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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 September 30, 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
400863023_cpa18logoa01a01a34.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)

Securities registered pursuant to Section 12(b) of the Act: None

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 117,490,016 shares of Class A common stock, $0.001 par value, and 32,392,428 shares of Class C common stock, $0.001 par value, outstanding at November 1, 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”); and the impact of recently issued accounting pronouncements and regulatory activity. 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 9/30/2019 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)
 
September 30, 2019
 
December 31, 2018
Assets
 
 
 
Investments in real estate:
 
 
 
Real estate — Land, buildings and improvements
$
1,145,792

 
$
1,210,776

Operating real estate — Land, buildings and improvements
533,610

 
503,149

Real estate under construction
192,993

 
152,106

Net investments in direct financing leases
41,932

 
41,745

In-place lease and other intangible assets
286,915

 
285,460

Investments in real estate
2,201,242

 
2,193,236

Accumulated depreciation and amortization
(316,732
)
 
(280,608
)
Assets held for sale, net

 
23,608

Net investments in real estate
1,884,510

 
1,936,236

Cash and cash equivalents
168,507

 
170,914

Accounts receivable and other assets, net
143,348

 
197,403

Total assets (a)
$
2,196,365

 
$
2,304,553

Liabilities and Equity
 
 
 
Non-recourse secured debt, net
$
1,175,801

 
$
1,237,427

Accounts payable, accrued expenses and other liabilities
140,619

 
132,065

Due to affiliates
12,166

 
16,827

Distributions payable
22,628

 
22,264

Total liabilities (a)
1,351,214

 
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; 116,505,536 and 114,589,333 shares, respectively, issued and outstanding
116

 
114

Class C common stock, $0.001 par value; 80,000,000 shares authorized; 32,105,792 and 31,641,265 shares, respectively, issued and outstanding
32

 
32

Additional paid-in capital
1,312,108

 
1,290,888

Distributions and accumulated losses
(453,290
)
 
(411,464
)
Accumulated other comprehensive loss
(72,510
)
 
(50,593
)
Total stockholders’ equity
786,456

 
828,977

Noncontrolling interests
58,695

 
66,993

Total equity
845,151

 
895,970

Total liabilities and equity
$
2,196,365

 
$
2,304,553

__________
(a)
See Note 2 for details related to variable interest entities (“VIEs”).

See Notes to Condensed Consolidated Financial Statements.


CPA:18 – Global 9/30/2019 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 September 30,
 
Nine Months Ended September 30,
 
2019

2018
 
2019
 
2018
Revenues
 
 
 
 
 
 
 
Lease revenues — net-leased
$
29,596

 
$
32,382

 
$
90,619

 
$
98,271

Lease revenues — operating real estate
17,405

 
20,167

 
51,967

 
58,711

Other operating and interest income
2,090

 
2,608

 
5,826

 
8,013

 
49,091


55,157

 
148,412

 
164,995

Operating Expenses
 
 
 
 
 
 
 
Depreciation and amortization
18,163

 
16,520

 
50,715

 
51,044

Property expenses
7,993

 
9,753

 
24,794

 
29,777

Operating real estate expenses
7,370

 
9,148

 
20,451

 
25,527

General and administrative
2,211

 
1,927

 
6,070

 
5,389

 
35,737

 
37,348

 
102,030

 
111,737

Other Income and Expenses
 
 
 
 
 
 
 
Interest expense
(11,739
)
 
(13,624
)
 
(36,140
)
 
(39,848
)
Gain on sale of real estate, net
8,548

 
52,193

 
24,606

 
52,193

Equity in losses of equity method investment in real estate
(337
)
 
(148
)
 
(1,588
)
 
(707
)
Other gains and (losses)
258

 
(801
)
 
1,732

 
5,119

 
(3,270
)
 
37,620

 
(11,390
)
 
16,757

Income before income taxes
10,084

 
55,429

 
34,992

 
70,015

Benefit from income taxes
380

 
58

 
323

 
771

Net Income
10,464

 
55,487

 
35,315

 
70,786

Net income attributable to noncontrolling interests (inclusive of Available Cash Distributions to a related party of $1,619, $1,710, $5,572, and $6,445, respectively)
(1,505
)
 
(10,003
)
 
(8,451
)
 
(15,309
)
Net Income Attributable to CPA:18 – Global
$
8,959


$
45,484

 
$
26,864

 
$
55,477

Class A Common Stock
 
 
 
 
 
 
 
Net income attributable to CPA:18 – Global
$
7,048

 
$
35,630

 
$
21,145

 
$
43,497

Basic and diluted weighted-average shares outstanding
116,843,927

 
113,800,898

 
116,188,858

 
112,981,455

Basic and diluted earnings per share
$
0.06

 
$
0.31

 
$
0.18

 
$
0.38

Class C Common Stock
 
 
 
 
 
 
 
Net income attributable to CPA:18 – Global
$
1,911

 
$
9,854

 
$
5,719

 
$
11,980

Basic and diluted weighted-average shares outstanding
32,226,626

 
31,654,504

 
32,056,045

 
31,563,948

Basic and diluted earnings per share
$
0.06

 
$
0.31

 
$
0.18

 
$
0.38


See Notes to Condensed Consolidated Financial Statements.


