10-Q 1 cpa182016q310-q.htm 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, 2016
 
 
 
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
cpa18logoa01a01a17.jpg
CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
(Exact name of registrant as specified in its charter)
Maryland
 
90-0885534
(State of incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
50 Rockefeller Plaza
 
 
New York, New York
 
10020
(Address of principal executive offices)
 
(Zip Code)
Investor Relations (212) 492-8920
(212) 492-1100
(Registrant’s telephone numbers, including area code)

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

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

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

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 107,499,845 shares of Class A common stock, $0.001 par value, and 30,529,040 shares of Class C common stock, $0.001 par value, outstanding at October 31, 2016.





INDEX

Forward-Looking Statements

This Quarterly Report on Form 10-Q, or this Report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of Part I of this Report, contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. It is important to note that our actual results could be materially different from those projected in such forward-looking statements. You should exercise caution in relying on forward-looking statements as they involve known and unknown risks, uncertainties, and other factors that may materially affect our future results, performance, achievements, or transactions. Information on factors that could impact actual results and cause them to differ from what is anticipated in the forward-looking statements contained herein is included in this Report as well as in our other filings with the Securities and Exchange Commission, or the SEC, including but not limited to those described in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC on March 15, 2016, or the 2015 Annual Report, and in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2016, as filed with the SEC on August 9, 2016. Except as required by federal securities laws and the rules and regulations of the SEC, we do not undertake to revise or update any forward-looking statements.

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




CPA®:18 – Global 9/30/2016 10-Q 1


PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
 
September 30, 2016
 
December 31, 2015
Assets
 
 
 
Investments in real estate:
 
 
 
Real estate, at cost
$
1,024,242

 
$
986,574

Operating real estate, at cost
573,354

 
490,852

Accumulated depreciation
(73,933
)
 
(42,194
)
Net investments in properties
1,523,663

 
1,435,232

Real estate under construction
197,938

 
131,930

Net investment in direct financing leases
50,182

 
51,966

Note receivable
28,000

 
28,000

Net investments in real estate
1,799,783

 
1,647,128

Equity investments in real estate
14,484

 
12,588

Cash and cash equivalents
84,775

 
117,453

In-place lease intangible assets, net
191,869

 
212,420

Other intangible assets, net
30,945

 
31,421

Goodwill
25,103

 
23,389

Other assets, net
84,587

 
90,284

Total assets
$
2,231,546

 
$
2,134,683

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Non-recourse debt, net
$
997,955

 
$
865,327

Bonds payable, net
147,677

 
133,886

Deferred income taxes
50,156

 
47,313

Accounts payable, accrued expenses and other liabilities
81,737

 
71,397

Due to affiliate
27,333

 
43,974

Distributions payable
20,777

 
20,078

Total liabilities
1,325,635

 
1,181,975

Commitments and contingencies (Note 11)

 

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

 

Class A common stock, $0.001 par value; 320,000,000 shares authorized; 106,335,979 and 103,214,083 shares, respectively, issued and outstanding
106

 
103

Class C common stock, $0.001 par value; 80,000,000 shares authorized; 30,190,015 and 29,536,899 shares, respectively, issued and outstanding
30

 
30

Additional paid-in capital
1,211,035

 
1,178,990

Distributions and accumulated losses
(326,084
)
 
(247,995
)
Accumulated other comprehensive loss
(48,545
)
 
(50,316
)
Total CPA®:18 – Global stockholders’ equity
836,542

 
880,812

Noncontrolling interests
69,369

 
71,896

Total equity
905,911

 
952,708

Total liabilities and equity
$
2,231,546

 
$
2,134,683


See Notes to Consolidated Financial Statements (Unaudited).


CPA®:18 – Global 9/30/2016 10-Q 2


CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except share and per share amounts) 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016

2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
 
Lease revenues:
 
 
 
 
 
 
 
 
Rental income
 
$
23,620

 
$
20,628

 
$
69,887

 
$
56,054

Interest income from direct financing leases
 
1,131

 
1,047

 
3,452

 
3,079

Total lease revenues
 
24,751

 
21,675

 
73,339

 
59,133

Other real estate income
 
18,711

 
12,308

 
52,190

 
27,332

Other operating income
 
3,112

 
2,376

 
9,138

 
6,128

Other interest income
 
710

 
710

 
2,130

 
2,120

 
 
47,284


37,069

 
136,797

 
94,713

Operating Expenses
 
 
 
 
 
 
 
 
Depreciation and amortization
 
20,876

 
17,652

 
62,771

 
44,303

Other real estate expenses
 
8,634

 
5,380

 
23,261

 
11,660

Property expenses
 
6,946

 
5,612

 
19,676

 
13,703

General and administrative
 
1,601

 
2,735

 
5,151

 
6,459

Acquisition expenses
 
36

 
10,795

 
4,747

 
34,575

 
 
38,093

 
42,174

 
115,606

 
110,700

Other Income and Expenses
 
 
 
 
 
 
 
 
Interest expense
 
(11,025
)
 
(7,970
)
 
(31,705
)
 
(24,065
)
Other income and (expenses)
 
87

 
(2,324
)
 
1,120

 
(4,256
)
 
 
(10,938
)
 
(10,294
)
 
(30,585
)
 
(28,321
)
Loss before income taxes and gain (loss) on sale of real estate
 
(1,747
)
 
(15,399
)
 
(9,394
)
 
(44,308
)
 (Provision for) benefit from income taxes
 
(103
)
 
1,062

 
(303
)
 
854

Loss before gain (loss) on sale of real estate
 
(1,850
)
 
(14,337
)
 
(9,697
)
 
(43,454
)
Gain (loss) on sale of real estate, net of tax
 

 
6,654

 
(63
)
 
6,654

Net Loss
 
(1,850
)
 
(7,683
)
 
(9,760
)
 
(36,800
)
Net income attributable to noncontrolling interests (inclusive of Available Cash Distributions to a related party of $1,662, $1,705, $5,319, and $4,021, respectively)
 
(2,231
)
 
(2,092
)
 
(6,730
)
 
(5,096
)
Net Loss Attributable to CPA®:18 – Global
 
$
(4,081
)

$
(9,775
)
 
$
(16,490
)
 
$
(41,896
)
 
 
 
 
 
 
 
 
 
Class A Common Stock
 
 
 
 
 
 
 
 
Net loss attributable to CPA®:18 – Global
 
$
(3,083
)
 
$
(7,078
)
 
$
(12,569
)
 
$
(31,659
)
Basic and diluted weighted-average shares outstanding
 
106,279,055

 
102,293,880

 
105,148,891

 
101,471,695

Basic and diluted loss per share
 
$
(0.03
)
 
$
(0.07
)
 
$
(0.12
)
 
$
(0.31
)
Distributions Declared Per Share
 
$
0.1563

 
$
0.1563

 
$
0.4689

 
$
0.4687

 
 
 
 
 
 
 
 
 
Class C Common Stock
 
 
 
 
 
 
 
 
Net loss attributable to CPA®:18 – Global
 
$
(998
)
 
$
(2,697
)
 
$
(3,921
)
 
$
(10,237
)
Basic and diluted weighted-average shares outstanding
 
30,205,326

 
29,279,706

 
29,964,756

 
26,925,898

Basic and diluted loss per share
 
$
(0.03
)
 
$
(0.09
)
 
$
(0.13
)
 
$
(0.38
)
Distributions Declared Per Share
 
$
0.1376

 
$
0.1340

 
$
0.4089

 
$
0.3998


See Notes to Consolidated Financial Statements (Unaudited).


CPA®:18 – Global 9/30/2016 10-Q 3


CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
(in thousands) 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Net Loss
 
$
(1,850
)
 
$
(7,683
)
 
$
(9,760
)
 
$
(36,800
)
Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
2,963

 
(6,724
)
 
8,739

 
(28,202
)
Change in net unrealized (loss) gain on derivative instruments
 
(928
)
 
837

 
(4,678
)
 
3,115

 
 
2,035

 
(5,887
)
 
4,061

 
(25,087
)
Comprehensive Income (Loss)
 
185

 
(13,570
)
 
(5,699
)
 
(61,887
)
 
 
 
 
 
 
 
 
 
Amounts Attributable to Noncontrolling Interests
 
 
 
 
 
 
 
 
Net income
 
(2,231
)
 
(2,092
)
 
(6,730
)
 
(5,096
)
Foreign currency translation adjustments
 
(813
)
 
1,300

 
(2,290
)
 
5,480

Comprehensive (income) loss attributable to noncontrolling interests
 
(3,044
)
 
(792
)
 
(9,020
)
 
384

Comprehensive Loss Attributable to CPA®:18 – Global
 
$
(2,859
)
 
$
(14,362
)
 
$
(14,719
)
 
$
(61,503
)
 
See Notes to Consolidated Financial Statements (Unaudited).



