10-Q 1 cpa182018q210-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 June 30, 2018
 
 
 
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
cpa18logoa01a01a29.jpg
CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
(Exact name of registrant as specified in its charter)
Maryland
 
90-0885534
(State of incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
50 Rockefeller Plaza
 
 
New York, New York
 
10020
(Address of principal executive offices)
 
(Zip Code)
Investor Relations (212) 492-8920
(212) 492-1100
(Registrant’s telephone numbers, including area code)

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

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

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

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

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

Registrant has 113,956,225 shares of Class A common stock, $0.001 par value, and 31,713,872 shares of Class C common stock, $0.001 par value, outstanding at August 3, 2018.





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. These forward-looking statements include, but are not limited to, statements regarding: the amount and timing of any future dividends; statements regarding our corporate strategy and underlying assumptions about our portfolio (e.g. occupancy rate, lease terms, and tenant credit quality, including our expectations about tenant bankruptcies and interest coverage), possible new acquisitions and dispositions, and our international exposure and acquisition volume; our future capital expenditure levels, including any plans to fund our future liquidity needs, and future leverage and debt service obligations; our capital structure; statements that we make regarding our ability to remain qualified for taxation as a real estate investment trust, or REIT, and the recently adopted Tax Cuts and Jobs Act in the United States; the impact of recently issued accounting pronouncements; other regulatory activity, such as the General Data Protection Regulation in the European Union or other data privacy initiatives; and the general economic outlook. It is important to note that our actual results could be materially different from those projected in such forward-looking statements. Other unknown or unpredictable factors could also have material adverse effects on our business, financial condition, liquidity, results of operations, Modified funds from operations, or MFFO, and prospects. You should exercise caution in relying on forward-looking statements as they involve known and unknown risks, uncertainties, and other factors that may materially affect our future results, performance, achievements, or transactions. Information on factors that could impact actual results and cause them to differ from what is anticipated in the forward-looking statements contained herein is included in this Report as well as in our other filings with the Securities and Exchange Commission, 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, 2017, as filed with the SEC on March 12, 2018, or the 2017 Annual Report. Moreover, because we operate in a very competitive and rapidly changing environment, new risks are likely to emerge from time to time. Given these risks and uncertainties, shareholders are cautioned not to place undue reliance on these forward-looking statements as a prediction of future results, which speak only as of the date of this Report, unless noted otherwise. Except as required by federal securities laws and the rules and regulations of the SEC, we do not undertake to revise or update any forward-looking statements.

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



CPA:18 – Global 6/30/2018 10-Q 1


PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
 
June 30, 2018
 
December 31, 2017
Assets
 
 
 
Investments in real estate:
 
 
 
Real estate — Land, buildings and improvements
$
1,275,023

 
$
1,263,172

Operating real estate — Land, buildings and improvements
568,601

 
566,489

Real estate under construction
195,122

 
134,366

Net investments in direct financing leases
41,648

 
39,957

In-place lease intangible assets
270,957

 
274,723

Other intangible assets
34,967

 
35,811

Investments in real estate
2,386,318

 
2,314,518

Accumulated depreciation and amortization
(282,588
)
 
(252,067
)
Net investments in real estate
2,103,730

 
2,062,451

Cash and cash equivalents
90,971

 
71,068

Accounts receivable and other assets, net
204,242

 
197,478

Total assets
$
2,398,943

 
$
2,330,997

Liabilities and Equity
 
 
 
Debt:
 
 
 
Non-recourse mortgages, net
$
1,223,215

 
$
1,129,432

Bonds payable, net
147,311

 
146,016

Debt, net
1,370,526

 
1,275,448

Accounts payable, accrued expenses and other liabilities
149,808

 
148,031

Due to affiliates
11,780

 
13,767

Distributions payable
21,967

 
21,686

Total liabilities
1,554,081

 
1,458,932

Commitments and contingencies (Note 10)

 

 
 
 
 
Preferred stock, $0.001 par value; 50,000,000 shares authorized; none issued

 

Class A common stock, $0.001 par value; 320,000,000 shares authorized; 112,849,543 and 111,193,651 shares, respectively, issued and outstanding
113

 
110

Class C common stock, $0.001 par value; 80,000,000 shares authorized; 31,410,984 and 31,189,137 shares, respectively, issued and outstanding
31

 
31

Additional paid-in capital
1,273,685

 
1,257,840

Distributions and accumulated losses
(453,823
)
 
(420,005
)
Accumulated other comprehensive loss
(40,749
)
 
(33,212
)
Total stockholders’ equity
779,257

 
804,764

Noncontrolling interests
65,605

 
67,301

Total equity
844,862

 
872,065

Total liabilities and equity
$
2,398,943

 
$
2,330,997


See Notes to Condensed Consolidated Financial Statements.


CPA:18 – Global 6/30/2018 10-Q 2


CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except share and per share amounts)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018

2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
Lease revenues:
 
 
 
 
 
 
 
Rental income
$
28,456

 
$
24,542

 
$
57,013

 
$
47,902

Interest income from direct financing leases
913

 
906

 
1,831

 
1,880

Total lease revenues
29,369

 
25,448

 
58,844

 
49,782

Operating real estate income
20,309

 
20,316

 
39,972

 
39,696

Other operating income
3,930

 
3,426

 
7,447

 
6,443

Other interest income
1,795

 
1,783

 
3,575

 
3,532

 
55,403


50,973

 
109,838

 
99,453

Operating Expenses
 
 
 
 
 
 
 
Depreciation and amortization
16,892

 
18,728

 
34,524

 
37,679

Property expenses
10,190

 
10,209

 
20,024

 
18,418

Operating real estate expenses
8,220

 
8,448

 
16,379

 
16,482

General and administrative
1,800

 
1,752

 
3,445

 
3,481

Acquisition and other expenses
17

 
(7
)
 
17

 
45

 
37,119

 
39,130

 
74,389

 
76,105

Other Income and Expenses
 
 
 
 
 
 
 
Interest expense
(13,294
)
 
(11,791
)
 
(26,224
)
 
(23,244
)
Other gains and (losses)
(2,072
)
 
9,459

 
5,920

 
12,121

Equity in losses of equity method investment in real estate
(235
)
 
(254
)
 
(559
)
 
(353
)
 
(15,601
)
 
(2,586
)
 
(20,863
)
 
(11,476
)
Income before income taxes
2,683

 
9,257

 
14,586

 
11,872

Benefit from (provision for) income taxes
298

 
(1,123
)
 
713

 
(1,193
)
Net Income
2,981

 
8,134

 
15,299

 
10,679

Net income attributable to noncontrolling interests (inclusive of Available Cash Distributions to a related party of $2,830, $2,186, $4,735, and $3,861, respectively)
(3,315
)
 
(2,350
)
 
(5,306
)
 
(4,274
)
Net (Loss) Income Attributable to CPA:18 – Global
$
(334
)

$
5,784

 
$
9,993

 
$
6,405

Class A Common Stock
 
 
 
 
 
 
 
Net (loss) income attributable to CPA:18 – Global
$
(213
)
 
$
4,600

 
$
7,901

 
$
5,179

Basic and diluted weighted-average shares outstanding
113,010,970

 
109,533,769

 
112,564,943

 
108,998,427

Basic and diluted (loss) income per share
$

 
$
0.04

 
$
0.07

 
$
0.05

Distributions Declared Per Share
$
0.1563

 
$
0.1563

 
$
0.3126

 
$
0.3126

 
 
 
 
 
 
 
 
Class C Common Stock
 
 
 
 
 
 
 
Net (loss) income attributable to CPA:18 – Global
$
(121
)
 
$
1,184

 
$
2,092

 
$
1,226

Basic and diluted weighted-average shares outstanding
31,593,597

 
31,030,596

 
31,517,919

 
30,898,107

Basic and diluted (loss) income per share
$

 
$
0.04

 
$
0.07

 
$
0.04

Distributions Declared Per Share
$
0.1378

 
$
0.1382

 
$
0.2753

 
$
0.2762


See Notes to Condensed Consolidated Financial Statements.