CPA:18 – Global 9/30/2019 10-Q 3


CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
(in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net Income
$
10,464

 
$
55,487

 
$
35,315

 
$
70,786

Other Comprehensive Loss
 
 
 
 
 
 
 
Foreign currency translation adjustments
(21,817
)
 
(2,659
)
 
(22,401
)
 
(13,664
)
Unrealized gain (loss) on derivative instruments
670

 
772

 
(1,539
)
 
3,531

 
(21,147
)
 
(1,887
)
 
(23,940
)
 
(10,133
)
Comprehensive (Loss) Income
(10,683
)
 
53,600

 
11,375

 
60,653

 
 
 
 
 
 
 
 
Amounts Attributable to Noncontrolling Interests
 
 
 
 
 
 
 
Foreign currency translation adjustments
2,196

 
260

 
2,023

 
969

Net income
(1,505
)
 
(10,003
)
 
(8,451
)
 
(15,309
)
Comprehensive loss (income) attributable to noncontrolling interests
691

 
(9,743
)
 
(6,428
)
 
(14,340
)
Comprehensive (Loss) Income Attributable to CPA:18 – Global
$
(9,992
)
 
$
43,857

 
$
4,947

 
$
46,313

 
See Notes to Condensed Consolidated Financial Statements.



CPA:18 – Global 9/30/2019 10-Q 4


CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
(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 July 1, 2019
116,033,328

 
$
115

 
32,002,614

 
$
32

 
$
1,306,923

 
$
(439,622
)
 
$
(53,559
)
 
$
813,889

 
$
63,084

 
$
876,973

Shares issued
961,464

 
1

 
293,499

 

 
10,954

 
 
 
 
 
10,955

 
 
 
10,955

Shares issued to affiliate
164,461

 

 
 
 
 
 
1,455

 
 
 
 
 
1,455

 
 
 
1,455

Shares issued to directors
9,164

 

 
 
 
 
 
80

 
 
 
 
 
80

 
 
 
80

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
(3,698
)
 
(3,698
)
Distributions declared ($0.1563 and $0.1376 per share to Class A and Class C, respectively)
 
 
 
 
 
 
 
 
 
 
(22,627
)
 
 
 
(22,627
)
 
 
 
(22,627
)
Net income
 
 
 
 
 
 
 
 
 
 
8,959

 
 
 
8,959

 
1,505

 
10,464

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 

Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
 
 
(19,621
)
 
(19,621
)
 
(2,196
)
 
(21,817
)
Unrealized gain on derivative instruments
 
 
 
 
 
 
 
 
 
 
 
 
670

 
670

 
 
 
670

Repurchase of shares
(662,881
)
 

 
(190,321
)
 

 
(7,304
)
 
 
 
 
 
(7,304
)
 
 
 
(7,304
)
Balance at September 30, 2019
116,505,536

 
$
116

 
32,105,792

 
$
32

 
$
1,312,108

 
$
(453,290
)
 
$
(72,510
)
 
$
786,456

 
$
58,695

 
$
845,151

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at July 1, 2018
112,849,543

 
$
113

 
31,410,984

 
$
31

 
$
1,273,685

 
$
(453,823
)
 
$
(40,749
)
 
$
779,257

 
$
65,605

 
$
844,862

Shares issued
978,213

 
1

 
302,680

 
1

 
10,976

 
 
 
 
 
10,978

 
 
 
10,978

Shares issued to affiliate
362,412

 

 
 
 
 
 
3,106

 
 
 
 
 
3,106

 
 
 
3,106

Shares issued to directors
8,753

 

 
 
 
 
 
75

 
 
 
 
 
75

 
 
 
75

Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
2,409

 
2,409

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
(11,503
)
 
(11,503
)
Distributions declared ($0.1563 and $0.1374 per share to Class A and Class C, respectively)
 
 
 
 
 
 
 
 
 
 
(22,112
)
 
 
 
(22,112
)
 
 
 
(22,112
)
Net income
 
 
 
