placed into service, principally related to the remaining portion of two substantially completed student housing operating properties, which is a non-cash investing activity.



CPA:18 – Global 3/31/2019 10-Q 18


Notes to Condensed Consolidated Financial Statements (Unaudited)


Ending Balance

As of March 31, 2019, we had 13 open development projects, with aggregate unfunded commitments of approximately $346.9 million, excluding capitalized interest, accrued costs, and capitalized acquisition fees for our Advisor.

Assets and Liabilities Held for Sale

Below is a summary of our properties held for sale (in thousands):
 
March 31, 2019
 
December 31, 2018
Operating real estate — Land, buildings and improvements
$

 
$
26,277

In-place lease intangible assets

 
1,090

Accumulated depreciation and amortization

 
(3,759
)
Assets held for sale, net
$

 
$
23,608

 
 
 
 
Non-recourse mortgages, net, including debt attributable to Assets held for sale
$

 
$
24,250


As of December 31, 2018, we had one multi-family residential property classified as Assets held for sale with a carrying value of $23.6 million, which was encumbered at that date by a non-recourse mortgage loan of $24.3 million. This property was sold in January 2019 and the debt was transferred to the buyer upon sale (Note 12).

Equity Investment in Real Estate

We classify distributions received from equity method investments using the cumulative earnings approach. Distributions received are considered returns on the investment and classified as cash inflows from operating activities. If, however, the investor’s cumulative distributions received, less distributions received in prior periods determined to be returns of investment, exceeds cumulative equity in earnings recognized, the excess is considered a return of investment and is classified as cash inflows from investing activities.

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 entity is jointly owned with a third party, which is also the general partner. Our ownership interest in the joint venture is 90%. As of March 31, 2019, the joint-venture partner had not accumulated the amounts to purchase its entire 10% equity interest, which will be funded by the distributions it is eligible to receive upon properties being placed into service. 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.

At March 31, 2019 and December 31, 2018, our total equity investment balance for these self-storage properties were $18.3 million and $18.8 million, respectively, which is included in Accounts receivable and other assets, net in the condensed consolidated financial statements. At March 31, 2019 and December 31, 2018, the joint venture had total third-party recourse debt of $31.5 million and $28.7 million, respectively. As of March 31, 2019, the unfunded commitments for the development projects totaled approximately $13.4 million, related to our equity investment.

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 (which are included in Accounts receivable and other assets, net in the condensed consolidated financial statements) 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 condensed consolidated financial statements. See Note 2 and Note 4 for information on ROU operating lease assets recognized on our condensed consolidated balance sheets.



CPA:18 – Global 3/31/2019 10-Q 19


Notes to Condensed Consolidated Financial Statements (Unaudited)


Notes Receivable

As of December 31, 2018, our notes receivable consisted of two mortgage loans. The first is a $28.0 million mezzanine tranche of 10-year commercial mortgage-backed securities on the Cipriani banquet halls in New York, New York with a maturity date of July 2024. The mezzanine tranche is subordinated to a $60.0 million senior loan on the properties. We have received and will continue to receive interest-only payments at a rate of 10% per annum on this loan through its maturity date. As of both March 31, 2019 and December 31, 2018, the balance for this note receivable remained $28.0 million.

The second is a $38.5 million mezzanine loan collateralized by 27 retail stores in Minnesota, Wisconsin, and Iowa leased to Mills Fleet Farm Group LLC (“Mills Fleet”). The loan bears interest at one month London Interbank Offered Rate (“LIBOR”) plus 10%, and we have received interest-only monthly payments. On October 9, 2018, the Mills Fleet borrower exercised its first of three options to extend the maturity date for one-year successive terms from October 2018 to October 2019. The loan is collateralized by the pledge of 27 entities that directly own the retail stores and is subordinated to a $280.0 million senior mortgage on the properties. As of both March 31, 2019 and December 31, 2018, the Mills Fleet note receivable is $36.0 million. On April 9, 2019 we received full repayment on this mezzanine loan (Note 14).