CPA®:18 – Global 9/30/2016 10-Q 4


CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
Nine Months Ended September 30, 2016 and 2015
(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, 2016
103,214,083

 
$
103

 
29,536,899

 
$
30

 
$
1,178,990

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

 
$
71,896

 
$
952,708

Shares issued, net of offering costs
2,900,565

 
3

 
939,990

 

 
32,450

 
 
 
 
 
32,453

 

 
32,453

Shares issued to affiliate
913,907

 
1

 
 
 
 
 
7,390

 
 
 
 
 
7,391

 

 
7,391

Stock-based compensation
12,658

 

 
 
 
 
 
100

 
 
 
 
 
100

 
 
 
100

Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
41

 
41

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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

 
(9,760
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 

Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
 
 
6,449

 
6,449

 
2,290

 
8,739

Change in net unrealized loss on derivative instruments
 
 
 
 
 
 
 
 
 
 
 
 
(4,678
)
 
(4,678
)
 
 
 
(4,678
)
Repurchase of shares
(705,234
)
 
(1
)
 
(286,874
)
 

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

 
$
106

 
30,190,015

 
$
30

 
$
1,211,035

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

 
$
69,369

 
$
905,911

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2015
99,924,009

 
$
100

 
18,026,013

 
$
18

 
$
1,055,342

 
$
(111,878
)
 
$
(20,941
)
 
$
922,641

 
$
77,587

 
$
1,000,228

Shares issued, net of offering costs
2,478,960

 
2

 
11,312,950

 
11

 
124,715

 
 
 
 
 
124,728

 
 
 
124,728

Shares issued to affiliate
490,598

 
1

 
 
 
 
 
4,906

 
 
 
 
 
4,907

 
 
 
4,907

Stock-based compensation
11,111

 

 
 
 
 
 
100

 
 
 
 
 
100

 
 
 
100

Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
4,132

 
4,132

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
(7,454
)
 
(7,454
)
Distributions declared ($0.4687 and $0.3998 per share to Class A and Class C, respectively)
 
 
 
 
 
 
 
 
 
 
(58,309
)
 
 
 
(58,309
)
 
 
 
(58,309
)
Net loss
 
 
 
 
 
 
 
 
 
 
(41,896
)
 
 
 
(41,896
)
 
5,096

 
(36,800
)
Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 

Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
 
 
(22,722
)
 
(22,722
)
 
(5,480
)
 
(28,202
)
Change in net unrealized gain on derivative instruments
 
 
 
 
 
 
 
 
 
 
 
 
3,115

 
3,115

 
 
 
3,115

Repurchase of shares
(544,294
)
 

 
(44,685
)
 

 
(5,621
)
 
 
 
 
 
(5,621
)
 
 
 
(5,621
)
Balance at September 30, 2015
102,360,384

 
$
103

 
29,294,278

 
$
29

 
$
1,179,442

 
$
(212,083
)
 
$
(40,548
)
 
$
926,943

 
$
73,881

 
$
1,000,824


See Notes to Consolidated Financial Statements (Unaudited).


CPA®:18 – Global 9/30/2016 10-Q 5


CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
 
Nine Months Ended September 30,
 
 
2016
 
2015
Cash Flows — Operating Activities
 

 
 
Net Cash Provided by Operating Activities
 
$
56,005

 
$
24,380

Cash Flows — Investing Activities
 
 
 
 
Funding and advances for build-to-suit projects
 
(81,119
)
 
(34,978
)
Acquisitions of real estate, net of cash acquired
 
(55,307
)
 
(658,384
)
Value added taxes paid in connection with acquisition of real estate
 
(7,994
)
 
(3,407
)
Capital expenditures on real estate
 
(5,363
)
 
(4,181
)
Payment of deferred acquisition fees to an affiliate
 
(4,476
)
 
(2,995
)
Value added taxes refunded in connection with acquisition of real estate
 
4,224

 

Deposits for investments
 
4,000

 
(4,000
)
Capital contributions to equity investment
 
(3,850
)
 
(5,469
)
Return of capital from equity investments in real estate
 
2,243

 
(48
)
Change in investing restricted cash
 
340

 
(7,208
)
Other investing activities, net
 
47

 

Proceeds from sale of real estate
 
40

 
35,674

Net Cash Used in Investing Activities
 
(147,215
)
 
(684,996
)
Cash Flows — Financing Activities
 
 
 
 
Proceeds from mortgage financing
 
106,601

 
436,656

Distributions paid
 
(60,900
)
 
(56,014
)
Proceeds from issuance of shares, net of issuance costs
 
30,588

 
125,243

Distributions to noncontrolling interests
 
(11,588
)
 
(7,454
)
Repurchase of shares
 
(7,896
)
 
(5,621
)
Change in financing restricted cash
 
5,171

 
(3,197
)
Scheduled payments and prepayments of mortgage principal
 
(3,641
)
 
(49,082
)
Payment of deferred financing costs and mortgage deposits
 
(796
)
 
(5,137
)
Contributions from noncontrolling interests
 
41

 
2,692

Proceeds from bond financing
 

 
66,328

Other financing activities, net
 

 
(44
)
Net Cash Provided by Financing Activities
 
57,580

 
504,370

Change in Cash and Cash Equivalents During the Period
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 
952

 
(3,441
)
Net decrease in cash and cash equivalents
 
(32,678
)
 
(159,687
)
Cash and cash equivalents, beginning of period
 
117,453

 
429,548

Cash and cash equivalents, end of period
 
$
84,775

 
$
269,861


See Notes to Consolidated Financial Statements (Unaudited).


CPA®:18 – Global 9/30/2016 10-Q 6


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

Note 1. Organization

Organization

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

Substantially all of our assets and liabilities are held by CPA®:18 Limited Partnership, or the Operating Partnership, and at September 30, 2016 we owned 99.97% of general and limited partnership interests in the Operating Partnership. The remaining interest in the Operating Partnership is held by a subsidiary of WPC.

At September 30, 2016, our portfolio was comprised of full or partial ownership interests in 59 properties, the majority of which were fully-occupied and triple-net leased to 102 tenants totaling 9.6 million square feet. The remainder of our portfolio was comprised of our full or partial ownership interests in 67 self-storage properties and eight multi-family properties totaling 6.5 million square feet.

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. From inception through September 30, 2016, we also received distribution reinvestment plan proceeds of $74.8 million and $18.3 million from our Class A and Class C common stock, respectively.

We operate in two reportable business segments: Net Lease and Self Storage. 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. In addition, we have an All Other category that includes our multi-family investments and our investment in a note receivable (Note 13). Our reportable business segments and All Other category are the same as our reporting units.

Note 2. Revisions of Previously-Issued Financial Statements

Error Associated with Financing Costs
During the second quarter of 2015, we identified an error related to the capitalization of financing costs associated with the refinancing of a mortgage loan, which should have been recorded as Interest expense within our consolidated statement of operations for the three months ended March 31, 2015. We have revised our consolidated statement of operations, which increased Other income and (expenses), Loss before income taxes, Net loss, and Net loss attributable to CPA®:18 – Global by $0.9 million and Net loss per share for Class A and Class C common stock by $0.01. This also resulted in a corresponding decrease of $0.9 million to Other assets, Total assets, Distributions and accumulated losses, and Total equity within the consolidated balance sheet and, where applicable, within the consolidated statement of equity. In addition, the amounts for Net loss, Comprehensive loss and Comprehensive loss attributable to CPA®:18 – Global on the consolidated statement of comprehensive loss for the three months ended March 31, 2015 increased by $0.9 million.