 
 
 
 
 
 
 
45,484

 
 
 
45,484

 
10,003

 
55,487

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
 
 
(2,399
)
 
(2,399
)
 
(260
)
 
(2,659
)
Unrealized gain on derivative instruments
 
 
 
 
 
 
 
 
 
 
 
 
772

 
772

 
 
 
772

Repurchase of shares
(434,411
)
 

 
(183,713
)
 

 
(5,119
)
 
 
 
 
 
(5,119
)
 
 
 
(5,119
)
Balance at September 30, 2018
113,764,510

 
$
114

 
31,529,951

 
$
32

 
$
1,282,723

 
$
(430,451
)
 
$
(42,376
)
 
$
810,042

 
$
66,254

 
$
876,296




CPA:18 – Global 9/30/2019 10-Q 5


CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
(Continued)
(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
2,886,630

 
3

 
884,732

 
1

 
32,921

 
 
 
 
 
32,925

 

 
32,925

Shares issued to affiliate
549,408

 
1

 
 
 
 
 
4,816

 
 
 
 
 
4,817

 

 
4,817

Shares issued to directors
9,164

 

 
 
 
 
 
80

 
 
 
 
 
80

 
 
 
80

Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
2,511

 
2,511

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
(17,237
)
 
(17,237
)
Distributions declared ($0.4689 and $0.4125 per share to Class A and Class C, respectively)
 
 
 
 
 
 
 
 
 
 
(67,582
)
 
 
 
(67,582
)
 
 
 
(67,582
)
Net income
 
 
 
 
 
 
 
 
 
 
26,864

 
 
 
26,864

 
8,451

 
35,315

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 

Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
 
 
(20,378
)
 
(20,378
)
 
(2,023
)
 
(22,401
)
Unrealized loss on derivative instruments
 
 
 
 
 
 
 
 
 
 
 
 
(1,539
)
 
(1,539
)
 
 
 
(1,539
)
Repurchase of shares
(1,528,999
)
 
(2
)
 
(420,205
)
 
(1
)
 
(16,597
)
 
 
 
 
 
(16,600
)
 
 
 
(16,600
)
Balance at September 30, 2019
116,505,536

 
$
116

 
32,105,792

 
$
32

 
$
1,312,108

 
$
(453,290
)
 
$
(72,510
)
 
$
786,456

 
$
58,695

 
$
845,151

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
2,986,360

 
3

 
927,854

 
1

 
32,988

 
 
 
 
 
32,992

 
 
 
32,992

Shares issued to affiliate
1,073,569

 
1

 
 
 
 
 
9,076

 
 
 
 
 
9,077

 
 
 
9,077

Shares issued to directors
8,753

 

 
 
 
 
 
75

 
 
 
 
 
75

 
 
 
75

Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
3,583

 
3,583

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
(18,970
)
 
(18,970
)
Distributions declared ($0.4689 and $0.4127 per share to Class A and Class C, respectively)
 
 
 
 
 
 
 
 
 
 
(65,923
)
 
 
 
(65,923
)
 
 
 
(65,923
)
Net income
 
 
 
 
 
 
 
 
 
 
55,477

 
 
 
55,477

 
15,309

 
70,786

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 

Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
 
 
(12,695
)
 
(12,695
)
 
(969
)
 
(13,664
)
Unrealized gain on derivative instruments
 
 
 
 
 
 
 
 
 
 
 
 
3,531

 
3,531

 
 
 
3,531

Repurchase of shares
(1,497,823
)
 

 
(587,040
)
 

 
(17,256
)
 
 
 
 
 
(17,256
)
 
 
 
(17,256
)
Balance at September 30, 2018
113,764,510

 
$
114

 
31,529,951

 
$
32

 
$
1,282,723

 
$
(430,451
)
 
$
(42,376
)
 
$
810,042

 
$
66,254

 
$
876,296


See Notes to Condensed Consolidated Financial Statements.


CPA:18 – Global 9/30/2019 10-Q 6


CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Nine Months Ended September 30,
 
2019
 
2018
Cash Flows — Operating Activities

 
 
Net Cash Provided by Operating Activities
$
71,662

 
$
79,184

Cash Flows — Investing Activities
 
 
 
Funding and advances for build-to-suit and development projects
(70,098
)
 
(68,337
)
Proceeds from sale of real estate
51,297

 
82,533

Proceeds from repayment of notes receivable
35,954

 
2,546

Acquisitions of real estate, build-to-suit and development projects
(12,946
)
 
(57,951
)
Value added taxes refunded in connection with acquisitions of real estate
8,819