Net Investments in Direct Financing Leases

Net investments in our direct financing lease investments is summarized as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
Lease payments receivable
$
57,725

 
$
58,353

Unguaranteed residual value
39,402

 
39,402

 
97,127

 
97,755

Less: unearned income
(55,298
)
 
(56,010
)
 
$
41,829

 
$
41,745


Interest income from direct financing leases was $1.0 million and $0.9 million for the three months ended March 31, 2019 and 2018, respectively, and is included in Other operating and interest income in our condensed consolidated statements of income.

Scheduled Future Lease Payments

Scheduled future lease payments (exclusive of renewal options that are determined to be reasonably certain of exercise, expenses paid by tenants, percentage of rents, and future CPI-based adjustments) under non-cancelable direct financing leases as of March 31, 2019 were as follows (in thousands):
Years Ending December 31, 
 
Total
2019 (remainder)
 
$
2,553

2020
 
3,466

2021
 
3,533

2022
 
3,610

2023
 
3,688

Thereafter
 
40,875

Total undiscounted cash flows
 
$
57,725




CPA:18 – Global 3/31/2019 10-Q 20


Notes to Condensed Consolidated Financial Statements (Unaudited)


Scheduled future lease payments (exclusive of renewal options that are determined to be reasonably certain of exercise, expenses paid by tenants, percentage of rents, and future CPI-based adjustments) under non-cancelable direct financing leases as of December 31, 2018 were as follows (in thousands):
Years Ending December 31, 
 
Total
2019
 
$
3,375

2020
 
3,455

2021
 
3,523

2022
 
3,599

2023
 
3,677

Thereafter
 
40,724

Total undiscounted cash flows
 
$
58,353


Credit Quality of Finance Receivables

As of both March 31, 2019 and December 31, 2018, 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, 2019. 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 is updated quarterly.

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, 2019
 
December 31, 2018
 
March 31, 2019
 
December 31, 2018
1
 
 
 
$

 
$

2
 
2
 
2
 
15,685

 
15,705

3
 
2
 
2
 
29,759

 
29,751

4
 
2
 
2
 
60,339

 
60,243

5
 
 
 

 

 
 
0
 
 
 
$
105,783

 
$
105,699


Note 6. Intangible Assets and Liabilities

In-place lease intangibles are included in In-place lease intangible assets in the condensed consolidated financial statements. Below-market ground lease intangibles (as lessee) and above-market rent intangibles are included in Right-of-use and other intangible assets in the condensed consolidated financial statements. Below-market rent intangibles and above-market ground lease intangibles (as lessee) are included in Accounts payable, accrued expenses and other liabilities in the condensed consolidated financial statements.

The following table presents a reconciliation of our goodwill, which is included in our Net Lease segment and included in Accounts receivable and other assets, net in the condensed consolidated financial statements (in thousands):
 
Three Months Ended March 31, 2019
Balance at January 1, 2019
$
26,354

Foreign currency translation
13

Balance at March 31, 2019
$
26,367




CPA:18 – Global 3/31/2019 10-Q 21


Notes to Condensed Consolidated Financial Statements (Unaudited)


Intangible assets and liabilities are summarized as follows (in thousands):
 
 
 
March 31, 2019
 
December 31, 2018
 
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
5 – 23
 
$
250,765

 
$
(124,265
)
 
$
126,500

 
$
252,316

 
$
(120,936
)
 
$
131,380

Below-market ground lease (a)
N/A
 

 

 

 
21,966

 
(1,719
)
 
20,247

Above-market rent
5 – 30
 
10,974

 
(3,986
)
 
6,988

 
11,178

 
(3,923
)
 
7,255

 
 
 
261,739

 
(128,251
)
 
133,488

 
285,460

 
(126,578
)
 
158,882

Indefinite-Lived Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill
 
 
26,367

 

 
26,367

 
26,354

 

 
26,354

Total intangible assets
 
 
$
288,106

 
$
(128,251
)
 
$
159,855

 
$
311,814

 
$
(126,578
)
 
$
185,236

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finite-lived Intangible Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Below-market rent
6 – 30
 
$
(15,212
)
 
$
5,902

 
$
(9,310
)
 
$
(15,309
)
 
$
5,651

 
$
(9,658
)
Above-market ground lease (a)
N/A
 

 

 

 
(105
)
 
6

 
(99
)
Total intangible liabilities
 
 
$
(15,212
)
 
$
5,902

 
$
(9,310
)
 
$
(15,414
)
 
$
5,657

 
$
(9,757
)
___________
(a)
In connection with our adoption of ASU 2016-02 (Note 2), in the first quarter of 2019, we prospectively reclassified below-market ground lease intangible assets and above-market ground lease intangible liabilities to be a component of ROU assets. These amounts are included within Right-of-use and other intangibles in our condensed consolidated balance sheets.