CPA:18 – Global 6/30/2018 10-Q 3


CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
(in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net Income
$
2,981

 
$
8,134

 
$
15,299

 
$
10,679

Other Comprehensive (Loss) Income
 
 
 
 
 
 
 
Foreign currency translation adjustments
(22,582
)
 
19,541

 
(11,005
)
 
23,697

Realized and unrealized gain (loss) on derivative instruments
3,418

 
(3,824
)
 
2,759

 
(4,281
)
 
(19,164
)
 
15,717

 
(8,246
)
 
19,416

Comprehensive (Loss) Income
(16,183
)
 
23,851

 
7,053

 
30,095

 
 
 
 
 
 
 
 
Amounts Attributable to Noncontrolling Interests
 
 
 
 
 
 
 
Net income
(3,315
)
 
(2,350
)
 
(5,306
)
 
(4,274
)
Foreign currency translation adjustments
2,326

 
(2,265
)
 
709

 
(2,795
)
Comprehensive income attributable to noncontrolling interests
(989
)
 
(4,615
)
 
(4,597
)
 
(7,069
)
Comprehensive (Loss) Income Attributable to CPA:18 – Global
$
(17,172
)
 
$
19,236

 
$
2,456

 
$
23,026

 
See Notes to Condensed Consolidated Financial Statements.



CPA:18 – Global 6/30/2018 10-Q 4


CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
Six Months Ended June 30, 2018 and 2017
(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, 2018
111,193,651

 
$
110

 
31,189,137

 
$
31

 
$
1,257,840

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

 
$
67,301

 
$
872,065

Shares issued
2,008,147

 
2

 
625,174

 
1

 
22,012

 
 
 
 
 
22,015

 

 
22,015

Shares issued to affiliate
711,157

 
1

 
 
 
 
 
5,970

 
 
 
 
 
5,971

 

 
5,971

Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
1,174

 
1,174

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
(7,467
)
 
(7,467
)
Distributions declared ($0.3126 and $0.2753 per share to Class A and Class C, respectively)
 
 
 
 
 
 
 
 
 
 
(43,811
)
 
 
 
(43,811
)
 
 
 
(43,811
)
Net income
 
 
 
 
 
 
 
 
 
 
9,993

 
 
 
9,993

 
5,306

 
15,299

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 

Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
 
 
(10,296
)
 
(10,296
)
 
(709
)
 
(11,005
)
Realized and unrealized gain on derivative instruments
 
 
 
 
 
 
 
 
 
 
 
 
2,759

 
2,759

 
 
 
2,759

Repurchase of shares
(1,063,412
)
 

 
(403,327
)
 
(1
)
 
(12,137
)
 
 
 
 
 
(12,138
)
 
 
 
(12,138
)
Balance at June 30, 2018
112,849,543

 
$
113

 
31,410,984

 
$
31

 
$
1,273,685

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

 
$
65,605

 
$
844,862

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
107,460,081

 
$
107

 
30,469,144

 
$
30

 
$
1,222,139

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

 
$
66,005

 
$
865,904

Shares issued
2,133,836

 
2

 
687,204

 
1

 
22,276

 
 
 
 
 
22,279

 
 
 
22,279

Shares issued to affiliate
686,096

 
1

 
 
 
 
 
5,420

 
 
 
 
 
5,421

 
 
 
5,421

Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
3,118

 
3,118

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
(8,261
)
 
(8,261
)
Distributions declared ($0.3126 and $0.2762 per share to Class A and Class C, respectively)
 
 
 
 
 
 
 
 
 
 
(42,611
)
 
 
 
(42,611
)
 
 
 
(42,611
)
Net income
 
 
 
 
 
 
 
 
 
 
6,405

 
 
 
6,405

 
4,274

 
10,679

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 

Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
 
 
20,902

 
20,902

 
2,795

 
23,697

Realized and unrealized loss on derivative instruments
 
 
 
 
 
 
 
 
 
 
 
 
(4,281
)
 
(4,281
)
 
 
 
(4,281
)
Repurchase of shares
(822,433
)
 
(1
)
 
(127,524
)
 

 
(7,348
)
 
 
 
 
 
(7,349
)
 
 
 
(7,349
)
Balance at June 30, 2017
109,457,580

 
$
109

 
31,028,824

 
$
31

 
$
1,242,487

 
$
(396,879
)
 
$
(45,083
)
 
$
800,665

 
$
67,931

 
$
868,596


See Notes to Condensed Consolidated Financial Statements.


CPA:18 – Global 6/30/2018 10-Q 5


CORPORATE PROPERTY ASSOCIATES 18 – GLOBAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Six Months Ended June 30,
 
2018
 
2017
Cash Flows — Operating Activities

 
 
Net Cash Provided by Operating Activities
$
44,960

 
$
43,091

Cash Flows — Investing Activities
 
 
 
Funding and advances for build-to-suit projects
(44,941
)
 
(30,497
)
Acquisitions of real estate, build-to-suit projects and direct financing leases
(37,985
)
 
(27,331
)
Proceeds from insurance settlements
7,074

 
3,895

Capital expenditures on real estate
(7,033
)
 
(5,458
)
Value added taxes refunded in connection with the acquisitions of real estate
3,374

 
12,050

Value added taxes paid in connection with acquisitions of real estate
(3,290
)
 
(2,491
)
Proceeds from repayment of notes receivable
2,546

 

Payment of deferred acquisition fees to an affiliate
(2,238
)
 
(2,854
)
Proceeds from sale of real estate
771

 

Other investing activities, net
12

 
(39
)
Capital contributions to equity investment
(6
)
 
(5,616
)
Return of capital from equity investments

 
236

Net Cash Used in Investing Activities
(81,716
)
 
(58,105
)
Cash Flows — Financing Activities
 
 
 
Proceeds from mortgage financing
128,010

 
32,613

Distributions paid
(43,530
)
 
(42,210
)
Scheduled payments and prepayments of mortgage principal
(22,654
)
 
(6,323
)
Proceeds from issuance of shares
20,970

 
21,175

Repurchase of shares
(12,138
)
 
(7,349
)
Distributions to noncontrolling interests
(7,467
)
 
(8,261
)
Contributions from noncontrolling interests
1,174

 
2,339

Payment of deferred financing costs and mortgage deposits
(965
)
 
(526
)
Other financing activities, net
540

 
(43
)
Proceeds from notes payable to affiliate

 
11,196

Repayment of notes payable to affiliate

 
(4,495
)
Net Cash Provided by (Used in) Financing Activities
63,940

 
(1,884
)
Change in Cash and Cash Equivalents and Restricted Cash During the Period
 
 
 
Effect of exchange rate changes on cash and cash equivalents and restricted cash
(2,690
)
 
2,776

Net increase (decrease) in cash and cash equivalents and restricted cash
24,494

 
(14,122
)
Cash and cash equivalents and restricted cash, beginning of period
90,183

 
93,741

Cash and cash equivalents and restricted cash, end of period
$
114,677

 
$
79,619


See Notes to Condensed Consolidated Financial Statements.


CPA:18 – Global 6/30/2018 10-Q 6


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

Note 1. Organization

Organization

Corporate Property Associates 18 – Global Incorporated, or CPA:18 – Global, and, together with its consolidated subsidiaries, we, us, or our, is a publicly owned, non-traded REIT, that invests primarily in a diversified portfolio of income-producing commercial real estate properties leased to companies and other real estate related assets, both domestically and internationally. 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 June 30, 2018 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 June 30, 2018, our portfolio was comprised of full or partial ownership interests in 59 properties, substantially all of which were fully-occupied and triple-net leased to 100 tenants totaling 10.2 million square feet. The remainder of our portfolio was comprised of our full or partial ownership interests in 69 self-storage properties and 14 multi-family and student-housing properties totaling 6.7 million square feet.