 
4,436

Value added taxes paid in connection with acquisitions of real estate
(5,499
)
 
(6,193
)
Payment of deferred acquisition fees to an affiliate
(3,628
)
 
(2,976
)
Return of capital from equity investments
3,159

 

Capital expenditures on real estate
(2,206
)
 
(9,902
)
Proceeds from insurance settlements
1,084

 
7,184

Other investing activities, net
(388
)
 
306

Net Cash Provided by (Used in) Investing Activities
5,548

 
(48,354
)
Cash Flows — Financing Activities
 
 
 
Distributions paid
(67,218
)
 
(65,495
)
Scheduled payments and prepayments of mortgage principal
(49,799
)
 
(50,627
)
Proceeds from mortgage financing
36,445

 
142,205

Proceeds from issuance of shares
31,365

 
31,419

Repurchase of shares
(16,600
)
 
(17,256
)
Distributions to noncontrolling interests
(15,406
)
 
(15,595
)
Contributions from noncontrolling interests
2,511

 
1,306

Other financing activities, net
(139
)
 
(222
)
Net Cash (Used in) Provided by Financing Activities
(78,841
)
 
25,735

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
(2,140
)
 
(2,972
)
Net (decrease) increase in cash and cash equivalents and restricted cash
(3,771
)
 
53,593

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

 
90,183

Cash and cash equivalents and restricted cash, end of period
$
187,067

 
$
143,776


See Notes to Condensed Consolidated Financial Statements.


CPA:18 – Global 9/30/2019 10-Q 7


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 taxes on income and gains that we distribute to our stockholders 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. 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 earn student housing and multi-family residential revenue primarily from leases of one year or less with the individual students and tenants, respectively. Our last multi-family residential property was sold on January 29, 2019, and as of that date, we no longer earn revenue from multi-family residential tenants. 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 September 30, 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 September 30, 2019, our net lease portfolio was comprised of full or partial ownership interests in 46 properties, substantially all of which were fully-occupied and triple-net leased to 50 tenants totaling 9.6 million square feet. The remainder of our portfolio was comprised of our full or partial ownership interests in 68 self-storage properties, 12 student housing development projects and three student housing operating properties, totaling 5.6 million square feet.

We operate in three reportable business segments: Net Lease, Self Storage, and Other Operating Properties. 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 Other Operating Properties segment is comprised of our investments in student housing development projects, student housing operating properties and multi-family residential properties (our last multi-family residential property was sold in January 2019). In addition, we have an All Other category that includes our notes receivable investments, one of which was repaid during the second quarter of 2019 (Note 13).

We raised aggregate gross proceeds in our initial public offering of approximately $1.2 billion through April 2, 2015, which is the date we closed our offering. We have fully invested the proceeds from our initial public offering. In addition, from inception through September 30, 2019, $175.6 million and $50.0 million of distributions to our shareholders were reinvested in our Class A and Class C common stock, respectively, through our Distribution Reinvestment Plan (“DRIP”).



CPA:18 – Global 9/30/2019 10-Q 8


Notes to Condensed Consolidated Financial Statements (Unaudited)


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.
 
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 VIE and, if so, whether we are the primary beneficiary and are therefore required to consolidate the entity. There have been no significant changes in our VIE policies from what was disclosed in the 2018 Annual Report.

As of both September 30, 2019 and December 31, 2018, we considered 21 entities to be VIEs, 20 of which we consolidated as we are considered the primary beneficiary. The following table presents a summary of selected financial data of the consolidated VIEs included in the condensed consolidated balance sheets (in thousands):
 
September 30, 2019
 
December 31, 2018
Real estate — Land, buildings and improvements
$
352,213

 
$
362,536

Operating real estate — Land, buildings and improvements
109,124

 
110,543

Real estate under construction
192,397

 
151,479

In-place lease and other intangible assets
106,056

 
103,234

Accumulated depreciation and amortization
(83,849
)
 
(68,534
)
Total assets
712,775

 
704,975

 
 
 
 
Non-recourse secured debt, net
$
330,274

 
$
341,922

Total liabilities
382,321

 
391,983


As of both September 30, 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 September 30, 2019 and December 31, 2018, the net carrying amount of this equity investment was $14.9 million and $18.8 million, respectively, and our maximum exposure to loss in this entity is limited to our investment. 