CPA®:18 – Global 9/30/2016 10-Q 7


Notes to Consolidated Financial Statements (Unaudited)


Revision of Share Repurchases
During the year ended December 31, 2015, we determined that our presentation of common shares repurchased should be classified as a reduction to Common stock, for the par amount of the common shares repurchased and as a reduction to Additional paid-in capital for the excess over the amount allocated to common stock, as well as included as shares unissued within the consolidated financial statements. We previously classified common shares repurchased as Treasury stock in our consolidated financial statements. We evaluated the impact of this correction on previously-issued financial statements and concluded they were not materially misstated. In order to conform previous financial statements to the current period, we elected to revise previously-issued financial statements the next time such financial statements are filed. The correction eliminates Treasury stock of $7.1 million as of September 30, 2015 and results in corresponding reductions of Common stock and Additional paid-in capital, but has no impact on total equity within the consolidated balance sheets as of September 30, 2015 and consolidated statements of equity for the nine months ended September 30, 2015. The accompanying consolidated statement of equity for the nine months ended September 30, 2015 has been revised accordingly. The misclassification had no impact on the previously-reported consolidated statements of operations, consolidated statements of comprehensive loss, or condensed consolidated statements of cash flows.

Note 3. Basis of Presentation

Basis of Presentation

Our interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of our consolidated financial position, results of operations, and cash flows in accordance with generally accepted accounting principles in the United States, or GAAP.
 
In the opinion of management, the unaudited financial information for the interim periods presented in this Report reflects all normal and recurring adjustments necessary for a fair statement of financial position, results of operations, and cash flows. Our interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 2015, which are included in the 2015 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 consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.

Basis of Consolidation

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

On January 1, 2016, we adopted the Financial Accounting Standards Board’s, or FASB’s, Accounting Standards Update, or ASU, 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, as described in the Recent Accounting Pronouncements section below, which amends the current consolidation guidance, including introducing a separate consolidation analysis specific to limited partnerships and other similar entities. When we obtain an economic interest in an entity, we evaluate the entity to determine if it should be deemed a variable interest entity, or VIE, and, if so, whether we are the primary beneficiary and are therefore required to consolidate the entity. We apply accounting guidance for consolidation of VIEs to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Fixed price purchase and renewal options within a lease, as well as certain decision-making rights within a loan or joint-venture agreement, can cause us to consider an entity a VIE. Limited partnerships and other similar entities that operate as a partnership will be considered a VIE unless the limited partners hold substantive kick-out rights or participation rights. Significant judgment is required to determine whether a VIE should be consolidated. We review the contractual arrangements provided for in the partnership agreement or other related contracts to determine whether the entity is considered a VIE and to establish whether we have any variable interests in the VIE. We then compare our variable interests, if any, to those of the other variable interest holders to determine which party is the primary beneficiary of the VIE based on whether the entity (i) has the


CPA®:18 – Global 9/30/2016 10-Q 8


Notes to Consolidated Financial Statements (Unaudited)


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. We performed this analysis on all of our subsidiary entities following the guidance in ASU 2015-02 to determine whether they qualify as VIEs and whether they should be consolidated or accounted for as equity investments in an unconsolidated venture. As a result of this change in guidance, we determined that eight entities that were previously classified as voting interest entities should now be classified as VIEs as of January 1, 2016 and therefore included in our VIE disclosures. However, there was no change in determining whether or not we consolidate these entities as a result of the new guidance. We elected to retrospectively adopt ASU 2015-02, which resulted in changes to our VIE disclosures within the consolidated balance sheets. There were no other changes to our consolidated balance sheets or results of operations for the periods presented. The liabilities of these VIEs are non-recourse to us and can only be satisfied from each VIE’s respective assets, except for the financing arrangement of our sole equity method investment, for which we have provided the lender with a guarantee of amounts due primarily of principal and interest payments.

At September 30, 2016, we considered 13 entities VIEs, 12 of which we consolidated as we are considered the primary beneficiary. At December 31, 2015, we considered 12 entities VIEs, 11 of which we consolidated as we are considered the primary beneficiary. The following table presents a summary of selected financial data of the consolidated VIEs included in the consolidated balance sheets (in thousands):
 
September 30, 2016
 
December 31, 2015
Net investments in properties
$
379,733

 
$
360,049

Real estate under construction
182,883

 
119,115

Net investments in direct financing leases
11,177

 
12,684

Cash and cash equivalents
12,402

 
18,356

In-place lease intangible assets, net
70,215

 
73,487

Other intangible assets, net
22,365

 
22,316

Other assets, net
44,117

 
52,915

Total assets
$
722,892

 
$
658,922

 
 
 
 
Non-recourse debt, net
$
231,548

 
$
196,436

Bonds payable, net
61,669

 
56,259

Deferred income taxes
22,948

 
21,577

Accounts payable, accrued expenses and other liabilities
33,836

 
29,163

Total liabilities
$
350,001

 
$
303,435


As of September 30, 2016 and December 31, 2015, 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 but does not give us power over decisions that significantly affect the economic performance of the entity. As of September 30, 2016 and December 31, 2015, the net carrying amount of our equity investment was $14.5 million and $12.6 million, respectively, and our maximum exposure to loss in this entity is limited to our investment. The carrying value of our equity investment may fall below zero.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation. Our consolidated balance sheets at September 30, 2016 and December 31, 2015, include a separate classification of our Equity investments in real estate for the amounts of $14.5 million and $12.6 million, respectively, which was previously classified in Other assets, net in our historical quarterly and annual reports.

On January 1, 2016, we adopted ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30) as described in the Recent Accounting Pronouncements section below. ASU 2015-03 changes the presentation of debt issuance costs, which were previously recognized as an asset and requires that they be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. As a result of adopting this guidance, we reclassified $9.0 million of deferred financing costs from Other assets, net to Non-recourse debt, net and Bonds payable, net as of December 31, 2015.



CPA®:18 – Global 9/30/2016 10-Q 9


Notes to Consolidated Financial Statements (Unaudited)


Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 does not apply to our lease revenues, but will apply to reimbursed tenant costs and revenues generated from our operating properties. Additionally, this guidance modifies disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 for all entities by one year, beginning in 2018, with early adoption permitted but not before 2017, the original public company effective date. We are currently evaluating the impact of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810). ASU 2015-02 amends the current consolidation guidance, including modification of the guidance for evaluating whether limited partnerships and similar legal entities are VIEs or voting interest entities. The guidance does not amend the existing disclosure requirements for VIEs or voting interest model entities. The guidance, however, modified the requirements to qualify under the voting interest model. Under the revised guidance, ASU 2015-02 requires an entity to classify a limited liability company or a limited partnership as a VIE unless the partnership provides partners with either substantive kick-out rights or substantive participating rights over the managing member or general partner. Please refer to the discussion in the Basis of Consolidation section above.

In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30). ASU 2015-03 changed the presentation of debt issuance costs, which were previously recognized as a deferred charge (that is, an asset) and required that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 does not affect the recognition and measurement guidance for debt issuance costs. ASU 2015-03 is effective for periods beginning after December 15, 2015, early adoption is permitted and retrospective application is required. We adopted ASU 2015-03 on January 1, 2016 and have disclosed the reclassification of our debt issuance costs in the Reclassifications section above.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805). ASU 2015-16 eliminates the requirement that an acquirer in a business combination account for measurement period adjustments retrospectively. Instead, an acquirer will recognize a measurement period adjustment during the period in which it determines the amount of the adjustment, including the effect on earnings of any amounts it would have recorded in previous periods if the accounting had been completed at the acquisition date. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, early adoption is permitted and prospective application is required for adjustments that are identified after the effective date of this update. We elected to early adopt ASU 2015-16 and implemented the standard prospectively beginning July 1, 2015. The adoption and implementation of the standard did not have a material impact on our consolidated financial statements.

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



CPA®:18 – Global 9/30/2016 10-Q 10


Notes to Consolidated Financial Statements (Unaudited)


In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. ASU 2016-05 clarifies that a change in counterparty to a derivative contract in and of itself, does not require the dedesignation of a hedging relationship. ASU 2016-05 is effective for fiscal years beginning after December 15, 2016, including interim periods within those years. Early adoption is permitted and entities have the option of adopting this guidance on a prospective basis to new derivative contracts or on a modified retrospective basis. We elected to early adopt ASU 2016-05 on January 1, 2016 on a prospective basis and there was no impact on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 323). ASU 2016-07 simplifies the transition to the equity method of accounting. ASU 2016-07 eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. Instead the equity method of accounting will be applied prospectively from the date significant influence is obtained. The new standard should be applied prospectively for investments that qualify for the equity method of accounting in interim and annual periods beginning after December 15, 2016. Early adoption is permitted and we elected to early adopt this standard as of January 1, 2016. The adoption of this standard had no impact on our consolidated financial statements.