Net amortization of intangibles, including the effect of foreign currency translation, was $3.9 million and $5.3 million for the three months ended March 31, 2019 and 2018, respectively. Amortization of below-market rent and above-market rent intangibles is recorded as an adjustment to Rental income; amortization of in-place lease intangibles is included in Depreciation and amortization expense; and amortization of below-market and above-market ground lease intangibles was included in Property expenses (prior to the reclassification of above-market ground lease and below-market lease intangibles to ROU assets within Right-of-use and other intangible assets during the first quarter of 2019, as described above).

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.



CPA:18 – Global 3/31/2019 10-Q 22


Notes to Condensed Consolidated Financial Statements (Unaudited)


Derivative Assets and Liabilities — Our derivative assets and liabilities, which are included in Accounts receivable and other assets, net and Accounts payable, accrued expenses and other liabilities, respectively, in the condensed 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.

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, 2019 and 2018. Gains and losses (realized and unrealized) recognized on items measured at fair value on a recurring basis included in earnings are reported within Other gains and (losses) on our condensed 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, 2019
 
December 31, 2018
 
Level
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Debt, net (a) (b)
3
 
$
1,201,993

 
$
1,230,036

 
$
1,237,427

 
$
1,257,032

Notes receivable (c)
3
 
63,954

 
66,154

 
63,954

 
66,154

___________
(a)
Debt, net consists of Non-recourse mortgages, net and Bonds payable, net. As of March 31, 2019 and December 31, 2018, the carrying value of Non-recourse mortgages, net includes unamortized deferred financing costs of $5.9 million and $6.2 million, respectively. As of March 31, 2019 and December 31, 2018, the carrying value of Bonds payable, net includes unamortized deferred financing costs of $0.6 million and $0.7 million, respectively. As of March 31, 2019 and December 31, 2018, the carrying value of Non-recourse mortgages, net includes unamortized discount, net of $3.5 million. As of March 31, 2019 and December 31, 2018, the carrying value of Bonds payable, net includes unamortized premium, net of $5.0 million and $4.8 million, respectively (Note 9).
(b)
We determined the estimated fair value of our Non-recourse mortgages, net and Bonds payable, net 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 as of both March 31, 2019 and December 31, 2018.

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.
 


CPA:18 – Global 3/31/2019 10-Q 23


Notes to Condensed Consolidated Financial Statements (Unaudited)


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: (i) a counterparty to a hedging arrangement defaulting on its obligation and (ii) 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, as well as 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 derivatives designated and that qualify as cash flow hedges, the change in fair value of the derivative is recognized in Other comprehensive income until the hedged transaction affects earnings. Gains and losses on the cash flow hedges representing hedge components excluded from the assessment of effectiveness are recognized in earnings over the life of the hedge on a systematic and rational basis, as documented at hedge inception in accordance with the Company’s accounting policy election. Such gains and losses are recorded within Other gains and (losses) or Interest expense in our condensed consolidated statements of income. The earnings recognition of excluded components is presented in the same line item as the hedged transactions. For derivatives designated and that qualify as a net investment hedge, the change in the 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. Amounts are reclassified out of Other comprehensive income into earnings when the hedged net investment is either sold or substantially liquidated.

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 condensed consolidated financial statements. As of both March 31, 2019 and December 31, 2018, no cash collateral had been posted or received for any of our derivative positions.