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

We raised aggregate gross proceeds in our initial public offering of approximately $1.2 billion through April 2, 2015, which is the date we closed our offering. We have fully invested the proceeds from our initial public offering. In addition, from inception through June 30, 2018, $133.6 million and $37.0 million of distributions to our shareholders were reinvested in our Class A and Class C common stock, respectively, through our Distribution Reinvestment Plan, or DRIP.

Note 2. Basis of Presentation

Basis of Presentation

Our interim condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of our consolidated financial position, results of operations, and cash flows in accordance with generally accepted accounting principles in the United States, or GAAP. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.
 
In the opinion of management, the unaudited financial information for the interim periods presented in this Report reflects all normal and recurring adjustments necessary for a fair statement of financial position, results of operations, and cash flows. Our interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 2017, which are included in the 2017 Annual Report, as certain disclosures that would substantially duplicate those contained in the audited consolidated financial statements have not been included in this Report. Operating results for interim periods are not necessarily indicative of operating results for an entire year.
 


CPA:18 – Global 6/30/2018 10-Q 7


Notes to Condensed Consolidated Financial Statements (Unaudited)


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

Basis of Consolidation

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

When we obtain an economic interest in an entity, we evaluate the entity to determine if it should be deemed a variable interest entity, 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 VIEs unless the limited partners hold substantive kick-out rights or participation rights. Significant judgment is required to determine whether a VIE should be consolidated. We review the contractual arrangements provided for in the partnership agreement or other related contracts to determine whether the entity is considered a VIE and to establish whether we have any variable interests in the VIE. We then compare our variable interests, if any, to those of the other variable interest holders to determine which party is the primary beneficiary of the VIE based on whether the entity (i) has the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The liabilities of these VIEs are non-recourse to us and can only be satisfied from each VIE’s respective assets.

At June 30, 2018, we considered 16 entities to be VIEs, 15 of which we consolidated as we are considered the primary beneficiary. At December 31, 2017, we considered 12 entities to be VIEs, 11 of which we consolidated. The following table presents a summary of selected financial data of the consolidated VIEs included in the condensed consolidated balance sheets (in thousands):
 
June 30, 2018
 
December 31, 2017
Real estate — Land, buildings and improvements
$
370,439

 
$
373,954

Real estate under construction
171,872

 
107,732

In-place lease intangible assets
87,185

 
88,617

Other intangible assets
17,536

 
18,040

Accumulated depreciation and amortization
(61,354
)
 
(54,592
)
Cash and cash equivalents
10,585

 
5,030

Accounts receivable and other assets, net
34,167

 
33,219

Total assets
630,430

 
572,000

 
 
 
 
Non-recourse mortgages, net
$
255,406

 
$
218,267

Bonds payable, net
60,945

 
60,577

Accounts payable, accrued expenses and other liabilities
52,637

 
46,858

Total liabilities
368,988

 
325,702


At both June 30, 2018 and December 31, 2017, we had one unconsolidated VIE, which we account for under the equity method of accounting. We do not consolidate this entity because we are not the primary beneficiary and the nature of our involvement in the activities of the entity allows us to exercise significant influence on, but does not give us power over, decisions that significantly affect the economic performance of the entity. As of June 30, 2018 and December 31, 2017, the net carrying amount of this equity investment was $19.6 million and $20.9 million, respectively, and our maximum exposure to loss in this entity is limited to our investment. 



CPA:18 – Global 6/30/2018 10-Q 8


Notes to Condensed Consolidated Financial Statements (Unaudited)


At times, the carrying value of our equity investment may fall below zero for certain investments. We intend to fund our share of the jointly owned investment’s future operating deficits should the need arise. However, we have no legal obligation to pay for any of the liabilities of such investments nor do we have any legal obligation to fund the operating deficits. At both June 30, 2018 and December 31, 2017, our sole equity investment did not have a carrying value below zero.

Accounting Policy Update

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

Reclassifications 

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

In the second quarter of 2018, we reclassified notes receivable, equity investment in real estate, and goodwill to be included within Accounts receivable and other assets, net in our condensed consolidated balance sheets. Additionally, we reclassified deferred income taxes to be included within Accounts payable, accrued expenses and other liabilities in our condensed consolidated balance sheets. Prior period balances have been reclassified to conform to the current period presentation.

The following table presents a summary of amounts included in Accounts receivable and other assets, net in the condensed consolidated financial statements (in thousands):

 
June 30, 2018
 
December 31, 2017
Accounts receivable and other assets, net
 
 
 
Notes receivable (Note 5)
$
63,954

 
$
66,500

Accounts receivable, net
33,249

 
32,572

Goodwill (Note 6)
27,562

 
26,084

Restricted cash
23,706

 
19,115

Equity investment in real estate (Note 4)
19,594

 
20,919

Prepaid expenses
14,484

 
13,496

Other assets
21,693

 
18,792

 
$
204,242

 
$
197,478


The following table presents a summary of amounts included in Accounts payable, accrued expenses and other liabilities in the condensed consolidated financial statements (in thousands):

 
June 30, 2018
 
December 31, 2017
Accounts payable, accrued expenses and other liabilities
 
 
 
Deferred income taxes
$
61,619

 
$
63,980

Accounts payable and accrued expenses
40,769

 
39,626

Deferred revenue
13,622

 
11,975

Intangible liabilities, net (Note 6)
10,393

 
11,009

Other liabilities
23,405

 
21,441

 
$
149,808

 
$
148,031




CPA:18 – Global 6/30/2018 10-Q 9


Notes to Condensed Consolidated Financial Statements (Unaudited)


Restricted Cash — In connection with our adoption of Accounting Standards Update, or ASU, 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, as described below, we revised our condensed consolidated statements of cash flows to include restricted cash when reconciling the beginning-of-period and end-of-period cash amounts shown on the statement of cash flows. As a result, we retrospectively revised prior periods presented to conform to the current period presentation. Restricted cash primarily consists of security deposits and amounts required to be reserved pursuant to lender agreements for debt service, capital improvements, and real estate taxes. The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the condensed consolidated statements of cash flows (in thousands):
 
June 30, 2018
 
December 31, 2017
Cash and cash equivalents
$
90,971

 
$
71,068

Restricted cash (a)
23,706

 
19,115

Total cash and cash equivalents and restricted cash
$
114,677

 
$
90,183

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

Recent Accounting Pronouncements

Pronouncements Adopted as of June 30, 2018

In May 2014, the Financial Accounting Standards Board, or 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, which constitute a majority of our revenues, but will primarily apply to revenues generated from our operating properties. We adopted this guidance for our interim and annual periods beginning January 1, 2018 using the modified retrospective transition method applied to any contracts not completed as of that date. There were no changes to the prior period presentations of revenue. Results of operations for reporting periods beginning January 1, 2018 are presented under Topic 606. The adoption of Topic 606 did not have a material impact on our condensed consolidated financial statements.

Revenue is recognized when, or as, control of promised goods or services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. At contract inception, we assess the services promised in our contracts with customers and identify a performance obligation for each promise to transfer to the customer a good or service (or bundle of goods or services) that is distinct. To identify the performance obligations, we consider all of the services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires all equity investments (other than those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value, with changes in the fair value recognized through net income. We adopted this guidance for our interim and annual periods beginning January 1, 2018. The adoption of ASU 2016-01 did not have a material impact on our condensed 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. We retrospectively adopted this guidance for our interim and annual periods beginning January 1, 2018. The adoption of ASU 2016-15 did not have a material impact on our condensed consolidated financial statements.



CPA:18 – Global 6/30/2018 10-Q 10


Notes to Condensed Consolidated Financial Statements (Unaudited)


In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 intends to reduce diversity in practice for the classification and presentation of changes in restricted cash on the statement of cash flows. ASU 2016-18 requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We retrospectively adopted this guidance for our interim and annual periods beginning January 1, 2018. See Restricted Cash above for additional information.