CPA:18 – Global 9/30/2019 10-Q 9


Notes to Condensed Consolidated Financial Statements (Unaudited)


Foreign Currencies

We are subject to fluctuations in exchange rates between foreign currencies and the U.S. dollar (primarily the euro and the Norwegian krone and, to a lesser extent, the British pound sterling). The following table reflects the end-of-period rate of the U.S. dollar in relation to foreign currencies:
 
September 30, 2019
 
December 31, 2018
 
Percent Change
British Pound Sterling
$
1.2294

 
$
1.2800

 
(4.0
)%
Euro
1.0889

 
1.1450

 
(4.9
)%
Norwegian Krone
0.1100

 
0.1151

 
(4.4
)%

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, which did not have a material impact on our condensed consolidated financial statements.

In the second quarter of 2019, we reclassified right-of-use (“ROU”) and other intangible assets to be included within In-place lease and other intangible assets in our consolidated balance sheets. Additionally, we reclassified non-recourse mortgages, net and bonds payable, net to be included within Non-recourse secured debt, net in our consolidated balance sheets. Prior period balances have been reclassified to conform to the current period presentation.

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):
 
September 30, 2019
 
December 31, 2018
Cash and cash equivalents
$
168,507

 
$
170,914

Restricted cash (a)
18,560

 
19,924

Total cash and cash equivalents and restricted cash
$
187,067

 
$
190,838

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



CPA:18 – Global 9/30/2019 10-Q 10


Notes to Condensed Consolidated Financial Statements (Unaudited)


Deferred Income Taxes

Our deferred tax liabilities were $46.7 million and $48.0 million at September 30, 2019 and December 31, 2018, respectively, and are included in Accounts payable, accrued expenses and other liabilities in the condensed consolidated financial statements. Our deferred tax assets, net of valuation allowances, were $1.3 million and $1.5 million at September 30, 2019 and December 31, 2018, respectively, and are included in Accounts receivable and other assets, net in the condensed consolidated financial statements.

Recent Accounting Pronouncements

Pronouncements Adopted through September 30, 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 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 land lease intangible assets, above market land lease intangible liabilities, and prepaid 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.

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.



CPA:18 – Global 9/30/2019 10-Q 11


Notes to Condensed Consolidated Financial Statements (Unaudited)


Under ASU 2016-02, lessors are allowed to only capitalize incremental direct leasing costs. We were not materially impacted by this change.

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 September 30, 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 is expected to apply to Net investments in direct financing leases and notes receivable within Accounts receivable and other assets, net on our condensed consolidated balance sheets. 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.

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, day-to-day management, 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.



CPA:18 – Global 9/30/2019 10-Q 12


Notes to Condensed Consolidated Financial Statements (Unaudited)


The following tables present a summary of fees we paid, expenses we reimbursed, and distributions we made to our Advisor and other affiliates in accordance with the terms of the relevant agreements (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Amounts Included in the Condensed Consolidated Statements of Income
 
 
 
 
 
 
 
Asset management fees
$
2,929

 
$
3,117

 
$
8,656

 
$
9,142

Available Cash Distributions
1,619

 
1,710

 
5,572

 
6,445

Personnel and overhead reimbursements
1,080

 
870

 
2,661

 
2,303

Interest expense on deferred acquisition fees and external joint venture loans
128

 
100

 
383

 
58

Disposition fees

 

 
1,117

 

 
$
5,756

 
$
5,797

 
$
18,389

 
$
17,948

 
 
 
 
 
 
 
 
Acquisition Fees Capitalized
 
 
 
 
 
 
 
Capitalized personnel and overhead reimbursements
$
2

 
$
313

 
$
91

 
$
684

Current acquisition fees

 
3,085

 
695

 
6,185

Deferred acquisition fees

 
2,468

 
555

 
4,948

 
$
2

 
$
5,866

 
$
1,341

 
$
11,817


The following table presents a summary of amounts included in Due to affiliates in the condensed consolidated financial statements (in thousands):
 
September 30, 2019
 
December 31, 2018
Due to Affiliates
 
 
 
External joint venture loans, accounts payable, and other (a)
$
5,826

 
$
5,070

Deferred acquisition fees, including accrued interest
5,344

 
8,720

Asset management fees payable
969

 
972

Current acquisition fees
27

 
2,065

 
$
12,166

 
$
16,827

___________
(a)
Includes loans from our joint venture partners to the jointly owned investments that we consolidate. As of September 30, 2019 and December 31, 2018, loans due to our joint venture partners, including accrued interest, were $4.5 million and $3.5 million, respectively.

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 September 30, 2019 and December 31, 2018, no such loans were outstanding.



CPA:18 – Global 9/30/2019 10-Q 13


Notes to Condensed Consolidated Financial Statements (Unaudited)


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 $8.91 as of June 30, 2019. 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 September 30, 2019, our Advisor owned 5,588,693 shares, or 3.8%, of our outstanding Class A common stock. Asset management fees are included in Property expenses 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 September 30, 2019 and December 31, 2018. The preferred return will continue to be assessed on a cumulative basis for the remainder of the fiscal year. 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 nine months ended September 30, 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.