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

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

In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control. ASU 2016-17 changes how a reporting entity that is a decision maker should consider indirect interests in a VIE held through an entity under common control. If a decision maker must evaluate whether it is the primary beneficiary of a VIE, it will only need to consider its proportionate indirect interest in the VIE held through a common control party. ASU 2016-17 amends ASU 2015-02, which we adopted on January 1, 2016, and which currently directs the decision maker to treat the common control party’s interest in the VIE as if the decision maker held the interest itself. ASU 2016-17 will be effective for public business entities in fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted. We are in the process of evaluating the impact of adopting ASU 2016-17 on our consolidated financial statements.



CPA®:18 – Global 9/30/2016 10-Q 11


Notes to Consolidated Financial Statements (Unaudited)


Note 4. Agreements and Transactions with Related Parties

Transactions with Our Advisor

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

The following tables present a summary of fees we paid, expenses we reimbursed, and distributions we made to our Advisor and other affiliates, which excludes the fees that impact equity as further disclosed below the tables, in accordance with the terms of the relevant agreements (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Amounts Included in the Consolidated Statements of Operations
 
 
 
 
 
 
 
 
Asset management fees
 
$
2,547

 
$
2,098

 
$
7,424

 
$
5,244

Available Cash Distributions
 
1,662

 
1,705

 
5,319

 
4,021

Personnel and overhead reimbursements
 
601

 
409

 
2,210

 
852

Interest expense on deferred acquisition fees and accretion of interest on annual distribution and shareholder servicing fee
 
203

 
101

 
631

 
274

Stock-based compensation
 
100

 
100

 
100

 
100

Acquisition expenses
 

 
6,851

 
3,484

 
25,532

Annual distribution and shareholder servicing fee (a)
 

 
671

 

 
1,836

 
 
$
5,113

 
$
11,935

 
$
19,168

 
$
37,859

 
 
 
 
 
 
 
 
 
Acquisition Fees Capitalized
 
 
 
 
 
 
 
 
Current acquisition fees
 
$
1,166

 
$
677

 
$
2,987

 
$
7,052

Deferred acquisition fees
 
933

 
542

 
2,390

 
5,641

Capitalized personnel and overhead reimbursements
 
35

 

 
283

 

 
 
$
2,134

 
$
1,219

 
$
5,660

 
$
12,693

___________
(a)
For the three and nine months ended September 30, 2016, we paid $0.6 million and $1.9 million, respectively, related to the annual distribution and shareholder servicing fee, which, beginning in the fourth quarter of 2015, is accounted for as a reduction in our shareholder servicing fee liability and additional paid-in capital in our consolidated financial statements.

The following table presents a summary of amounts included in Due to affiliate in the consolidated financial statements (in thousands):
 
 
September 30, 2016
 
December 31, 2015
Due to Affiliate
 
 
 
 
Deferred acquisition fees, including interest
 
$
16,255

 
$
26,747

Shareholder servicing fee liability
 
7,868

 
9,394

Accounts payable and other
 
2,178

 
3,872

Asset management fees payable
 
846

 
813

Current acquisition fees
 
186

 
3,148

 
 
$
27,333

 
$
43,974




CPA®:18 – Global 9/30/2016 10-Q 12


Notes to Consolidated Financial Statements (Unaudited)


Organization and Offering Costs

Pursuant to the advisory agreement, we were liable for certain expenses related to our initial public offering, including filing, legal, accounting, printing, advertising, transfer agent, and escrow fees, which were deducted from the gross proceeds of the offering. We reimbursed Carey Financial LLC, or Carey Financial, our dealer manager and an affiliate of our Advisor (who may then reimburse selected dealers) for reasonable bona fide due diligence expenses incurred that were supported by a detailed and itemized invoice. Total underwriting compensation paid in connection with our offering, including selling commissions and the dealer manager fee, and reimbursements made by Carey Financial to selected dealers and investment advisors, did not exceed the limitations prescribed by the Financial Industry Regulatory Authority, Inc., the regulator for broker-dealers like Carey Financial, which limit underwriting compensation to 10% of gross offering proceeds. Our Advisor agreed to be responsible for the repayment of organization and offering expenses (excluding selling commissions and dealer manager fees paid to Carey Financial and selected dealers and fees paid and expenses reimbursed to selected dealers) that exceeded, in the aggregate, 1.5% of the gross proceeds from our initial public offering. From inception and through September 30, 2016, our Advisor incurred organization and offering costs of $8.7 million on our behalf, all of which we were obligated to pay because such costs did not exceed 1.5% of the gross proceeds from our initial public offering. As a result, we have fully repaid our Advisor for such costs, which we have charged to stockholders’ equity in our consolidated financial statements.

Loans from WPC

In January 2013, our board of directors and the board of directors of WPC approved unsecured loans from WPC to us of up to $100.0 million, in the aggregate, at a rate equal to the rate at which WPC was able to borrow funds under its senior credit facility, for the purpose of facilitating acquisitions approved by our Advisor’s investment committee that we would not otherwise have had sufficient available funds to complete. All loans were made solely at the discretion of WPC’s management. This line of credit with WPC was terminated in January 2016. 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. We did not borrow any funds from WPC during the three and nine months ended September 30, 2016 or 2015, nor did we have any amounts outstanding at September 30, 2016 or December 31, 2015. See Note 14, Subsequent Events.

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. We amended the advisory agreement in 2015, so that the asset management fees are payable in cash or shares of our Class A common stock at our option, after consultation with our Advisor. If our Advisor receives all or a portion of its fees in shares, the number of shares issued is determined by dividing the dollar amount of fees by our most recently published estimated net asset value per share, or NAV, which was published in August 2016 and estimated to be $7.90 for Class A common stock as of June 30, 2016 (before our initial NAV was published in March 2016, as was the case at December 31, 2015, we used the offering price of our Class A shares of $10.00 per share). For both the three and nine months ended September 30, 2016 and 2015, our Advisor received its asset management fees in shares of our Class A common stock, which is a non-cash financing activity. At September 30, 2016, our Advisor owned 1,889,683 shares, or 1.4%, of our Class A common stock outstanding. Asset management fees are included in Property expenses in the consolidated financial statements.

Selling Commissions and Dealer Manager Fees

Pursuant to our dealer manager agreement, Carey Financial received a selling commission in connection with our initial public offering of $0.70 and $0.14 per share sold and a dealer manager fee of $0.30 and $0.21 per share sold for the Class A and Class C common stock, respectively. Our initial public offering closed on April 2, 2015. These amounts were recorded in Additional paid-in capital in the consolidated financial statements. We recorded selling commissions and dealer manager fees of $107.9 million on a cumulative basis through September 30, 2016.

Annual Distribution and Shareholder Servicing Fee

Carey Financial also receives an annual distribution and shareholder servicing fee in connection with our Class C common stock, which it may re-allow to selected dealers. The amount of the annual distribution and shareholder servicing fee was initially 1.0% of the offering price per share of our Class C common stock before we began reporting our NAV, but is now 1.0% of the most recently published NAV of our Class C common stock, which was published in August 2016 and estimated to be $7.90 for Class C common stock as of June 30, 2016. The annual distribution and shareholder servicing fee accrues daily and is


CPA®:18 – Global 9/30/2016 10-Q 13


Notes to Consolidated Financial Statements (Unaudited)


payable quarterly in arrears. We will no longer incur the annual distribution and shareholder servicing fee beginning on the date at which, in the aggregate, underwriting compensation from all sources, including the annual distribution and shareholder servicing fee, any organizational and offering fee paid for underwriting and underwriting compensation paid by WPC and its affiliates, reaches 10.0% of the gross proceeds from our initial public offering, which it has not yet reached. At September 30, 2016 and December 31, 2015, we had a liability of $7.9 million and $9.4 million, respectively, within Due to affiliate in the consolidated financial statements to reflect the present value of the estimated future payments that we expect to pay Carey Financial.