CPA:18 – Global 3/31/2019 10-Q 24


Notes to Condensed 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
 
Derivative Assets Fair Value at
 
Derivative Liabilities Fair Value at
 
 
March 31, 2019
 
December 31, 2018
 
March 31, 2019
 
December 31, 2018
Foreign currency forward contracts
 
Accounts receivable and other assets, net
 
$
1,856

 
$
2,011

 
$

 
$

Foreign currency collars
 
Accounts receivable and other assets, net
 
1,024

 
750

 

 

Interest rate swaps
 
Accounts receivable and other assets, net
 
433

 
808

 

 

Interest rate swaps
 
Accounts payable, accrued expenses and other liabilities
 

 

 
(1,042
)
 
(529
)
Foreign currency collars
 
Accounts payable, accrued expenses and other liabilities
 

 

 
(180
)
 
(622
)
 
 
 
 
3,313

 
3,569

 
(1,222
)
 
(1,151
)
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
 
 
 
Foreign currency collars
 
Accounts payable, accrued expenses and other liabilities
 

 

 
(17
)
 
(115
)
 
 
 
 

 

 
(17
)
 
(115
)
Total derivatives
 
 
 
$
3,313

 
$
3,569

 
$
(1,239
)
 
$
(1,266
)

The following tables present the impact of our derivative instruments in the condensed consolidated financial statements (in thousands):
 
 
Amount of Gain (Loss) Recognized on Derivatives in Other Comprehensive Income
 
 
Three Months Ended March 31,
Derivatives in Cash Flow Hedging Relationships 
 
2019
 
2018
Interest rate swaps
 
$
(887
)
 
$
1,157

Foreign currency collars
 
805

 
(1,205
)
Foreign currency forward contracts
 
(157
)
 
(629
)
Interest rate cap
 
1

 
18

Derivatives in Net Investment Hedging Relationship (a)
 
 
 
 
Foreign currency collars
 
1

 
(126
)
Foreign currency forward contracts
 

 
(23
)
Total
 
$
(237
)
 
$
(808
)
___________
(a)
The changes in fair value and the settlement of these contracts are reported in the foreign currency translation adjustment section of Other comprehensive income.



CPA:18 – Global 3/31/2019 10-Q 25


Notes to Condensed Consolidated Financial Statements (Unaudited)


 
 
 
 
Amount of Gain (Loss) on Derivatives Reclassified from Other Comprehensive Income into Income
Derivatives in Cash Flow Hedging Relationships 
 
Location of Gain (Loss) Recognized in Income
 
Three Months Ended March 31,
 
 
2019
 
2018
Foreign currency forward contracts
 
Other gains and (losses)
 
$
346

 
$
222

Interest rate swaps
 
Interest expense
 
27

 
(83
)
Foreign currency collars
 
Other gains and (losses)
 
11

 
(154
)
Interest rate cap
 
Interest expense
 
(3
)
 
(31
)
Total
 
 
 
$
381

 
$
(46
)

Amounts reported in Other comprehensive income related to our interest derivative contracts will be reclassified to Interest expense as interest is incurred on our variable-rate debt. Amounts reported in Other comprehensive income related to foreign currency derivative contracts will be reclassified to Other gains and (losses) when the hedged foreign currency contracts are settled. As of March 31, 2019, we estimated that an additional $0.1 million and $1.5 million will be reclassified as Interest expense and Other gains and (losses), respectively, during the next 12 months.

The following table presents the impact of our derivative instruments in the condensed 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,
 
 
2019
 
2018
Foreign currency collars
 
Other gains and (losses)
 
$
118

 
$
(151
)
Interest rate swaps
 
Interest expense
 

 
(6
)
Derivatives in Cash Flow Hedging Relationships
 
 
 
 
 
 
Foreign currency collars
 
Other gains and (losses)
 
7

 
(10
)
Interest rate swaps
 
Interest expense
 
(1
)
 
6

Total
 
 
 
$
124

 
$
(161
)

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 joint investment partners have obtained, and may in the future obtain, variable-rate non-recourse mortgage loans and, as a result, we have entered into, and may continue to enter into interest rate swap agreements or interest rate cap agreements with 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 as of March 31, 2019 are summarized as follows (currency in thousands):
Interest Rate Derivatives
 
Number of Instruments
 
Notional
Amount
 
Fair Value at
March 31, 2019 (a)
Interest rate swaps
 
10
 
98,918

USD
 
$
(544
)
Interest rate swap
 
1
 
9,664

EUR
 
(65
)
Interest rate cap
 
1
 
5,700

USD
 

 
 
 
 
 
 
 
$
(609
)
___________


CPA:18 – Global 3/31/2019 10-Q 26


Notes to Condensed Consolidated Financial Statements (Unaudited)


(a)
Fair value amount is based on the exchange rate of the euro as of March 31, 2019, as applicable.