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 September 30, 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 the percentage 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 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. In addition, 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. 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 our 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 an asset acquisition.



CPA:18 – Global 9/30/2019 10-Q 14


Notes to Condensed Consolidated Financial Statements (Unaudited)


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 September 30, 2019, we owned interests ranging from 50% to 100% 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.

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):
 
September 30, 2019
 
December 31, 2018
Land
$
184,653

 
$
195,275

Buildings and improvements
961,139

 
1,015,501

Less: Accumulated depreciation
(126,212
)
 
(112,061
)
 
$
1,019,580

 
$
1,098,715


The carrying value of our Real Estate — Land, buildings and improvements decreased by $31.9 million from December 31, 2018 to September 30, 2019, reflecting the impact of exchange rate fluctuations during the same period (Note 2).

Depreciation expense, including the effect of foreign currency translation, on our real estate was $7.1 million and $7.8 million for the three months ended September 30, 2019 and 2018, respectively, and $22.0 million and $23.6 million for the nine months ended September 30, 2019 and 2018, respectively.

Dispositions of Real Estate

During the nine months ended September 30, 2019, we sold the 11 properties in our United Kingdom portfolio (the “Truffle portfolio”). As a result, the carrying value of our real estate properties decreased by $26.0 million from December 31, 2018 to September 30, 2019 (Note 12).



CPA:18 – Global 9/30/2019 10-Q 15


Notes to Condensed Consolidated Financial Statements (Unaudited)


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 are as follows (in thousands):
 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
Lease revenues — net-leased
 
 
 
Lease income — fixed
$
24,797

 
$
75,598

Lease income — variable (a)
3,859

 
12,177

Total operating lease income (b)
$
28,656

 
$
87,775

 
 
 
 
Lease revenues — operating real estate
 
 
 
Lease income — fixed
$
16,758

 
$
50,038

Lease income — variable (c)
648

 
1,932

Total operating lease income
$
17,406

 
$
51,970

___________
(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)
The three and nine months ended September 30, 2019 excludes $0.9 million and $2.8 million, respectively, of interest income from direct financing leases that is included in Lease revenues — net-leased in the condensed consolidated statements of income.
(c)
Primarily comprised of late fees and administrative fees revenues.

Scheduled Future Lease Payments to be Received
 
Scheduled future lease payments to be received (exclusive of expenses paid by tenants, percentage rents, and future CPI-based adjustments) under non-cancelable operating leases at September 30, 2019 are as follows (in thousands): 
Years Ending December 31, 
 
Total
2019 (remainder)
 
$
23,500

2020
 
93,270

2021
 
93,328

2022
 
93,868

2023
 
87,271

Thereafter
 
533,773

Total
 
$
925,010


Scheduled future lease payments to be received (exclusive of 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


See Note 5 for scheduled future lease payments to be received under non-cancelable direct financing leases.



CPA:18 – Global 9/30/2019 10-Q 16


Notes to Condensed Consolidated Financial Statements (Unaudited)


Lease Cost

During the three and nine months ended September 30, 2019 total lease cost for operating leases totaled $0.3 million and $0.8 million, respectively. Additionally, we recognized reimbursable ground rent totaling approximately $0.1 million and $0.3 million, respectively, which is included in Lease revenues — net-leased in the condensed consolidated statements of income.

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
 
September 30, 2019
Operating ROU assets — land leases
In-place lease and other intangible assets
 
$
33,827

 
 
 
 
Operating lease liabilities — land leases
Accounts payable, accrued expenses and other liabilities
 
$
7,915

 
 
 
 
Weighted-average remaining lease term — operating leases (a)
 
 
43.5 years

Weighted-average discount rate — operating leases (a)
 
 
6.8
%
Number of land lease arrangements (b)
 
 
8

Lease term range
 
 
6 – 983 years

___________
(a)
Excludes a $6.8 million ROU land lease asset related to the student housing development project located in Swansea, United Kingdom as it has no future obligation during the remaining 983-year lease term.
(b)
During the three months ended September 30, 2019, two land leases were transferred to the buyer upon sale of our Truffle Portfolio (Note 12).

Cash paid for operating lease liabilities included in the Net cash provided by operating activities for the nine months ended September 30, 2019 was $0.6 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 September 30, 2019 is as follows (in thousands):
Years Ending December 31, 
 
Total
2019 (remainder)
 
$
71

2020
 
639

2021
 
639

2022
 
639

2023
 
639

Thereafter
 
22,520

Total lease payments
 
25,147

Less: amount of lease payments representing interest
 
(17,232
)
Present value of future lease payments/lease obligations
 
$
7,915


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.