In February 2017, the FASB issued ASU 2017-05, Other Income — Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. ASU 2017-05 clarifies the scope and application of Accounting Standards Codification, or ASC, 610-20 on the sale or transfer of nonfinancial assets and in substance nonfinancial assets to non-customers, including partial sales. Nonfinancial assets within the scope of this Subtopic include the sale of land, buildings and intangible assets. ASU 2017-05 further clarifies that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. The amendments define the term “in substance nonfinancial asset,” in part, as a financial asset promised to a counterparty in a contract if substantially all of the fair value of the assets (recognized and unrecognized) that are promised to the counterparty in the contract is concentrated in nonfinancial assets. This amendment also clarifies that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. For example, a parent company may transfer control of nonfinancial assets by transferring ownership interests in a consolidated subsidiary. We adopted this guidance for our interim and annual periods beginning January 1, 2018 and applied the modified retrospective transition method (applicable to any contracts not completed as of that date). The adoption of ASU 2017-05 did not have a material impact on our condensed consolidated financial statements.

Pronouncements to be Adopted after June 30, 2018

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 modifies the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract, the lessee and the lessor. ASU 2016-02 provides new guidelines that change the accounting for leasing arrangements for lessees, whereby their rights and obligations under substantially all leases, existing and new, would be capitalized and recorded on the balance sheet. For lessors, however, the accounting remains largely equivalent to the current model, with the distinction between operating, sales-type, and direct financing leases retained, but updated to align with certain changes to the lessee model and the new revenue recognition standard. ASU 2016-02 also replaces existing sale-leaseback guidance with a new model that requires symmetrical accounting between the seller-lessee and buyer-lessor. Additionally, ASU 2016-02 requires lessors to record costs paid directly by a lessee on behalf of a lessor (e.g., real estate taxes and insurance costs) on a gross basis and will require extensive quantitative and qualitative disclosures.

Early application is permitted for all entities. ASU 2016-02 provides two transition methods. The first transition method allows for application of the new model at the beginning of the earliest comparative period presented. Under the second transition method, comparative periods would not be restated, with any cumulative effect adjustments recognized in the opening balance of retained earnings in the period of adoption. In addition, a practical expedient was recently issued by the FASB, which allows lessors to combine non-lease components with related lease components if certain conditions are met. Further, in March 2018, the FASB approved, but has not yet finalized or issued, an update to allow lessors to make a policy election to record certain costs (e.g., insurance) paid directly by the lessee net, if the uncertainty regarding these variable amounts is not expected to ultimately be resolved. We will adopt this guidance for our interim and annual periods beginning January 1, 2019 and expect to use the second transition method. ASU 2016-02 is expected to impact our condensed consolidated financial statements as we have certain operating office and land lease arrangements for which we are the lessee and also certain lease arrangements that include common area maintenance services (non-lease components) where we are the lessor. We are evaluating the impact of ASU 2016-02 and have not yet determined if it will have a material impact on our business or our condensed consolidated financial statements.



CPA:18 – Global 6/30/2018 10-Q 11


Notes to Condensed Consolidated Financial Statements (Unaudited)


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

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 will make more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess hedge effectiveness. It is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. ASU 2017-12 will be effective in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We are in the process of evaluating the impact of adopting ASU 2017-12 on our condensed consolidated financial statements, and will adopt the standard for the fiscal year beginning January 1, 2019.

Note 3. Agreements and Transactions with Related Parties

Transactions with Our Advisor

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

The following tables present a summary of fees we paid, expenses we reimbursed, and distributions we made to our Advisor and other affiliates (which excludes the annual distribution and shareholder servicing fee that impacts equity as further disclosed below the tables), in accordance with the terms of the relevant agreements (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Amounts Included in the Condensed Consolidated Statements of Operations
 
 
 
 
 
 
 
Asset management fees
$
3,151

 
$
2,767

 
$
6,025

 
$
5,476

Available Cash Distributions
2,830

 
2,186

 
4,735

 
3,861

Personnel and overhead reimbursements
716

 
787

 
1,433

 
1,569

Director compensation
40

 
53

 
80

 
105

Interest expense on deferred acquisition fees, affiliate loan, and accretion of interest on annual distribution and shareholder servicing fee (a)
20

 
319

 
(42
)
 
620

 
$
6,757

 
$
6,112

 
$
12,231

 
$
11,631

 
 
 
 
 
 
 
 
Advisor Fees Capitalized
 
 
 
 
 
 
 
Current acquisition fees
$
2,379

 
$

 
$
3,100

 
$
1,393

Deferred acquisition fees
1,903

 

 
2,480

 
1,114

Capitalized personnel and overhead reimbursements
259

 
2

 
371

 
184

 
$
4,541

 
$
2

 
$
5,951

 
$
2,691

__________
(a)
For the three and six months ended June 30, 2018 interest on the annual distribution and shareholder servicing fee is excluded as it is paid directly to selected dealers rather than through Carey Financial LLC, or Carey Financial, as discussed further below.



CPA:18 – Global 6/30/2018 10-Q 12


Notes to Condensed Consolidated Financial Statements (Unaudited)


The following table presents a summary of amounts included in Due to affiliates in the condensed consolidated financial statements (in thousands):
 
June 30, 2018
 
December 31, 2017
Due to Affiliates
 
 
 
Deferred acquisition fees, including accrued interest
$
5,786

 
$
6,693

Accounts payable and other
3,316

 
6,102

Current acquisition fees
1,652

 

Asset management fees payable
1,026

 
972

 
$
11,780

 
$
13,767


Loans from WPC

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

As of June 30, 2018 and December 31, 2017, we had no loans outstanding to WPC.

Asset Management Fees

Pursuant to the advisory agreement, our Advisor is entitled to an annual asset management fee ranging from 0.5% to 1.5%, depending on the type of investment and based on the average market value or average equity value, as applicable, of our investments. Asset management fees are payable in cash and/or shares of our Class A common stock at our option, after consultation with our Advisor. If our Advisor receives all or a portion of its fees in shares, the number of shares issued is determined by dividing the dollar amount of fees by our most recently published estimated net asset value per share, or NAV, per Class A share, which was $8.57 as of March 31, 2018. For the three and six months ended June 30, 2018 and the year ended December 31, 2017, our Advisor received its asset management fees in shares of our Class A common stock. At June 30, 2018, our Advisor owned 4,327,814 shares, or 3.0%, of our outstanding Class A common stock. Asset management fees are included in Property expenses in the condensed consolidated financial statements.

Annual Distribution and Shareholder Servicing Fee

Through June 30, 2017, Carey Financial, the wholly-owned subsidiary of our Advisor that was a registered broker-dealer, was entitled to receive an annual distribution and shareholder servicing fee from us in connection with our Class C common stock, which it may have re-allowed to selected dealers. Beginning with the payment for the third quarter of 2017 (paid during the first month of the fourth quarter of 2017) the annual distribution and shareholder servicing fees are paid directly to selected dealers rather than through Carey Financial. The amount of the annual distribution and shareholder servicing fee is 1.0% of the most recently published NAV of our Class C common stock. The annual distribution and shareholder servicing fee accrues daily and is payable quarterly in arrears. We will no longer incur the annual distribution and shareholder servicing fee beginning on the date at which, in the aggregate, underwriting compensation from all sources reaches 10.0% of the gross proceeds from our initial public offering, which it had not yet reached as of June 30, 2018. At June 30, 2018 and December 31, 2017, we recorded a liability of $4.8 million and $5.7 million, respectively, within Accounts payable, accrued expenses and other liabilities in the condensed consolidated financial statements.