Acquisition and Disposition Fees

Our Advisor receives acquisition fees, a portion of which is payable upon acquisition, while the remaining portion is subordinated to a preferred return of a non-compounded cumulative distribution of 5.0% per annum (based initially on our invested capital). The initial acquisition fee and subordinated acquisition fee are 2.5% and 2.0%, respectively, of the aggregate total cost of our portion of each investment for all investments, other than those in readily-marketable real estate securities purchased in the secondary market, for which our Advisor will not receive any acquisition fees. Deferred acquisition fees are scheduled to be paid in three equal annual installments following the quarter in which a property was purchased and are subject to the preferred return described above. The preferred return was achieved as of the periods ended September 30, 2016 and December 31, 2015. Unpaid deferred acquisition fees are included in Due to affiliate in the consolidated financial statements and bear interest at an annual rate of 2%. The cumulative total acquisition costs, including acquisition fees paid to the advisor, may not exceed 6.0% of the aggregate contract purchase price of all investments, which is measured at the end of each year.

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

Personnel and Overhead Reimbursements

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

We reimburse our Advisor for various expenses it incurs in the course of providing services to us. We reimburse certain third-party expenses paid by our Advisor on our behalf, including property-specific costs, professional fees, office expenses, and business development expenses. In addition, we reimburse our Advisor for the allocated costs of personnel and overhead in managing our day-to-day operations, including accounting services, stockholder services, corporate management, and property management and operations. We do not reimburse our Advisor for the cost of personnel if these personnel provide services for transactions for which our Advisor receives a transaction fee, such as for acquisitions and dispositions. Under the advisory agreement currently in place, the amount of applicable personnel costs allocated to us was capped at 2.4% for 2015 and 2.2% for 2016 of pro rata lease revenues for each year. Beginning in 2017, the cap decreases to 2.0% of pro rata lease revenues for that year. Costs related to our Advisor’s legal transactions group are based on a schedule of expenses relating to services performed for different types of transactions, such as financing, lease amendments, and dispositions, among other categories, and includes 0.25% of the total investment cost of an acquisition. In general, personnel and overhead reimbursements are included in General and administrative expenses in the consolidated financial statements. However, we capitalize certain of the costs related to our Advisor’s legal transactions group if the costs relate to a transaction that is not considered to be a business combination.

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



CPA®:18 – Global 9/30/2016 10-Q 14


Notes to Consolidated Financial Statements (Unaudited)


Available Cash Distributions

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

Jointly-Owned Investments and Other Transactions with our Affiliates

At September 30, 2016, we owned interests ranging from 50% to 97% in jointly-owned investments, with the remaining interests held by affiliates or by third parties. We consolidate all of these joint ventures with exception to our sole equity investment (Note 5), which we account for under the equity method of accounting. Additionally, no other parties hold any rights that overcome our control. We account for the minority share of these investments as noncontrolling interests.

Note 5. Net Investments in Properties and Real Estate Under Construction

Real Estate

Real estate, which consists of land and buildings leased to others, at cost, and which are subject to operating leases, is summarized as follows (in thousands):
 
September 30, 2016
 
December 31, 2015
Land
$
179,564

 
$
173,094

Buildings and improvements
844,679

 
813,480

Less: Accumulated depreciation
(51,243
)
 
(31,467
)
 
$
973,000

 
$
955,107


The carrying value of our Real estate increased by $21.9 million from December 31, 2015 to September 30, 2016, due to the weakening of the U.S. dollar relative to foreign currencies (primarily the euro) during the period.

Operating Real Estate
 
Operating real estate, which consists of our self-storage and multi-family properties, at cost, is summarized as follows (in thousands):
 
September 30, 2016
 
December 31, 2015
Land
$
100,616

 
$
86,016

Buildings and improvements
472,737

 
404,836

Less: Accumulated depreciation
(22,690
)
 
(10,727
)
 
$
550,663

 
$
480,125


Depreciation expense was $10.6 million and $8.6 million for the three months ended September 30, 2016 and 2015, respectively, and $31.2 million and $22.0 million for the nine months ended September 30, 2016 and 2015, respectively.

Acquisitions of Real Estate and Operating Real Estate During 2016

Asset Acquisition

On February 19, 2016, we invested in a build-to-suit joint venture with a third party for a university complex development site located in Accra, Ghana for $6.5 million, which includes capitalized acquisition costs of $2.6 million. Upon completion of this project, which is estimated to be in 2018, our total investment is expected to be approximately $65.7 million. We deemed this investment to be a VIE since the joint venture does not have sufficient equity at risk. Additionally, we consolidate the entity, since we currently wholly own and control the joint venture. See Real Estate Under Construction below for more details.



CPA®:18 – Global 9/30/2016 10-Q 15


Notes to Consolidated Financial Statements (Unaudited)


In connection with the above project, on February 19, 2016, the joint venture obtained third-party financing (subject to the tenant obtaining a letter of credit, which has not yet occurred) in an amount up to $41.0 million, with an estimated interest rate based on the U.S. treasury rate plus 300 basis points. As of September 30, 2016, we had no amount outstanding under this financing arrangement. In addition, the joint venture has procured a policy of political risk insurance on its equity investment, which is subject to coverage-specific limits and other conditions.

Business Combinations Self-Storage Properties

During the nine months ended September 30, 2016, we acquired the following four self-storage investments, for a total of $43.0 million:

$20.3 million for five facilities, including three in Delaware, one in Milford, Massachusetts, and one in Washington D.C., on April 11, 2016;
$11.0 million for a facility in Gilroy, California on February 17, 2016;
$5.6 million for a facility in Avondale, Louisiana on January 14, 2016; and
$6.1 million for a facility in Kissimmee, Florida on January 14, 2016.

In connection with these self-storage property transactions, we incurred acquisition expenses totaling $4.7 million, which are included in Acquisition expenses in the consolidated financial statements.

During the nine months ended September 30, 2016, we obtained non-recourse mortgage loans totaling $108.3 million, of which $13.8 million relate to our 2016 acquisitions and the remainder related to our 2015 acquisitions. In addition, we assumed certain non-recourse mortgage loans totaling $27.9 million, which related to the properties we acquired on April 11, 2016 (Note 10).

Summary of Assets Acquired and Liabilities Assumed

The following tables present a summary of assets acquired and liabilities assumed in our business combinations at the date of acquisition, and revenues and earnings thereon since their respective dates of acquisition through September 30, 2016 (in thousands):
 
 
Self-Storage Properties (a)
Cash consideration
 
$
43,023

Assets acquired at fair value:
 
 
Land
 
$
11,573

Buildings
 
51,231

In-place lease intangible assets
 
8,158

Other assets acquired
 
447

 
 
71,409

Liabilities assumed at fair value:
 
 
Mortgages assumed
 
(27,925
)
Other liabilities assumed
 
(461
)
 
 
(28,386
)
Total identifiable net assets
 
$
43,023


 
 
Self-Storage Properties
 
 
Respective Acquisition dates through September 30, 2016
Revenues
 
$
4,052

 
 
 
Net loss
 
$
(6,078
)
Net loss attributable to CPA®:18 – Global
 
$
(6,078
)
___________


CPA®:18 – Global 9/30/2016 10-Q 16


Notes to Consolidated Financial Statements (Unaudited)


(a)
The purchase price for each transaction was allocated to the assets acquired and liabilities assumed based upon their preliminary fair values. The information in this table is based on the best estimates of management as of the date of this Report. We are in the process of finalizing our assessment of the fair value of the assets acquired and liabilities assumed. Accordingly, the fair value of these assets acquired and liabilities assumed are subject to change.

Real Estate Under Construction

The following table provides the activity of our Real estate under construction (in thousands):
 
 
Nine Months Ended September 30, 2016
Beginning balance
 
$
131,930

Capitalized funds
 
93,575

Capitalized interest
 
5,137

Foreign currency translation adjustments
 
(2,839
)
Placed into service
 
(29,865
)
Ending balance
 
$
197,938


Capitalized Funds — During the nine months ended September 30, 2016, total capitalized funds primarily related to our build-to-suit projects, which were comprised primarily of initial funding of $6.5 million and construction draws of $87.1 million. Capitalized funds include accrued costs of $5.7 million, which are a non-cash investing activity.

