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Real Estate, Operating Real Estate, Real Estate Under Construction, and Equity Investment in Real Estate

6 Months Ended

Jun. 30, 2020

Real Estate, Operating Real Estate, Real Estate Under Construction, and Equity Investment in Real Estate

Real Estate — Land, Buildings and Improvements

Real estate, which consists of land and buildings leased to others, which are subject to operating leases, is summarized as follows (in thousands):



	June 30, 2020			December 31, 2019
Land	$	193,353		$	196,693
Buildings and improvements	992,285			1,003,952
Less: Accumulated depreciation	(148,173		)	(135,922		)
	$	1,037,465		$	1,064,723

The carrying value of our Real Estate — Land, buildings and improvements decreased by $19.4 million from December 31, 2019 to June 30, 2020, reflecting the impact of exchange rate fluctuations during the same period (Note 2).

Depreciation expense, including the effect of foreign currency translation, on our real estate was $7.3 million and $7.4 million for the three months ended June 30, 2020 and 2019, respectively, and $14.4 million and $14.9 million for the six months ended June 30, 2020 and 2019, respectively.

Operating Real Estate — Land, Buildings and Improvements

Operating real estate, which consists of our self-storage and student housing properties (not subject to net lease agreements), is summarized as follows (in thousands):



	June 30, 2020			December 31, 2019
Land	$	77,649		$	78,240
Buildings and improvements	427,211			434,245
Less: Accumulated depreciation	(64,489		)	(57,237		)
	$	440,371		$	455,248

The carrying value of our Operating real estate — land, buildings and improvements decreased by $8.0 million from December 31, 2019 to June 30, 2020, reflecting the impact of exchange rate fluctuations during the same period (Note 2).

Depreciation expense, including the effect of foreign currency translation, on our operating real estate was $3.8 million for both the three months ended June 30, 2020 and 2019, and $7.6 million for both the six months ended June 30, 2020 and 2019.

Leases

Operating Lease Income

Lease income related to operating leases recognized and included within Lease revenues — net-leased and Lease revenues — operating real estate in the condensed consolidated statements of operations are as follows (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Lease revenues — net-leased
Lease income — fixed ^(a)	$	21,462	$	25,414	$	39,083	$	50,801
Lease income — variable ^(b)	4,095		3,757		7,877		8,318
Total operating lease income ^(c)	$	25,557	$	29,171	$	46,960	$	59,119

Lease revenues — operating real estate
Lease income — fixed	$	16,013	$	16,639	$	33,315	$	33,280
Lease income — variable ^(d)	495		658		1,136		1,282
Total operating lease income	$	16,508	$	17,297	$	34,451	$	34,562

___________

(a)

The six months ended June 30, 2020 includes a $7.0 million write-off of straight-line rent receivables based on our current assessment of less than 75% likelihood of collecting all remaining contractual rent on certain net lease hotels. For both the three and six months ended June 30, 2020, approximately $2.6 million of rent for these properties was not collected, and thus not recognized (Note 2).


(b)	Includes (i) rent increases based on changes in the Consumer Price Index (“CPI”) and other comparable indices and (ii) reimbursements for property taxes, insurance, and common area maintenance services.

(c)

Excludes interest income from direct financing leases of $0.6 million and $0.9 million for the three months ended June 30, 2020 and 2019, respectively, and $1.6 million and $1.9 million for the six months ended June 30, 2020 and 2019, respectively (Note 5). Approximately $0.4 million of rent for one of our tenants was not collected during the three and six months ended June 30, 2020, and thus not recognized (Note 2). Interest income from direct financing leases is included in Lease revenues — net-leased in the condensed consolidated statements of operations.


(d)	Primarily comprised of late fees and administrative fees revenues.

Real Estate Under Construction

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



	Six Months Ended June 30, 2020
Beginning balance	$	235,751
Capitalized funds	82,786
Placed into service	(6,065		)
Capitalized interest	4,232
Foreign currency translation adjustments	(1,212		)
Ending balance	$	315,492

Capitalized Funds

During the six months ended June 30, 2020, total capitalized funds primarily related to construction draws for our student housing development projects, and includes accrued costs of $6.4 million, which is a non-cash investing activity.

Placed into Service

During the six months ended June 30, 2020, a total of $6.1 million was placed into service, primarily relating to capital investment projects at two of our net lease properties, 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 $4.2 million during the six months ended June 30, 2020, which is a non-cash investing activity.

Ending Balance

As of June 30, 2020, we had 12 ongoing student housing development projects, with aggregate unfunded commitments of approximately $229.7 million, excluding capitalized interest, accrued costs, and capitalized acquisition fees for our Advisor.

Ghana Settlement Update

During the six months ended June 30, 2020, the collectibility of the value added tax (“VAT”) receivable to be refunded by the Ghanaian government was no longer deemed probable. As such, we recorded a $2.8 million loss to write-off the VAT receivable during the six months ended June 30, 2020, which is included within Other gains and (losses) on our condensed consolidated statements of operations.

Subsequent to June 30, 2020, in relation to the ongoing litigation with the joint venture partner on our previously owned Ghana investment, the arbitrator issued a final decision and awarded the joint venture partner $2.6 million in damages. Since this is a recognized subsequent event, we have recorded an additional noncontrolling interest payable amount of $1.4 million during the three months ended June 30, 2020, bringing the total noncontrolling interest payable to $2.6 million as of June 30, 2020 (Note 13).

Equity Investment in Real Estate

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

We have an interest in an unconsolidated investment in our Self Storage segment that relates to a joint venture for three self-storage facilities in Canada. This entity was jointly owned with a third party, which is also the general partner of the joint venture. Our ownership and economic interest in the joint venture is 100%. We continue to not consolidate this entity because we are not the primary beneficiary due to shared decision making with the general partner and the nature of our involvement in the activities, which allows us to exercise significant influence, but does not give us power over decisions that significantly affect the economic performance of the entity.

As of June 30, 2020 and December 31, 2019, our total equity investment balance for these self-storage properties was $13.8 million and $14.9 million, respectively, which is included in Accounts receivable and other assets, net in the condensed consolidated financial statements. As of June 30, 2020 and December 31, 2019, the joint venture had total third-party recourse debt of $30.3 million and $32.2 million, respectively.

Equity Investment Debt Covenants

At June 30, 2020, we were in breach of debt yield covenants on loans for two self-storage properties accounted for as equity investments. As a result of the breaches, the lender has the right to require us to make principal reduction payments of $1.8 million and $0.7 million for the respective loans. As of the date of this Report, the lender has not requested any principal reduction payments be made.