CPA:18 – Global 6/30/2018 10-Q 13


Notes to Condensed Consolidated Financial Statements (Unaudited)


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 June 30, 2018 and December 31, 2017. Unpaid installments of deferred acquisition fees are included in Due to affiliates in the condensed consolidated financial statements and bear interest at an annual rate of 2.0%. The cumulative total acquisition costs, including acquisition fees paid to the advisor, may not exceed 6.0% of the aggregate contract purchase price of all investments, which is measured at the end of each year. During the year ended December 31, 2017, we overpaid acquisition fees to our Advisor totaling $0.7 million, and as a result, we recorded a reimbursement receivable from our Advisor for this amount and included it within Accounts receivable and other assets, net in our condensed consolidated financial statements. This amount was repaid to us during the period ended June 30, 2018.

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

Personnel and Overhead Reimbursements

Under the terms of the advisory agreement, our Advisor allocates a portion of its personnel and overhead expenses to us and the other entities that are managed by WPC and its affiliates, including Corporate Property Associates 17 – Global, Carey Watermark Investors Incorporated, Carey Watermark Investors 2 Incorporated, and Carey European Housing Fund I L.P., which are collectively referred to as the Managed Programs. Our Advisor also allocated a portion of its personnel and overhead expenses to Carey Credit Income Fund (now known as Guggenheim Credit Income Fund) prior to September 11, 2017, which was the effective date of its resignation as the advisor to that fund. Our Advisor allocates these expenses to us on the basis of our trailing four quarters of reported revenues in comparison to those of WPC and other entities managed by WPC and its affiliates.

We reimburse our Advisor for various expenses it incurs in the course of providing services to us. We reimburse certain third-party expenses paid by our Advisor on our behalf, including property-specific costs, professional fees, office expenses, and business development expenses. In addition, we reimburse our Advisor for the allocated costs of personnel and overhead in managing our day-to-day operations, including accounting services, stockholder services, corporate management, and property management and operations. We do not reimburse our Advisor for the cost of personnel if these personnel provide services for transactions for which our Advisor receives a transaction fee, such as for acquisitions and dispositions. Under the advisory agreement, the amount of applicable personnel costs allocated to us is capped at 1.0% and 2.0% for 2018 and 2017, respectively, of pro rata lease revenues for each 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 condensed consolidated financial statements. However, we capitalize certain of the costs related to our Advisor’s legal transactions group if the costs relate to a transaction that is not considered to be a business combination.

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



CPA:18 – Global 6/30/2018 10-Q 14


Notes to Condensed Consolidated Financial Statements (Unaudited)


Available Cash Distributions

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

Jointly Owned Investments and Other Transactions with our Affiliates

At June 30, 2018, we owned interests ranging from 50% to 99% in jointly owned investments, with the remaining interests held by affiliates or by third parties. We consolidate all of these joint ventures with exception to our sole equity investment (Note 4), which we account for under the equity method of accounting. Additionally, no other parties hold any rights that overcome our control. We account for the minority share of these investments as noncontrolling interests.

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

Real Estate Land, Buildings and Improvements

Real estate, which consists of land and buildings leased to others, and which are subject to operating leases, is summarized as follows (in thousands):
 
June 30, 2018
 
December 31, 2017
Land
$
204,198

 
$
202,500

Buildings and improvements
1,070,825

 
1,060,672

Less: Accumulated depreciation
(101,331
)
 
(87,886
)
 
$
1,173,692

 
$
1,175,286


During the six months ended June 30, 2018, the U.S. dollar strengthened against the euro, as the end-of-period rate for the U.S. dollar in relation to the euro decreased by 2.8% to $1.1658 from $1.1993. As a result, the carrying value of our Real estate — land, buildings and improvements decreased by $17.5 million from December 31, 2017 to June 30, 2018.

Depreciation expense, including the effect of foreign currency translation, on our real estate was $7.9 million and $6.7 million for the three months ended June 30, 2018 and 2017, respectively, and $15.8 million and $13.0 million for the six months ended June 30, 2018 and 2017, respectively.

Operating Real Estate Land, Buildings and Improvements
 
Operating real estate, which consists of our self-storage and multi-family properties, is summarized as follows (in thousands):
 
June 30, 2018
 
December 31, 2017
Land
$
98,432

 
$
98,429

Buildings and improvements
470,169

 
468,060

Less: Accumulated depreciation
(52,409
)
 
(43,786
)
 
$
516,192

 
$
522,703


Depreciation expense on our operating real estate was $4.3 million and $4.5 million for the three months ended June 30, 2018 and 2017, respectively, and $8.7 million and $8.9 million for the six months ended June 30, 2018 and 2017, respectively.



CPA:18 – Global 6/30/2018 10-Q 15


Notes to Condensed Consolidated Financial Statements (Unaudited)


Real Estate Under Construction

The following table provides the activity of our Real estate under construction (in thousands):
 
Six Months Ended June 30, 2018
Beginning balance
$
134,366

Capitalized funds
87,646

Placed into service
(25,900
)
Foreign currency translation adjustments
(3,498
)
Capitalized interest
2,508

Ending balance
$
195,122


Capitalized Funds

We entered into the following build-to-suit investments during the six months ended June 30, 2018 (amounts based on the exchange rate of the euro on the date of acquisition):

$10.5 million to enter into a build-to-suit joint venture with a third party for a student-housing development site located in Barcelona, Spain on March 8, 2018. We acquired 99% of the equity in this investment at closing. This property is under construction and is currently projected to be completed in September 2019, at which point our total investment is expected to be approximately $28.5 million. Since we are responsible for substantially all of the economics but we proportionally have less voting rights, this investment is considered to be a VIE that we consolidate (Note 2);
$9.3 million to enter into a build-to-suit joint venture with a third party for a student-housing development site located in Coimbra, Portugal on June 11, 2018. We acquired 99% of the equity in this investment at closing. This property is under construction and is currently projected to be completed in September 2019, at which point our total investment is expected to be approximately $26.3 million. Since we are responsible for substantially all of the economics but we proportionally have less voting rights, this investment is considered to be a VIE that we consolidate (Note 2);
$13.1 million to enter into a build-to-suit project for a student-housing development site located in San Sebastian, Spain on June 14, 2018. This property is under construction and is currently projected to be completed in September 2020, at which point our total investment is expected to be approximately $36.7 million. As there is insufficient equity at risk, the investment is considered to be a VIE (Note 2); and
$13.1 million to enter into a build-to-suit project for a student-housing development site located in Barcelona, Spain on June 25, 2018. This property is under construction and is currently projected to be completed in September 2020, at which point our total investment is expected to be approximately $31.7 million. As there is insufficient equity at risk, the investment is considered to be a VIE (Note 2).

Ghana — On February 19, 2016, we entered into a build-to-suit joint venture with a third party for a university complex development site located in Accra, Ghana. As of June 30, 2018, total capitalized funds related to this investment were $32.5 million, inclusive of accrued construction costs of $0.9 million and the effect of recording deferred tax liabilities of $3.7 million.

At the time of the investment, the joint venture entered into an agreement for third-party financing in an amount up to $41.0 million from the Overseas Private Investment Corporation, or OPIC, a developmental finance institution of the U.S. Government, with an estimated interest rate based on the U.S. Treasury rate plus 300 basis points. The transaction, including the funding of this loan, was subject to the tenant obtaining a letter of credit, which did not occur, and as a result the tenant was in default under its concession agreement with us. Because of the tenant’s default, we terminated the concession agreement in May 2018, and therefore we will not pursue the completion of this project. We are currently pursuing appropriate remedies, including payment from the tenant or through our insurance policy. We had no amounts outstanding under this financing arrangement at June 30, 2018



CPA:18 – Global 6/30/2018 10-Q 16


Notes to Condensed Consolidated Financial Statements (Unaudited)


We have evaluated this investment for impairment and probability-weighted different scenarios in estimating future undiscounted cash flows, including payment from the tenant or through our insurance policy. Because we believe there is a high probability that we will recover the full amount invested, we have not recorded any impairment charge in connection with this investment as of June 30, 2018, although recovery may take additional time. We will continue to monitor this investment for impairment.