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 gains and (losses) in the condensed 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 as of March 31, 2019 (currency in thousands):
Foreign Currency Derivatives
 
Number of Instruments
 
Notional
Amount
 
Fair Value at
March 31, 2019
Designated as Cash Flow Hedging Instruments
 
 
 
 
 
 
 
Foreign currency forward contracts
 
13
 
5,072

EUR
 
$
1,449

Foreign currency collars
 
34
 
23,436

EUR
 
513

Foreign currency forward contracts
 
7
 
10,531

NOK
 
352

Foreign currency collars
 
21
 
42,480

NOK
 
246

Designated as Net Investment Hedging Instruments
 
 
 
 
 
 
 
Foreign currency collars
 
2
 
9,350

NOK
 
85

Foreign currency forward contracts
 
1
 
2,568

NOK
 
55

Not Designated as Hedging Instruments
 
 
 
 
 
 
 
Foreign currency collars
 
2
 
3,000

EUR
 
(17
)
 
 
 
 
 
 
 
$
2,683


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, 2019. At March 31, 2019, our total credit exposure was $3.1 million and the maximum exposure to any single counterparty was $2.1 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. As of March 31, 2019, 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 and $1.3 million as of March 31, 2019 and December 31, 2018, respectively, which included accrued interest and any nonperformance risk adjustments. If we had breached any of these provisions as of March 31, 2019 or December 31, 2018, we could have been required to settle our obligations under these agreements at their aggregate termination value of $1.3 million and $1.4 million, respectively.



CPA:18 – Global 3/31/2019 10-Q 27


Notes to Condensed Consolidated Financial Statements (Unaudited)


Note 9. Debt, net

Debt, net consists of Non-recourse mortgages, net, including debt attributable to Assets held for sale and Bonds payable, net, which are collateralized by the assignment of real estate properties. As of March 31, 2019, our debt bore interest at fixed annual rates ranging from 1.7% to 5.8% and variable contractual annual rates ranging from 1.6% to 8.2%, with maturity dates ranging from 2019 to 2039.

Financing Activity During 2019

On March 4, 2019, we obtained a construction loan of $51.7 million for a student housing development project located in Austin, Texas. The loan bears a variable interest rate on outstanding drawn balances (4.6% on the date of the loan), and is scheduled to mature in March 2023. We have the option to extend this loan one year from the original maturity date to March 2024. As of March 31, 2019, less than $0.1 million had been drawn on the construction loan.

In connection with the construction loan acquired in 2018 for the student housing development project located in Barcelona, Spain, we made additional draws during the three months ended March 31, 2019 at an annual fixed interest rate of 2.5% on (i) the development tranche of the loan totaling $2.1 million, which has a maturity date of April 2032; and (ii) the furniture, fixtures, and equipment tranche of the loan totaling $0.2 million, which has a maturity date of April 2026. Finally, we drew down a total of $0.2 million on the additional loan for this development project, which has a maturity date of May 2022 and also bears an annual fixed interest rate of 2.5%. All foregoing loan amounts are quoted based on the exchange rates of the euro at the date of each drawdown.

During the three months ended March 31, 2019, we made additional draws totaling $1.0 million in relation to a student housing operating property located in Portsmouth, United Kingdom. The loan bears a variable interest rate on outstanding drawn balances (6.3% as of March 31, 2019) and is scheduled to mature in November 2019. We made additional draws totaling $0.7 million on a construction loan related to a student housing operating property located in Cardiff, United Kingdom. The loan bears an annual interest rate of 7.5% plus LIBOR for outstanding drawn balances, with a maturity date of October 2019. All foregoing loan amounts are quoted based on the exchange rate of the British pound sterling at the date of each drawdown.