Capitalized Interest — Capitalized interest includes amortization of the mortgage discount and deferred financing costs and interest incurred during construction, which totaled $5.1 million during the nine months ended September 30, 2016 and is a non-cash investing activity. Of that total, $0.3 million of capitalized interest relates to our equity investment in real estate.

Placed into Service — During the nine months ended September 30, 2016, we placed into service two build-to-suit expansion projects and one partially completed student housing development totaling $29.9 million, which is a non-cash investing activity. Of that total, $15.1 million was reclassified to Operating real estate, at cost and $14.8 million was reclassified to Real estate, at cost.

Ending Balance — At September 30, 2016, we had six open build-to-suit projects and one open build-to-suit expansion project with aggregate unfunded commitments totaling approximately $176.4 million, which included $22.4 million related to our equity investment. At September 30, 2016, the aggregate unfunded commitments related to our VIEs totaled $169.2 million.

Equity Investment in Real Estate


We have an interest in an unconsolidated investment that relates to a joint venture project for the development of self-storage facilities in Canada. This investment is jointly-owned with a third party, which also serves as the general partner. We do not consolidate this entity because we are not the primary beneficiary and the nature of our involvement in the activities of the entity allows us to exercise significant influence but does not give us power over decisions that significantly affect the economic performance of the entity.

On May 2, 2016, the joint venture purchased a vacant parcel of land in Vaughan, Ontario for $2.0 million, which is based on the exchange rate of the Canadian dollar at the date of acquisition. This parcel of land will be the site of our third self-storage development in Canada as a part of this joint venture.

On July 1, 2016, we commenced operations in one Canadian self-storage facility upon the completion of a distinct phase of the overall development, and as a result, $2.9 million of the total project was placed into service. During both the three and nine months ended September 30, 2016, we incurred losses of less than $0.1 million relating to this project, which is included in Other income and (expenses) on our consolidated financial statements.

At September 30, 2016 and December 31, 2015, our total equity investment balance for these properties was $14.5 million and $12.6 million, respectively, and the joint venture had total third-party recourse debt of $10.7 million and $0.1 million, respectively.



CPA®:18 – Global 9/30/2016 10-Q 17


Notes to Consolidated Financial Statements (Unaudited)


Note 6. 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 Net investments in direct financing leases and our Note receivable. Operating leases are not included in finance receivables in the consolidated financial statements.

Net Investments in Direct Financing Leases

Interest income from direct financing leases was $1.1 million and $1.0 million for the three months ended September 30, 2016 and 2015, respectively, and $3.5 million and $3.1 million for the nine months ended September 30, 2016 and 2015, respectively.

Disposition

On December 30, 2013 and March 7, 2014, we entered into domestic net lease financing transactions with subsidiaries of Crowne Group Inc., from whom we acquired a total of five industrial facilities located in South Carolina, Indiana, and Michigan. In August 2015, the tenants exercised their purchase options and we sold these five industrial facilities back to the subsidiaries of Crowne Group Inc. for $35.7 million. During the three and nine months ended September 30, 2015, we recognized a gain on sale of $6.7 million, which is included in Gain on sale of real estate, net of tax in our consolidated financial statements. Simultaneously, we paid off the existing mortgage loan that encumbered all of these properties (Note 10) and terminated the interest rate swap agreement that was in place. As a result, we recognized a $1.1 million loss on extinguishment of debt within Other income and (expenses) on our consolidated financial statements.

Credit Quality of Finance Receivables

We generally seek investments in facilities that we believe are critical to a tenant’s business and that we believe have a low risk of tenant default. At both September 30, 2016 and December 31, 2015, we had no significant balances of our finance receivables 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, 2016 or the year ended December 31, 2015. We evaluate the credit quality of our finance receivables utilizing an internal five-point credit rating scale, with one representing the highest credit quality and five representing the lowest. The credit quality evaluation of our finance receivables was last updated in the third quarter of 2016.

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, 2016
 
December 31, 2015
 
September 30, 2016
 
December 31, 2015
1
 
1
 
1
 
$
11,177

 
$
12,684

2
 
1
 
1
 
9,135

 
9,065

3
 
4
 
4
 
57,870

 
58,217

4
 
 
 

 

5
 
 
 

 

 
 
0
 
 
 
$
78,182

 
$
79,966


Note 7. Intangible Assets and Liabilities

In connection with our acquisitions of properties (Note 5) during the nine months ended September 30, 2016, we have recorded In-place lease intangibles of $8.2 million that are being amortized over a period of approximately two years. In-place lease intangibles are included in In-place lease intangible assets, net in the consolidated financial statements. Below-market ground lease intangibles and above-market rent intangibles are included in Other intangible assets, net in the consolidated financial statements. Below-market rent intangibles and above-market ground lease intangibles are included in Accounts payable, accrued expenses and other liabilities in the consolidated financial statements.



CPA®:18 – Global 9/30/2016 10-Q 18


Notes to Consolidated Financial Statements (Unaudited)


Goodwill represents the consideration exceeding the fair value of the identifiable assets acquired and liabilities assumed for certain of our previously acquired investments that were deemed to be business combinations. Goodwill resulted primarily from recognizing deferred tax liabilities in connection with the acquisition of certain of our foreign investments. The following table presents a reconciliation of our goodwill, which is included in our Net Lease reporting unit (in thousands):
 
 
Nine Months Ended
September 30, 2016
Balance at January 1, 2016
 
$
23,389

Foreign currency translation
 
1,714

Balance at September 30, 2016
 
$
25,103


Intangible assets, intangible liabilities, and goodwill are summarized as follows (in thousands):
 
September 30, 2016
 
December 31, 2015
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Amortizable Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
In-place lease
$
266,908

 
$
(75,039
)
 
$
191,869

 
$
255,510

 
$
(43,090
)
 
$
212,420

Below-market ground lease
21,416

 
(642
)
 
20,774

 
20,894

 
(325
)
 
20,569

Above-market rent
12,327

 
(2,156
)
 
10,171

 
12,174

 
(1,322
)
 
10,852

 
300,651

 
(77,837
)
 
222,814

 
288,578

 
(44,737
)
 
243,841

Unamortizable Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
Goodwill
25,103

 

 
25,103

 
23,389

 

 
23,389

Total intangible assets
$
325,754

 
$
(77,837
)
 
$
247,917

 
$
311,967

 
$
(44,737
)
 
$
267,230

 
 
 
 
 
 
 
 
 
 
 
 
Amortizable Intangible Liabilities
 
 
 
 
 
 
 
 
 
 
 
Below-market rent
$
(15,295
)
 
$
2,999

 
$
(12,296
)
 
$
(15,439
)
 
$
1,546

 
$
(13,893
)
Above-market ground lease
(106
)
 
3

 
(103
)
 
(121
)
 
2

 
(119
)
Total intangible liabilities
$
(15,401
)
 
$
3,002

 
$
(12,399
)
 
$
(15,560
)
 
$
1,548

 
$
(14,012
)

Net amortization of intangibles, including the effect of foreign currency translation, was $10.3 million and $9.0 million for the three months ended September 30, 2016 and 2015, respectively, and $31.5 million and $22.4 million for the nine months ended September 30, 2016 and 2015, respectively. Amortization of below-market and above-market rent intangibles is recorded as an adjustment to Rental income, amortization of below-market and above-market ground lease intangibles is included in Property expenses, and amortization of in-place lease intangibles is included in Depreciation and amortization expense.

Note 8. Fair Value Measurements
 
The fair value of an asset is defined as the exit price, which is the amount that would either be received when an asset is sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a three-tier fair value hierarchy based on the inputs used in measuring fair value. These tiers are: Level 1, for which quoted market prices for identical instruments are available in active markets, such as money market funds, equity securities, and U.S. Treasury securities; Level 2, for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument, such as certain derivative instruments including interest rate caps, interest rate swaps, foreign currency forward contracts and foreign currency collars; and Level 3, for securities that do not fall into Level 1 or Level 2 and for which little or no market data exists, therefore requiring us to develop our own assumptions.

Items Measured at Fair Value on a Recurring Basis

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

Derivative Assets — Our derivative assets, which are included in Other assets, net in the consolidated financial statements, are comprised of foreign currency forward contracts, interest rate caps, and foreign currency collars (Note 9). These derivative


CPA®:18 – Global 9/30/2016 10-Q 19


Notes to Consolidated Financial Statements (Unaudited)


instruments were measured at fair value using readily observable market inputs, such as quotations on interest rates, and were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market.