During the six months ended June 30, 2018, total capitalized funds primarily related to our build-to-suit projects, which were comprised principally of initial funding of $47.9 million and construction draws of $39.7 million. Capitalized funds include accrued costs of $2.5 million, which is a non-cash investing activity.

Capitalized Interest

Capitalized interest includes amortization of the mortgage discount and deferred financing costs and interest incurred during construction, which totaled $2.5 million during the six months ended June 30, 2018 and is a non-cash investing activity.

Placed into Service

During the six months ended June 30, 2018, a total of $25.9 million was placed into service and reclassified to Real estate — land, buildings and improvements, principally related to the remaining portion of a substantially completed hotel, which is a non-cash investing activity.

Ending Balance

At June 30, 2018, we had eight open build-to-suit projects with aggregate unfunded commitments of approximately $181.7 million, excluding capitalized interest, accrued costs, and capitalized acquisition fees for our Advisor.

Equity Investment in Real Estate

We have an interest in an unconsolidated investment in our Self Storage segment that relates to a joint venture for the development of four self-storage facilities in Canada. This investment is jointly owned with a third party, which is also the general partner. Our ownership interest in the joint venture is 90%. As of June 30, 2018, the joint-venture partner had not purchased its 10% equity interest, which will be funded by the distributions it is eligible to receive upon properties being placed into service. We do not consolidate this entity because we are not the primary beneficiary and the nature of our involvement in the activities of the entity allows us to exercise significant influence but does not give us power over decisions that significantly affect the economic performance of the entity.

At June 30, 2018 and December 31, 2017, our total equity investment balance for these properties was $19.6 million and $20.9 million, respectively, which is included in Accounts receivable and other assets, net in the condensed consolidated financial statements. At June 30, 2018 and December 31, 2017, the joint venture had total third-party recourse debt of $23.3 million and $21.5 million, respectively. At June 30, 2018, the unfunded commitments for the build-to-suit projects totaled approximately $20.2 million.

Note 5. Finance Receivables

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

Notes Receivable

Our notes receivable at December 31, 2017 consisted of a $28.0 million mezzanine tranche of 10-year commercial mortgage-backed securities on the Cipriani banquet halls in New York, New York (referred to as Cipriani) and a $38.5 million mezzanine loan collateralized by 27 retail stores in Minnesota, Wisconsin, and Iowa leased to Mills Fleet Farm Group LLC (referred to as Mills Fleet). We have and will continue to receive interest-only payments on each of these loans through maturity in July 2024 and October 2018, respectively.



CPA:18 – Global 6/30/2018 10-Q 17


Notes to Condensed Consolidated Financial Statements (Unaudited)


During the six months ended June 30, 2018, we received partial repayments for the Mills Fleet mezzanine loan totaling $2.5 million. As a result, the balances for the receivables at June 30, 2018 were $28.0 million and $36.0 million for Cipriani and Mills Fleet, respectively.

Credit Quality of Finance Receivables

We generally invest in facilities that we believe are critical to a tenant’s business and therefore have a lower risk of tenant default. At both June 30, 2018 and December 31, 2017, we had no significant finance receivable balances that were past due and we had not established any allowances for credit losses. Additionally, there were no modifications of finance receivables during the six months ended June 30, 2018. We evaluate the credit quality of our finance receivables utilizing an internal five-point credit rating scale, with one representing the highest credit quality and five representing the lowest. The credit quality evaluation of our finance receivables is updated quarterly.

A summary of our finance receivables by internal credit quality rating is as follows (dollars in thousands):
 
 
Number of Tenants/Obligors at
 
Carrying Value at
Internal Credit Quality Indicator
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
1
 
 
 
$

 
$

2
 
2
 
2
 
15,738

 
14,386

3
 
2
 
2
 
29,734

 
29,716

4
 
2
 
2
 
60,130

 
62,355

5
 
 
 

 

 
 
0
 
 
 
$
105,602

 
$
106,457


Note 6. Intangible Assets and Liabilities

In-place lease intangibles are included in In-place lease intangible assets in the condensed consolidated financial statements. Below-market ground lease intangibles and above-market rent intangibles are included in Other intangible assets in the condensed 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 condensed consolidated financial statements.

The following table presents a reconciliation of our goodwill, which is included in our Net Lease segment and included in Accounts receivable and other assets, net in the condensed consolidated financial statements (in thousands):
 
Six Months Ended June 30, 2018
Balance at January 1, 2018
$
26,084

Other
1,629

Foreign currency translation
(151
)
Balance at June 30, 2018
$
27,562




CPA:18 – Global 6/30/2018 10-Q 18


Notes to Condensed Consolidated Financial Statements (Unaudited)


Intangible assets and liabilities are summarized as follows (in thousands):
 
 
 
June 30, 2018
 
December 31, 2017
 
Amortization Period (Years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Finite-Lived Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
In-place lease
4 - 23
 
$
270,957

 
$
(123,210
)
 
$
147,747

 
$
274,723

 
$
(115,515
)
 
$
159,208

Below-market ground lease
30 - 99
 
22,362

 
(1,538
)
 
20,824

 
23,000

 
(1,238
)
 
21,762

Above-market rent
4 - 30
 
12,605

 
(4,100
)
 
8,505

 
12,811

 
(3,642
)
 
9,169

 
 
 
305,924

 
(128,848
)
 
177,076

 
310,534

 
(120,395
)
 
190,139

Indefinite-Lived Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill
 
 
27,562

 

 
27,562

 
26,084

 

 
26,084

Total intangible assets
 
 
$
333,486

 
$
(128,848
)
 
$
204,638

 
$
336,618

 
$
(120,395
)
 
$
216,223

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finite-lived Intangible Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Below-market rent
5 - 30
 
$
(15,423
)
 
$
5,133

 
$
(10,290
)
 
$
(15,476
)
 
$
4,573

 
$
(10,903
)
Above-market ground lease
81
 
(108
)
 
5

 
(103
)
 
(110
)
 
4

 
(106
)
Total intangible liabilities
 
 
$
(15,531
)
 
$
5,138

 
$
(10,393
)
 
$
(15,586
)
 
$
4,577

 
$
(11,009
)

Net amortization of intangibles, including the effect of foreign currency translation, was $4.6 million and $7.5 million for the three months ended June 30, 2018 and 2017, respectively, and $9.9 million and $15.6 million for the six months ended June 30, 2018 and 2017, respectively. Amortization of below-market rent and above-market rent intangibles is recorded as an adjustment to Rental income, amortization of below-market and above-market ground lease intangibles is included in Property expenses, and amortization of in-place lease intangibles is included in Depreciation and amortization expense in the condensed consolidated financial statements.

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

Items Measured at Fair Value on a Recurring Basis

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

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



CPA:18 – Global 6/30/2018 10-Q 19


Notes to Condensed Consolidated Financial Statements (Unaudited)


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

Rent Guarantees — Our rent guarantees, which are included in Accounts receivable and other assets, net in the condensed consolidated financial statements, are related to two 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 both June 30, 2018 and December 31, 2017, our rent guarantees had a fair value of $0.7 million. 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 six months ended June 30, 2018, we recognized $0.5 million and $0.6 million, respectively, of mark-to-market gains related to these rent guarantees within Other income and expenses on our condensed consolidated financial statements. During the three and six months ended June 30, 2017, we recognized $0.4 million and $0.5 million, respectively, of mark-to-market gains related to these rent guarantees within Other income and expenses on our condensed consolidated financial statements.
 
We did not have any transfers into or out of Level 1, Level 2, and Level 3 measurements during the three and six months ended June 30, 2018 and 2017. Gains and losses (realized and unrealized) recognized on items measured at fair value on a recurring basis included in earnings are reported within Other gains and (losses) on our condensed consolidated financial statements.
 