Scheduled Debt Principal Payments
 
Scheduled debt principal payments during the remainder of 2019, each of the next four calendar years following December 31, 2019, and thereafter are as follows (in thousands):
Years Ending December 31,
 
Total
2019 (remainder)
 
$
83,801

2020
 
88,996

2021
 
162,238

2022
 
118,598

2023
 
154,957

Thereafter through 2039
 
598,460

Total principal payments
 
1,207,050

Unamortized deferred financing costs
 
(6,534
)
Unamortized premium, net
 
1,477

Total
 
$
1,201,993


Certain amounts in the table above are based on the applicable foreign currency exchange rate at March 31, 2019.

The carrying value of our Non-recourse mortgages, net, and Bonds payable, net decreased by $2.5 million in the aggregate from December 31, 2018 to March 31, 2019, reflecting the impact of the strengthening of the U.S. dollar relative to certain foreign currencies (primarily the euro) during the same period.



CPA:18 – Global 3/31/2019 10-Q 28


Notes to Condensed Consolidated Financial Statements (Unaudited)


Debt Covenants

As of March 31, 2019, we remained in breach of the debt service coverage ratio covenant on our Agrokor mortgage loan. The covenant breach will be cured once the net operating income for the related property exceeds the amount set forth in the related loan agreement. During the period ended March 31, 2019, no additional payments have been made on the loan principal as a result of the breach. As Agrokor is currently in financial distress, there is uncertainty regarding future rent collections (Note 13) and whether the default can be cured.

As of March 31, 2019, we remained in breach of a non-financial covenant on one of our non-recourse mortgage loans. As a result of the breach, the lender has the right to declare a “cash trap” in which any surplus cash in our rent account would be transferred to a reserve account with the lender. As of March 31, 2019, $2.5 million has been transferred to the reserve account with the lender, which is included as restricted cash within Accounts receivable and other assets, net on our condensed consolidated balance sheets. The amounts will be released once the non-financial covenant breach is cured.

Note 10. Commitments and Contingencies

As of March 31, 2019, 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 condensed consolidated financial position or results of operations.

See Note 4 for unfunded construction commitments.

Note 11. Earnings Per Share and Equity

Basic and Diluted Earnings Per Share

The following table presents earnings per share (in thousands, except share and per share amounts):
 
Three Months Ended March 31, 2019
 
Three Months Ended March 31, 2018
 
Basic and Diluted Weighted-Average
Shares Outstanding
 
Allocation of Net Income
 
Basic and Diluted Earnings Per Share 
 
Basic and Diluted Weighted-Average
Shares Outstanding
 
Allocation of Net Income
 
Basic and Diluted Earnings Per Share 
Class A common stock
115,497,094

 
$
11,654

 
$
0.10

 
112,113,960

 
$
8,110

 
$
0.07

Class C common stock
31,879,027

 
3,173

 
0.10

 
31,441,399

 
2,217

 
0.07

Net income attributable to CPA:18 – Global
 
 
$
14,827

 
 
 
 
 
$
10,327

 
 

The allocation of Net income 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. The Class C common stock allocation includes interest expense related to accretion of interest on the annual distribution and shareholder servicing fee liability of less than $0.1 million and $0.1 million for the three months ended March 31, 2019 and 2018, respectively (Note 3).

Distributions

Distributions are declared at the discretion of our board of directors and are not guaranteed. For the three months ended March 31, 2019, our board of directors declared quarterly distributions of $0.1563 per share for our Class A common stock and $0.1373 per share for our Class C common stock, which was paid on April 15, 2019 to stockholders of record on March 29, 2019, in the amount of $22.4 million.



CPA:18 – Global 3/31/2019 10-Q 29


Notes to Condensed Consolidated Financial Statements (Unaudited)


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, 2019
 
Gains and (Losses) on Derivative Instruments
 
Foreign Currency Translation Adjustments
 
Total
Beginning balance
$
2,215

 
$
(52,808
)
 
$
(50,593
)
Other comprehensive loss before reclassifications
143

 
(4,242
)
 
(4,099
)
Amounts reclassified from accumulated other comprehensive loss to:
 
 
 
 
 
Other gains and (losses)
(357