Derivative Liabilities — Our derivative liabilities, which are included in Accounts payable, accrued expenses and other liabilities in the consolidated financial statements, are comprised of interest rate swaps and foreign currency collars (Note 9). These derivative instruments were measured at fair value using readily observable market inputs, such as quotations on interest rates, and were classified as Level 2 because they are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market.

Rent Guarantees — Our rent guarantees, which are included in Other assets, net in the consolidated financial statements, are related to three of our international investments. These rent guarantees were measured at fair value using a discounted cash flow model, and were classified as Level 3 because the model uses unobservable inputs. At September 30, 2016 and December 31, 2015, our rent guarantees had a fair value of $0.9 million and $1.3 million, respectively. We determined the fair value of the rent guarantees based on an estimate of discounted cash flows using a discount rate that ranged from 7% to 9% and a growth rate that ranged from 1% to 2%, which are considered significant unobservable inputs. Significant increases or decreases to these inputs in isolation would result in a significant change in the fair value measurement. During the three and nine months ended September 30, 2016, we recognized $0.3 million and $1.1 million, respectively, of mark-to-market gains related to these rent guarantees within Other income and (expenses) on our consolidated financial statements.
 
We did not have any transfers into or out of Level 1, Level 2, and Level 3 category of measurements during the three and nine months ended September 30, 2016 and 2015. Gains and losses (realized and unrealized) included in earnings are reported in Other income and (expenses) in the consolidated financial statements.
 
Our other financial instruments had the following carrying values and fair values as of the dates shown (dollars in thousands):
 
 
 
September 30, 2016
 
December 31, 2015
 
Level
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Debt (a) (b)
3
 
$
1,145,632

 
$
1,192,071

 
$
999,213

 
$
1,022,641

Note receivable (c)
3
 
28,000

 
28,400

 
28,000

 
28,400

___________
(a)
In accordance with ASU 2015-03, we reclassified deferred financing costs from Other assets, net to Non-recourse debt, net and Bonds payable, net as of December 31, 2015 (Note 3). At September 30, 2016 and December 31, 2015, the carrying value of Non-recourse debt, net includes unamortized deferred financing costs of $8.4 million and $8.3 million, respectively. At both September 30, 2016 and December 31, 2015, the carrying value of Bonds payable, net includes unamortized deferred financing costs of $0.7 million.
(b)
We determined the estimated fair value of our non-recourse debt and bonds payable using a discounted cash flow model that estimates the present value of the future loan payments by discounting such payments at current estimated market interest rates. The estimated market interest rates take into account interest rate risk and the value of the underlying collateral, which includes quality of the collateral, the credit quality of the tenant/obligor, and the time until maturity.
(c)
We determined the estimated fair value of our note receivable using a discounted cash flow model with rates that take into account the credit of the tenant/obligor, order of payment tranches, and interest rate risk. We also considered the value of the underlying collateral, taking into account the quality of the collateral, the credit quality of the tenant/obligor, the time until maturity, and the current market interest rate.

We estimated that our other financial assets and liabilities (excluding net investments in direct financing leases) had fair values that approximated their carrying values at both September 30, 2016 and December 31, 2015.



CPA®:18 – Global 9/30/2016 10-Q 20


Notes to Consolidated Financial Statements (Unaudited)


Note 9. 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 assets and liabilities. Credit risk is the risk of default on our operations and our tenants’ inability or unwillingness to make contractually required payments. Market risk includes changes in the value of our properties and related loans, as well as changes in the value of our other investments due to changes in interest rates or other market factors. We own international investments, primarily in Europe, and are subject to risks associated with fluctuating foreign currency exchange rates.
 
Derivative Financial Instruments
 
When we use derivative instruments, it is generally to reduce our exposure to fluctuations in interest rates and foreign currency exchange rate movements. We have not entered into, and do not plan to enter into financial instruments for trading or speculative purposes. In addition to entering into derivative instruments on our own behalf, we may also be a party to derivative instruments that are embedded in other contracts and we may be granted common stock warrants by lessees when structuring lease transactions, which are considered to be derivative instruments. The primary risks related to our use of derivative instruments include a counterparty to a hedging arrangement defaulting on its obligation and a downgrade in the credit quality of a counterparty to such an extent that our ability to sell or assign our side of the hedging transaction is impaired. While we seek to mitigate these risks by entering into hedging arrangements with large financial institutions that we deem to be creditworthy, it is possible that our hedging transactions, which are intended to limit losses, could adversely affect our earnings. Furthermore, if we terminate a hedging arrangement, we may be obligated to pay certain costs, such as transaction or breakage fees. We have established policies and procedures for risk assessment and the approval, reporting, and monitoring of derivative financial instrument activities.
 
We measure derivative instruments at fair value and record them as assets or liabilities, depending on our rights or obligations under the applicable derivative contract. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. For a derivative designated and that qualified as a cash flow hedge, the effective portion of the change in fair value of the derivative is recognized in Other comprehensive income (loss) until the hedged item is recognized in earnings. For a derivative designated, and that qualified, as a net investment hedge, the effective portion of the change in its fair value and/or the net settlement of the derivative are reported in Other comprehensive income (loss) as part of the cumulative foreign currency translation adjustment. Amounts are reclassified out of Other comprehensive income (loss) into earnings when the hedged investment is either sold or substantially liquidated. The ineffective portion of the change in fair value of any derivative is immediately recognized in earnings.

All derivative transactions with an individual counterparty are governed by a master International Swap and Derivatives Association agreement, which can be considered as a master netting arrangement; however, we report all our derivative instruments on a gross basis on our consolidated financial statements. At both September 30, 2016 and December 31, 2015, no cash collateral had been posted or received for any of our derivative positions.

The following table sets forth certain information regarding our derivative instruments (in thousands):
Derivatives Designated as Hedging Instruments
 
Balance Sheet Location
 
Asset Derivatives Fair Value at
 
Liability Derivatives Fair Value at
 
 
September 30, 2016
 
December 31, 2015
 
September 30, 2016
 
December 31, 2015
Foreign currency forward contracts and collars
 
Other assets, net
 
$
4,576

 
$
7,471

 
$

 
$

Interest rate caps
 
Other assets, net
 
1

 
17

 

 

Foreign currency collars
 
Accounts payable, accrued expenses and other liabilities
 

 

 
(201
)
 
(28
)
Interest rate swaps
 
Accounts payable, accrued expenses and other liabilities
 

 

 
(3,514
)
 
(1,568
)
 
 
 
 
$
4,577

 
$
7,488

 
$
(3,715
)
 
$
(1,596
)



CPA®:18 – Global 9/30/2016 10-Q 21


Notes to Consolidated Financial Statements (Unaudited)


The following table presents the impact of our derivative instruments in the consolidated financial statements (in thousands):
 
 
Amount of Gain (Loss) Recognized on Derivatives in
Other Comprehensive Income (Loss) (Effective Portion)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Derivatives in Cash Flow Hedging Relationships 
 
2016
 
2015
 
2016
 
2015
Foreign currency forward contracts and collars
 
$
(1,294
)
 
$
835

 
$
(2,715
)
 
$
2,624

Interest rate swaps
 
366

 
22

 
(1,947
)
 
524

Interest rate caps
 

 
(20
)
 
(16
)
 
(33
)
Derivatives in Net Investment Hedging Relationship (a)
 
 
 
 
 
 
 
 
Foreign currency forward contracts and collars
 
(166
)
 
276

 
(306
)
 
366

Total
 
$
(1,094
)
 
$
1,113

 
$
(4,984
)
 
$
3,481

___________
(a)
The effective portion of the change in fair value and the settlement of these contracts are reported in the foreign currency translation adjustment section of Other comprehensive income (loss) until the underlying investment is sold, at which time we reclassify the gain or loss to earnings.