Our other financial instruments had the following carrying values and fair values as of the dates shown (dollars in thousands):
 
 
 
June 30, 2018
 
December 31, 2017
 
Level
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Debt, net (a) (b)
3
 
$
1,370,526

 
$
1,387,730

 
$
1,275,448

 
$
1,301,844

Notes receivable (c) (d)
3
 
63,954

 
66,454

 
66,500

 
69,000

___________
(a)
Debt, net consists of Non-recourse mortgages, net and Bonds payable, net. At June 30, 2018 and December 31, 2017, the carrying value of Non-recourse mortgages, net includes unamortized deferred financing costs of $7.5 million and $7.0 million, respectively. At both June 30, 2018 and December 31, 2017, the carrying value of Bonds payable, net includes unamortized deferred financing costs of $0.8 million (Note 9).
(b)
We determined the estimated fair value of our Non-recourse mortgages, net and Bonds payable, net using a discounted cash flow model that estimates the present value of the future loan payments by discounting such payments at current estimated market interest rates. The estimated market interest rates take into account interest rate risk and the value of the underlying collateral, which includes quality of the collateral, the credit quality of the tenant/obligor, and the time until maturity.
(c)
We determined the estimated fair value of our Notes receivable using a discounted cash flow model with rates that take into account the credit of the tenant/obligor, order of payment tranches, and interest rate risk. We also considered the value of the underlying collateral, taking into account the quality of the collateral, the credit quality of the tenant/obligor, the time until maturity, and the current market interest rate.
(d)
During the six months ended June 30, 2018, we received partial repayments for the Mills Fleet mezzanine loan totaling $2.5 million. As a result, the balances for the notes receivable at June 30, 2018 were $28.0 million and $36.0 million for Cipriani and Mills Fleet, respectively (Note 5).

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 June 30, 2018 and December 31, 2017.



CPA:18 – Global 6/30/2018 10-Q 20


Notes to Condensed Consolidated Financial Statements (Unaudited)


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

All derivative transactions with an individual counterparty are governed by a master International Swap and Derivatives Association agreement, which can be considered as a master netting arrangement; however, we report all our derivative instruments on a gross basis on our condensed consolidated financial statements. At both June 30, 2018 and December 31, 2017, no cash collateral had been posted or received for any of our derivative positions.



CPA:18 – Global 6/30/2018 10-Q 21


Notes to Condensed Consolidated Financial Statements (Unaudited)


The following table sets forth certain information regarding our derivative instruments (in thousands):
Derivatives Designated as Hedging Instruments
 
Balance Sheet Location
 
Asset Derivatives Fair Value at
 
Liability Derivatives Fair Value at
 
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
Foreign currency forward contracts
 
Accounts receivable and other assets, net
 
$
2,217

 
$
2,419

 
$

 
$

Interest rate swaps
 
Accounts receivable and other assets, net
 
1,509

 
553

 

 

Foreign currency collars
 
Accounts receivable and other assets, net
 
165

 
258

 

 

Interest rate caps
 
Accounts receivable and other assets, net
 
1

 
1

 

 

Foreign currency collars
 
Accounts payable, accrued expenses and other liabilities
 

 

 
(1,988
)
 
(3,266
)
Interest rate swaps
 
Accounts payable, accrued expenses and other liabilities
 

 

 
(176
)
 
(698
)
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
 
 
 
Foreign currency collars
 
Accounts payable, accrued expenses and other liabilities
 

 

 

 
(366
)
Total
 
 
 
$
3,892

 
$
3,231

 
$
(2,164
)
 
$
(4,330
)

The following tables present the impact of our derivative instruments in the condensed consolidated financial statements (in thousands):
 
 
Amount of Gain (Loss) Recognized on Derivatives in Other Comprehensive (Loss) Income (Effective Portion)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Derivatives in Cash Flow Hedging Relationships 
 
2018
 
2017
 
2018
 
2017
Foreign currency collars
 
$
2,626

 
$
(2,379
)
 
$
1,421

 
$
(2,613
)
Foreign currency forward contracts
 
427

 
(1,162
)
 
(202
)
 
(1,634
)
Interest rate swaps
 
363

 
(277
)
 
1,520

 
(32
)
Interest rate caps
 
2

 
(6
)
 
20

 
(2
)
Derivatives in Net Investment Hedging Relationship (a)
 
 
 
 
 
 
 
 
Foreign currency collars
 
80

 
(23
)
 
(46
)
 
(33
)
Foreign currency forward contracts
 
23

 
(88
)
 

 
(107
)
Total
 
$
3,521

 
$
(3,935
)
 
$
2,713

 
$
(4,421
)
___________
(a)
The effective portion of the changes in fair value and the settlement of these contracts is reported in the foreign currency translation adjustment section of Other comprehensive (loss) income until the underlying investment is sold, at which time we reclassify the gain or loss to earnings.



CPA:18 – Global 6/30/2018 10-Q 22


Notes to Condensed Consolidated Financial Statements (Unaudited)


 
 
 
 
Amount of Gain (Loss) on Derivatives Reclassified from Other Comprehensive (Loss) Income into Income (Effective Portion)
Derivatives in Cash Flow Hedging Relationships 
 
Location of Gain (Loss) Recognized in Income
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Foreign currency forward contracts
 
Other gains and (losses)
 
$
237

 
$
334

 
$
459

 
$
690

Interest rate swaps
 
Interest expense
 
(76
)
 
(176
)
 
(159
)
 
(387
)
Foreign currency collars
 
Other gains and (losses)
 
(26
)
 
77

 
(180
)
 
169

Interest rate caps
 
Interest expense
 
(8
)
 
(10
)
 
(39
)
 
(15
)
Total
 
 
 
$
127

 
$
225

 
$
81

 
$
457


Amounts reported in Other comprehensive (loss) income related to our interest rate swaps will be reclassified to Interest expense as interest payments are made on our variable-rate debt. Amounts reported in Other comprehensive (loss) income related to foreign currency derivative contracts will be reclassified to Other gains and (losses) when the hedged foreign currency contracts are settled. At June 30, 2018, we estimated that less than $0.1 million and an additional $0.6 million will be reclassified as Interest expense and Other gains and (losses), respectively, during the next 12 months.

The following table presents the impact of our derivative instruments in the condensed consolidated financial statements (in thousands):
 
 
 
 
Amount of Gain (Loss) on Derivatives Recognized in Income
Derivatives Not in Cash Flow Hedging Relationships 
 
Location of Gain (Loss) Recognized in Income
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Foreign currency collars
 
Other gains and (losses)
 
$
56

 
$
(25
)
 
$
(95
)
 
$
(45
)
Interest rate swaps
 
Interest expense
 
(41
)
 
27

 
(47
)
 
(22
)
Derivatives in Cash Flow Hedging Relationships (a)
 
 
 
 
 
 
 
 
 
 
Foreign currency collars
 
Other gains and (losses)
 
(5
)
 
(5
)
 
(15
)
 
(4
)
Interest rate swaps
 
Interest expense
 
(1
)
 
7

 
5

 
10

Total
 
 
 
$
9

 
$
4

 
$
(152
)
 
$
(61
)
__________
(a)
Relates to the ineffective portion of the hedging relationship.

Interest Rate Swaps and Caps

We are exposed to the impact of interest rate changes primarily through our borrowing activities. To limit this exposure, we attempt to obtain mortgage financing on a long-term, fixed-rate basis. However, from time to time, we or our joint investment partners have obtained, and may in the future obtain, variable-rate non-recourse mortgage loans and, as a result, we have entered into, and may continue to enter into interest rate swap agreements or interest rate cap agreements with counterparties. Interest rate swaps, which effectively convert the variable-rate debt service obligations of a loan to a fixed rate, are agreements in which one party exchanges a stream of interest payments for a counterparty’s stream of cash flow over a specific period. The notional, or face, amount on which the swaps are based is not exchanged. Interest rate caps limit the effective borrowing rate of variable-rate debt obligations while allowing participants to share in downward shifts in interest rates. Our objective in using these derivatives is to limit our exposure to interest rate movements.
 