CPA:18 – Global 9/30/2019 10-Q 17


Notes to Condensed Consolidated Financial Statements (Unaudited)


Operating Real Estate Land, Buildings and Improvements
 
Operating real estate, which consists of our self-storage, student housing, and multi-family residential properties (our last multi-family residential property was sold on January 29, 2019), is summarized as follows (in thousands):
 
September 30, 2019
 
December 31, 2018
Land
$
77,662

 
$
77,984

Buildings and improvements (a)
455,948

 
425,165

Less: Accumulated depreciation
(53,403
)
 
(41,969
)
 
$
480,207

 
$
461,180

___________
(a)
Amount includes $31.3 million as a result of the substantial completion of the student housing operating property located in Barcelona, Spain on July 2, 2019 (based on the exchange rate of the euro at the date in which assets were placed into service).

The carrying value of our Operating real estate — land, buildings and improvements decreased by $5.5 million from December 31, 2018 to September 30, 2019, reflecting the impact of exchange rate fluctuations during the same period (Note 2).

Depreciation expense, including the effect of foreign currency translation, on our operating real estate was $4.0 million and $4.3 million for the three months ended September 30, 2019 and 2018, respectively, and $11.6 million and $13.1 million for the nine months ended September 30, 2019 and 2018, respectively.

Dispositions of Operating Real Estate

During the nine months ended September 30, 2019, we sold our last multi-family residential property, which was previously classified as held for sale at December 31, 2018 (Note 12).

Real Estate Under Construction

The following table provides the activity of our Real estate under construction (in thousands):
 
Nine Months Ended September 30, 2019
Beginning balance
$
152,106

Capitalized funds
76,928

Placed into service
(34,433
)
Foreign currency translation adjustments
(6,770
)
Capitalized interest
5,162

Ending balance
$
192,993


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 nine months ended September 30, 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 $65.8 million. Capitalized funds include accrued costs of $2.6 million, which is a non-cash investing activity.



CPA:18 – Global 9/30/2019 10-Q 18


Notes to Condensed Consolidated Financial Statements (Unaudited)


Capitalized Interest

Capitalized interest includes interest incurred during construction as well as amortization of the mortgage discount and deferred financing costs, which totaled $5.2 million during the nine months ended September 30, 2019, which is a non-cash investing activity.

Placed into Service

During the three months ended September 30, 2019, upon the substantial completion of the student housing development project located in Barcelona, Spain, we reclassified $31.3 million from Real estate under construction to Operating real estate — Land, buildings and improvements on our condensed consolidated financial statements. Additionally, during the nine months ended September 30, 2019, we placed into service $3.1 million relating to the remaining portion of two substantially completed student housing operating properties, all of which are non-cash investing activities.

Ending Balance

At September 30, 2019, we had 12 open development projects, with aggregate unfunded commitments of approximately $293.3 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):
 
September 30, 2019
 
December 31, 2018
Operating real estate — Land, buildings and improvements
$

 
$
26,277

 
 
 
 
In-place lease and other intangible assets

 
1,090

Accumulated depreciation and amortization

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

 
$
23,608

 
 
 
 
Non-recourse secured debt, net
$

 
$
24,250


At December 31, 2018, we had one multi-family residential property classified as Assets held for sale, net, 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 three self-storage facilities in Canada. This entity was jointly owned with a third party, which is also the general partner of the joint venture. On April 15, 2019, the joint-venture agreement was amended and our ownership and economic interest in the joint venture increased from 90% to 100%. We continue to not consolidate this entity because we are not the primary beneficiary due to shared decision making with the general partner and the nature of our involvement in the activities, which allows us to exercise significant influence, but does not give us power over decisions that significantly affect the economic performance of the entity.



CPA:18 – Global 9/30/2019 10-Q 19


Notes to Condensed Consolidated Financial Statements (Unaudited)


On August 15, 2019, we closed on the disposition and transfer of ownership of the development project located in Vaughan, Canada. In conjunction with this disposal, we recognized equity income of $0.2 million during the three months ended September 30, 2019, which is included in Equity in losses of equity method investment in real estate in our condensed consolidated financial statements.

At September 30, 2019 and December 31, 2018, our total equity investment balance for these self-storage properties was $14.9 million and $18.8 million, respectively, which is included in Accounts receivable and other assets, net in the condensed consolidated financial statements. At September 30, 2019 and December 31, 2018, the joint venture had total third-party recourse debt of $31.7 million and $28.7 million, respectively.