The following table presents the impact of our derivative instruments in the consolidated financial statements (in thousands):
 
 
 
 
Amount of Gain (Loss) on Derivatives Reclassified from
Other Comprehensive Income (Loss) into Income (Effective Portion)
Derivatives in Cash Flow Hedging Relationships 
 
Location of Gain (Loss) Recognized in Income
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Foreign currency forward contracts and collars
 
Other income and (expenses)
 
$
342

 
$
308

 
$
1,010

 
$
870

Interest rate swaps
 
Interest expense
 
(230
)
 
(1,401
)
 
(660
)
 
(2,001
)
Interest rate caps
 
Interest expense
 
(1
)
 

 
(1
)
 

Total
 
 
 
$
111

 
$
(1,093
)
 
$
349

 
$
(1,131
)

Amounts reported in Other comprehensive income (loss) related to our interest rate swaps will be reclassified to Interest expense as interest is incurred on our variable-rate debt. Amounts reported in Other comprehensive income (loss) related to foreign currency derivative contracts will be reclassified to Other income and (expenses) when the hedged foreign currency contracts are settled. At September 30, 2016, we estimated that an additional $0.8 million and $1.2 million will be reclassified as Interest expense and Other income and (expenses), respectively, during the next 12 months.

The following table presents the impact of our derivative instruments in the consolidated financial statements (in thousands):
 
 
 
 
Amount of Gain (Loss) on Derivatives Recognized in Income
Derivatives Not in Cash Flow Hedging Relationships 
 
Location of Gain (Loss)
Recognized in Income
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Foreign currency collars
 
Other income and (expenses)
 
$
(11
)
 
$

 
$
(21
)
 
$

Interest rate swaps
 
Interest expense
 

 
(63
)
 

 
(63
)
Derivatives in Cash Flow Hedging Relationships
 
 
 
 
 
 
 
 
 
 
Interest rate swaps (a)
 
Interest expense
 
5

 

 
1

 

 
 
 
 
$
(6
)
 
$
(63
)
 
$
(20
)
 
$
(63
)
__________
(a)
Relates to the ineffective portion of the hedging relationship.



CPA®:18 – Global 9/30/2016 10-Q 22


Notes to Consolidated Financial Statements (Unaudited)


Interest Rate Swaps and Caps

We are exposed to the impact of interest rate changes primarily through our borrowing activities. To limit this exposure, we attempt to obtain mortgage financing on a long-term, fixed-rate basis. However, from time to time, we or our investment partners may obtain non-recourse variable-rate mortgage loans and, as a result, may continue to enter into interest rate swap agreements or interest rate cap agreements with counterparties. Interest rate swaps, which effectively convert the variable-rate debt service obligations of a loan to a fixed rate, are agreements in which one party exchanges a stream of interest payments for a counterparty’s stream of cash flow over a specific period. The notional, or face, amount on which the swaps are based is not exchanged. Interest rate caps limit the effective borrowing rate of variable-rate debt obligations while allowing participants to share in downward shifts in interest rates. Our objective in using these derivatives is to limit our exposure to interest rate movements.
 
The interest rate swaps and caps that our consolidated subsidiaries had outstanding at September 30, 2016 are summarized as follows (currency in thousands):
Interest Rate Derivatives
 
Number of Instruments
 
Notional
Amount
 
Fair Value at
September 30, 2016
Interest rate swaps
 
7
 
54,255

USD
 
$
(3,514
)
Interest rate caps
 
2
 
22,000

USD
 
1

 
 
 
 
 
 
 
$
(3,513
)

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

In order to hedge certain of our foreign currency cash flow exposures, we enter into foreign currency forward contracts and collars. A foreign currency forward contract is a commitment to deliver a certain amount of currency at a certain price on a specific date in the future. By entering into forward contracts and holding them to maturity, we are locked into a future currency exchange rate for the term of the contract. A foreign currency collar consists of a written call option and a purchased put option to sell the foreign currency and guarantees that the exchange rate of the currency will not fluctuate beyond the range of the options’ strike prices. These instruments lock the range in which a foreign currency exchange rate may fluctuate. Our foreign currency forward contracts and foreign currency collars have maturities of 76 months or less.

The following table presents the foreign currency derivative contracts we had outstanding and their designations at September 30, 2016 (currency in thousands):
Foreign Currency Derivatives
 
Number of Instruments
 
Notional
Amount
 
Fair Value at
September 30, 2016
Designated as Cash Flow Hedging Instruments
 
 
 
 
 
 
 
Foreign currency forward contracts and collars
 
65
 
28,133

EUR
 
$
3,049

Foreign currency forward contracts and collars
 
47
 
92,041

NOK
 
1,200

Designated as Net Investment Hedging Instruments
 
 
 
 
 
 
 
Foreign currency forward contracts and collars
 
7
 
30,513

NOK
 
126

 
 
 
 
 
 
 
$
4,375




CPA®:18 – Global 9/30/2016 10-Q 23


Notes to Consolidated Financial Statements (Unaudited)


Credit Risk-Related Contingent Features

We measure our credit exposure on a counterparty basis as the net positive aggregate estimated fair value of our derivatives, net of any collateral received. No collateral was received as of September 30, 2016. At September 30, 2016, our total credit exposure was $4.2 million and the maximum exposure to any single counterparty was $2.8 million.

Some of the agreements we have with our derivative counterparties contain cross-default provisions that could trigger a declaration of default on our derivative obligations if we default, or are capable of being declared in default, on certain of our indebtedness. At September 30, 2016, 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 $3.8 million and $1.6 million at September 30, 2016 and December 31, 2015, respectively, which included accrued interest and any nonperformance risk adjustments. If we had breached any of these provisions at September 30, 2016 or December 31, 2015, we could have been required to settle our obligations under these agreements at their aggregate termination value of $4.2 million and $1.7 million, respectively.

Note 10. Non-Recourse Debt and Bonds Payable

At September 30, 2016, our debt bore interest at fixed annual rates ranging from 1.6% to 5.8% and variable contractual annual rates ranging from 2.2% to 5.1%, with maturity dates from 2017 to 2039.

During the nine months ended September 30, 2016, we obtained or assumed several non-recourse mortgage financings totaling $120.4 million, with a weighted-average annual interest rate of 4.5% and term of nine years. In addition, we obtained a €48.0 million senior construction-to-term mortgage loan related to the development of an office building located in Eindhoven, the Netherlands, which bears an interest rate of Euro Interbank Offered Rate plus 2.5% for each draw down. As of September 30, 2016, we had drawn $15.8 million on this loan, at an interest rate of 3.19%, which is based on the exchange rate of the euro at the date of each drawdown. Upon the completion of the development project, this loan will be converted to a seven-year term loan, at which time it will bear a fixed interest rate of 1.75%.

In addition, during the nine months ended September 30, 2016, we entered into agreements for third-party non-recourse mortgage financing related to the following build-to-suit investments, which had no amounts drawn as of September 30, 2016:

$41.0 million that will be used to finance the construction of the university complex development site located in Accra, Ghana (Note 5), which is subject to the tenant obtaining a letter of credit and will bear an interest rate based on the U.S. treasury rate plus 300 basis points upon draw down;
€15.2 million that is expected to be available upon the substantial completion of a hotel located in Hamburg, Germany, which will bear an interest rate of 2.1% upon draw down; and
€12.8 million that was scheduled to become available upon the completion of the expansion of an industrial facility located in Michalovce, Slovakia, which will bear an interest rate based upon the Euro Interbank Offered Rate plus 3.1% upon draw down. This expansion was completed during the three months ended September 30, 2016, and we drew down on the mortgage proceeds on October 14, 2016.

In conjunction with the August 2015 sale of the Crowne Group Inc. properties (Note 6), we paid off the existing mortgage loans that encumbered all of these properties. The buyer paid the prepayment penalty on our behalf due to the unwinding of the related interest rate swap agreement. During the three and nine months ended September 30, 2015, we recognized a loss on extinguishment of debt of $1.1 million related to the termination of this swap within Other income and (expenses) in our consolidated financial statements.



CPA®:18 – Global 9/30/2016 10-Q 24


Notes to Consolidated Financial Statements (Unaudited)


Scheduled Debt Principal Payments
 
Scheduled debt principal payments during the remainder of 2016, each of the next four calendar years following December 31, 2016, and thereafter are as follows (in thousands):
Years Ending December 31,
 
Total
2016 (remainder)
 
$
1,117

2017
 
22,668

2018
 
27,296

2019
 
5,644

2020
 
115,415

Thereafter through 2039
 
982,363

 
 
1,154,503

Unamortized premium, net
 
279

Deferred financing costs (a)
 
(9,150
)
Total
 
$
1,145,632