CPA:18 – Global 6/30/2018 10-Q 23


Notes to Condensed Consolidated Financial Statements (Unaudited)


The interest rate swaps and caps that our consolidated subsidiaries had outstanding at June 30, 2018 are summarized as follows (currency in thousands):
Interest Rate Derivatives
 
Number of Instruments
 
Notional
Amount
 
Fair Value at
June 30, 2018 (a)
Interest rate swaps
 
9
 
94,283

USD
 
$
1,374

Interest rate swap
 
1
 
10,025

EUR
 
(41
)
Interest rate cap
 
2
 
11,300

USD
 
1

 
 
 
 
 
 
 
$
1,334

___________
(a)
Fair value amount is based on the exchange rate of the euro at June 30, 2018, as applicable.

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

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

The following table presents the foreign currency derivative contracts we had outstanding and their designations at June 30, 2018 (currency in thousands):
Foreign Currency Derivatives
 
Number of Instruments
 
Notional
Amount
 
Fair Value at
June 30, 2018
Designated as Cash Flow Hedging Instruments
 
 
 
 
 
 
 
Foreign currency collars
 
48
 
31,964

EUR
 
$
(1,789
)
Foreign currency forward contracts
 
19
 
7,375

EUR
 
1,598

Foreign currency forward contracts
 
13
 
20,293

NOK
 
559

Foreign currency collars
 
24
 
49,470

NOK
 
(79
)
Designated as Net Investment Hedging Instruments
 
 
 
 
 
 
 
Foreign currency forward contracts
 
2
 
4,504

NOK
 
60

Foreign currency collars
 
3
 
16,750

NOK
 
45

 
 
 
 
 
 
 
$
394


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 June 30, 2018. At June 30, 2018, our total credit exposure was $3.1 million and the maximum exposure to any single counterparty was $1.8 million.



CPA:18 – Global 6/30/2018 10-Q 24


Notes to Condensed Consolidated Financial Statements (Unaudited)


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 June 30, 2018, 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 $2.2 million and $4.4 million at June 30, 2018 and December 31, 2017, respectively, which included accrued interest and any nonperformance risk adjustments. If we had breached any of these provisions at June 30, 2018 or December 31, 2017, we could have been required to settle our obligations under these agreements at their aggregate termination value of $2.3 million and $4.5 million, respectively.

Note 9. Debt, net

Debt, net consists of Non-recourse mortgages, net and Bonds payable, net, which are collateralized by the assignment of real estate properties. At June 30, 2018, our debt bore interest at fixed annual rates ranging from 1.6% to 5.8% and variable contractual annual rates ranging from 1.6% to 8.0%, with maturity dates ranging from 2018 to 2039.

Financing Activity During 2018

On May 9, 2018, we obtained a $34.0 million term loan encumbering seven self-storage properties located in Southern California.  The properties were encumbered by a first mortgage loan in the amount of $16.4 million, which was paid in full on the same date using a portion of the proceeds from the term loan.  The term loan bears an annual fixed interest rate of 4.5%, with a term to maturity of three years. We have two options to extend the maturity date, each by an additional year. The principal balance is due at maturity and interest is payable monthly.

On February 13, 2018, we obtained a construction loan of $48.8 million for a student-housing development project located in Portsmouth, United Kingdom (based on the exchange rate of the British pound sterling at the date of acquisition). The loan bears a variable interest rate for outstanding drawn balances, with a term to maturity of 1.8 years and an interest rate of 6.0% as of June 30, 2018. We had drawn $29.1 million on the construction loan (based on the exchange rate of the British pound sterling at the date of each drawdown) as of June 30, 2018.

During the six months ended June 30, 2018, we had additional drawdowns of $14.1 million (based on the exchange rate of the British pound sterling at the date of each drawdown) on a construction loan related to a student-housing development project located in Cardiff, United Kingdom. The loan bears an annual interest rate of 7.5% plus the London Interbank Offered Rate, or LIBOR, for outstanding drawn balances, with a term to maturity of two years. Additionally, we drew down $52.4 million (based on the exchange rate of the euro at the date of drawdown) on the non-recourse mortgage loan for a completed build-to-suit hotel in Munich, Germany. The loan bears an annual interest rate of 2.8%, with a term to maturity of 5.4 years.

Scheduled Debt Principal Payments
 
Scheduled debt principal payments during the remainder of 2018, each of the next four calendar years following December 31, 2018, and thereafter are as follows (in thousands):
Years Ending December 31,
 
Total
2018 (remainder)
 
$
9,084

2019
 
58,138

2020
 
124,786

2021
 
206,022

2022
 
195,229

Thereafter through 2039
 
785,278

Total principal payments
 
1,378,537

Unamortized deferred financing costs
 
(8,250
)
Unamortized discount, net
 
239

Total
 
$
1,370,526


Certain amounts in the table above are based on the applicable foreign currency exchange rate at June 30, 2018.



CPA:18 – Global 6/30/2018 10-Q 25


Notes to Condensed Consolidated Financial Statements (Unaudited)


The carrying value of our Non-recourse mortgages, net and Bonds payable, net decreased by $13.7 million in the aggregate from December 31, 2017 to June 30, 2018, reflecting the impact of the strengthening of the U.S. dollar relative to certain foreign currencies (primarily the euro) during the same period.

Debt Covenants

As of December 31, 2017, we had repaid a total of $1.8 million (amount is based on the exchange rate of the euro as of the date of repayments) of principal on our Agrokor mortgage loan as a result of a debt service coverage ratio covenant breach. The covenant breach will be cured once the net operating income for the related property exceeds the amount set forth in the related loan agreement. As of June 30, 2018, less than $0.1 million of additional payments have been made on the loan principal. As Agrokor is currently in financial distress, there is uncertainty regarding future rent collections (Note 12) and whether the default can be cured.

As of December 31, 2017, we were in breach of a loan-to-value covenant on one of our bonds payable. On June 14, 2018, we entered into a pledge agreement with the bondholders to cure the covenant breach, pursuant to which we deposited $5.6 million (based on the exchange rate for the Norwegian krone on the date of deposit) in a bank account and granted a first priority interest in, and pledged the account to, the bondholders. The pledge of the account to the bondholders will stay in effect until the loan-to-value ratio is within the threshold set forth in the bond agreement or until the bonds are paid in full. There were no changes to the amounts or timing of scheduled interest and principal payments. The balance in the pledged account, based on the exchange rate as of June 30, 2018, was $5.5 million and is included as restricted cash within Accounts receivable and other assets, net on our condensed consolidated balance sheets.

Note 10. Commitments and Contingencies

At June 30, 2018, we were not involved in any material litigation. Various claims and lawsuits arising in the normal course of business are pending against us. The results of these proceedings are not expected to have a material adverse effect on our consolidated financial position or results of operations. See Note 4 for unfunded construction commitments.



CPA:18 – Global 6/30/2018 10-Q 26


Notes to Condensed Consolidated Financial Statements (Unaudited)


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

Basic and Diluted (Loss) Income Per Share

The following table presents net (loss) income per share (in thousands, except share and per share amounts):
 
Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
 
Basic and Diluted Weighted-Average
Shares Outstanding
 
Allocation of Net Loss
 
Basic and Diluted Net (Loss) Income
Per Share 
 
Basic and Diluted Weighted-Average
Shares Outstanding
 
Allocation of Net Income
 
Basic and Diluted Net Income
Per Share 
Class A common stock
113,010,970

 
$
(213
)
 
$

 
109,533,769

 
$
4,600

 
$
0.04

Class C common stock
31,593,597

 
(121
)