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. See Note 2 and Note 4 for information on ROU operating lease assets recognized on our condensed consolidated balance sheets.

Notes Receivable

At September 30, 2019, our notes receivable consisted of 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. At both September 30, 2019 and December 31, 2018, the balance for this note receivable remained $28.0 million.

On April 9, 2019, we received full repayment totaling $36.0 million on the Mills Fleet Farm Group LLC mezzanine loan (“Mills Fleet”), which was the balance that remained at December 31, 2018.

Net Investments in Direct Financing Leases

Net investments in our direct financing lease investments is summarized as follows (in thousands):
 
September 30, 2019
 
December 31, 2018
Lease payments receivable
$
56,030

 
$
58,353

Unguaranteed residual value
39,402

 
39,402

 
95,432

 
97,755

Less: unearned income
(53,500
)
 
(56,010
)
 
$
41,932

 
$
41,745


Interest income from direct financing leases was $0.9 million for both three months ended September 30, 2019 and 2018, respectively, and $2.8 million and $2.7 million for the nine months ended September 30, 2019 and 2018, respectively, and is included in Lease revenues — net-leased in our condensed consolidated statements of income.



CPA:18 – Global 9/30/2019 10-Q 20


Notes to Condensed Consolidated Financial Statements (Unaudited)


Scheduled Future Lease Payments to be Received

Scheduled future lease payments to be received (exclusive of expenses paid by tenants, percentage of rents, and future CPI-based adjustments) under non-cancelable direct financing leases as of September 30, 2019 were as follows (in thousands):
Years Ending December 31, 
 
Total
2019 (remainder)
 
$
858

2020
 
3,466

2021
 
3,533

2022
 
3,610

2023
 
3,688

Thereafter
 
40,875

Total undiscounted cash flows
 
$
56,030


Scheduled future lease payments to be received (exclusive of 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


See Note 4 for scheduled lease payments to be received under non-cancelable operating leases.

Credit Quality of Finance Receivables

We generally invest in facilities that we believe are critical to a tenant’s business and therefore have a lower risk of tenant default. As of both September 30, 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 nine months ended September 30, 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. A credit quality of one through three indicates a range of investment grade to stable. A credit quality of four through five indicates inclusion on the watch list to risk of default. 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
 
September 30, 2019
 
December 31, 2018
 
September 30, 2019
 
December 31, 2018
1-3
 
4
 
4
 
$
45,422

 
$
45,456

4
 
1
 
2
 
24,510

 
60,243

5
 
 
 

 

 
 
0
 
 
 
$
69,932

 
$
105,699




CPA:18 – Global 9/30/2019 10-Q 21


Notes to Condensed Consolidated Financial Statements (Unaudited)


Note 6. Intangible Assets and Liabilities

In-place lease and above-market rent intangibles are included in In-place lease and other intangible assets in the condensed consolidated financial statements. Below-market rent intangibles are included in Accounts payable, accrued expenses and other liabilities in the condensed consolidated financial statements.

Goodwill is included in our Net Lease segment and included in Accounts receivable and other assets, net in the condensed consolidated financial statements. As a result of foreign currency translation adjustments, goodwill decreased from $26.4 million as of December 31, 2018 to $25.2 million as of September 30, 2019.

Intangible assets and liabilities are summarized as follows (in thousands):
 
 
 
September 30, 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
 
$
243,032

 
$
(133,245
)
 
$
109,787

 
$
252,316

 
$
(120,936
)
 
$
131,380

Above-market rent
5 – 30
 
10,056

 
(3,872
)
 
6,184

 
11,178

 
(3,923
)
 
7,255

Below-market ground lease (a)
N/A
 

 

 

 
21,966

 
(1,719
)
 
20,247

 
 
 
253,088

 
(137,117
)
 
115,971

 
285,460

 
(126,578
)
 
158,882

Indefinite-Lived Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill
 
 
25,225

 

 
25,225

 
26,354

 

 
26,354

Total intangible assets
 
 
$
278,313

 
$
(137,117
)
 
$
141,196

 
$
311,814

 
$
(126,578
)
 
$
185,236

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finite-lived Intangible Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Below-market rent
6 – 30
 
$
(14,928
)
 
$
6,304

 
$
(8,624
)
 
$
(15,309
)
 
$
5,651

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

 

 

 
(105
)
 
6

 
(99
)
Total intangible liabilities
 
 
$
(14,928
)
 
$
6,304

 
$
(8,624
)
 
$
(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 In-place lease and other intangibles in our condensed consolidated balance sheets.