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):



	September 30, 2018			December 31, 2017
Land	$	206,128		$	202,500
Buildings and improvements	1,060,077			1,060,672
Less: Accumulated depreciation	(108,716		)	(87,886		)
	$	1,157,489		$	1,175,286

During the nine months ended September 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 3.5% to $1.1576 from $1.1993. As a result, the carrying value of our Real estate — land, buildings and improvements decreased by $22.4 million from December 31, 2017 to September 30, 2018.

Depreciation expense, including the effect of foreign currency translation, on our real estate was $7.8 million and $7.5 million for the three months ended September 30, 2018 and 2017, respectively, and $23.6 million and $20.5 million for the nine months ended September 30, 2018 and 2017, respectively.

Operating Real Estate — Land, Buildings and Improvements

Operating real estate, which consists of our self-storage, student housing, and multi-family properties, is summarized as follows (in thousands):



	September 30, 2018			December 31, 2017
Land	$	81,114		$	98,429
Buildings and improvements	434,663			468,060
Less: Accumulated depreciation	(40,824		)	(43,786		)
	$	474,953		$	522,703

Depreciation expense on our operating real estate was $4.3 million and $4.6 million for the three months ended September 30, 2018 and 2017, respectively, and $13.1 million and $13.5 million for the nine months ended September 30, 2018 and 2017, respectively.

Dispositions of Operating Real Estate

During the three and nine months ended September 30, 2018, we sold four multi-family properties. As a result, the carrying value of operating properties decreased by $96.4 million from December 31, 2017 to September 30, 2018 (Note 12).

Real Estate Under Construction

The following table provides the activity of our Real estate under construction (in thousands):



	Nine Months Ended September 30, 2018
Beginning balance	$	134,366
Capitalized funds	133,325
Placed into service	(123,817		)
Foreign currency translation adjustments	(4,596		)
Capitalized interest	4,288
Ending balance	$	143,566

Capitalized Funds

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

•

$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 March 2020, 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);

•

$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);

•

$7.1 million to enter into a build-to-suit project for a student-housing development site located in Valencia, Spain on July 30, 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 2020, at which point our total investment is expected to be approximately $27.0 million. As there is insufficient equity at risk, the investment is considered to be a VIE (Note 2);

•

$13.7 million to enter into a build-to-suit project for a student-housing development site located in Austin, Texas on September 20, 2018. We acquired 90% of the equity in this investment at closing. The seller retained the remaining interest on this investment, which was accounted for as a $2.3 million non-cash financing activity. This property is under construction and is currently projected to be completed in August 2020, at which point our total investment is expected to be approximately $70.2 million. In addition, we assumed a 90% interest in an existing $4.5 million loan on this property (Note 9). As there is insufficient equity at risk, the investment is considered to be a VIE (Note 2); and

•

$4.3 million to enter into a build-to-suit project for a student-housing development site located in Granada, Spain on September 21, 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 2020, at which point our total investment is expected to be approximately $23.4 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 September 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 actively pursuing appropriate remedies, including payment from the tenant or through our insurance policy. We believe there is a high probability that we will recover the full amount invested. We had no amounts outstanding under this financing arrangement at September 30, 2018.

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. We have not recorded any impairment charge in connection with this investment as of September 30, 2018, although recovery may take additional time. We will continue to monitor this investment for impairment.

During the nine months ended September 30, 2018, total capitalized funds primarily related to our build-to-suit projects, which were comprised principally of initial funding of $72.7 million and construction draws of $60.6 million. Capitalized funds include accrued costs of $2.4 million, which is a non-cash investing activity.

Capitalized Interest

Capitalized interest includes interest incurred during construction as well as amortization of the mortgage discount and deferred financing costs, which totaled $4.3 million during the nine months ended September 30, 2018 and is a non-cash investing activity.

Placed into Service

During the nine months ended September 30, 2018, a total of $123.8 million was placed into service, principally related to the substantial completion of two student-housing developments located in the United Kingdom and the remaining portion of a substantially completed hotel, which is a non-cash investing activity. Of that total, $26.2 million was reclassified to Real estate — land, buildings and improvements and $97.6 million was reclassified to Operating real estate — land, buildings and improvements.

Ending Balance

At September 30, 2018, we had nine open and three substantially completed build-to-suit projects with aggregate unfunded commitments of approximately $263.0 million, excluding capitalized interest, accrued costs, and capitalized acquisition fees for our Advisor.

Assets and Liabilities Held for Sale

Below is a summary of our properties held for sale (in thousands):



	September 30, 2018			December 31, 2017
Operating real estate — Land, buildings and improvements	$	42,026		$	—
In-place lease intangible assets	1,791			—
Accumulated depreciation and amortization	(5,388		)	—
Assets held for sale, net	$	38,429		$	—

Non-recourse mortgages, net, including debt attributable to Assets held for sale	$	29,750		$	—

At September 30, 2018, we had one multi-family property classified as Assets held for sale with a carrying value of $38.4 million, which was encumbered at that date by a non-recourse mortgage loan of $29.8 million. This property was sold in November 2018 (Note 14).

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 September 30, 2018, the joint-venture partner had not accumulated the amounts to purchase its entire 10% equity interest, which will be funded by the distributions it is eligible to receive upon properties being placed into service. We do not consolidate this entity because we are not the primary beneficiary and the nature of our involvement in the activities of the entity allows us to exercise significant influence but does not give us power over decisions that significantly affect the economic performance of the entity.

During the nine months ended September 30, 2018, the joint venture completed distinct phases of the overall development at two Canadian self-storage facilities and, as a result, placed a total of $7.1 million of the total amounts of these projects into service.

At September 30, 2018 and December 31, 2017, our total equity investment balance for these self-storage properties were $19.8 million and $20.9 million, respectively, which is included in Accounts receivable and other assets, net in the condensed consolidated financial statements. At September 30, 2018 and December 31, 2017, the joint venture had total third-party recourse debt of $28.0 million and $21.5 million, respectively. At September 30, 2018, the unfunded commitments for the two remaining open and one substantially complete self-storage build-to-suit projects totaled approximately $18.2 million.

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.