Corporate Property Associates 17 - Global INC - FORM 10-Q - November 13, 2014

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
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: 000-52891
CORPORATE PROPERTY ASSOCIATES 17 – GLOBAL INCORPORATED
(Exact name of registrant as specified in its charter)
Maryland
 
20-8429087
(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 R 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 R No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer R
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No R
 
Registrant has 328,937,993 shares of common stock, $0.001 par value, outstanding at October 31, 2014.
 
 


INDEX


Forward-Looking Statements

This Quarterly Report on Form 10-Q, or the Report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, in Item 2 of Part I of this Report, contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. It is important to note that our actual results could be materially different from those projected in such forward-looking statements. You should exercise caution in relying on forward-looking statements as they involve known and unknown risks, uncertainties, and other factors that may materially affect our future results, performance, achievements, or transactions. Information on factors which 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, 2013 as filed with the SEC on March 14, 2014, or the 2013 Annual Report. Except as required by federal securities laws and the rules and regulations of the SEC, we do not undertake to revise or update any forward-looking statements.

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




CPA®:17 – Global 9/30/2014 10-Q – 1


PART I
Item 1. Financial Statements.

CORPORATE PROPERTY ASSOCIATES 17 – GLOBAL INCORPORATED 
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
 
September 30, 2014
 
December 31, 2013
Assets
 
 
 
Investments in real estate:
 
 
 
Real estate, at cost (inclusive of $138,819 and $150,378, respectively, attributable to variable interest entities, or VIEs)
$
2,382,572

 
$
2,402,315

Operating real estate, at cost (inclusive of $0 and $12,557, respectively, attributable to VIEs)
272,191

 
283,370

Accumulated depreciation (inclusive of $9,169 and $8,235, respectively, attributable to VIEs)
(185,016
)
 
(144,405
)
Net investments in properties
2,469,747

 
2,541,280

Real estate under construction (inclusive of $3,761 and $25,268, respectively, attributable to VIEs)
123,274

 
127,935

Net investments in direct financing leases (inclusive of $245,389 and $244,084, respectively, attributable to VIEs)
481,561

 
479,916

Equity investments in real estate
489,167

 
412,964

Net investments in real estate
3,563,749

 
3,562,095

Cash and cash equivalents (inclusive of $42 and $339, respectively, attributable to VIEs)
335,946

 
418,108

In-place lease intangible assets, net (inclusive of $16,573 and $17,277, respectively, attributable to VIEs)
429,642

 
457,244

Other intangible assets, net
93,873

 
105,056

Other assets, net (inclusive of $16,803 and $17,118, respectively, attributable to VIEs)
215,952

 
170,866

Total assets
$
4,639,162

 
$
4,713,369

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Non-recourse debt (inclusive of $194,930 and $199,315, respectively, attributable to VIEs)
$
1,918,805

 
$
1,915,601

Accounts payable, accrued expenses and other liabilities (inclusive of $9,754 and $8,833, respectively, attributable to VIEs)
130,565

 
132,254

Deferred income taxes (inclusive of $64 and $0, respectively, attributable to VIEs)
5,389

 
7,108

Below-market rent and other intangible liabilities, net (inclusive of $371 and $387, respectively, attributable to VIEs)
100,948

 
102,597

Due to affiliates
12,554

 
20,211

Distributions payable
52,959

 
51,570

Total liabilities
2,221,220

 
2,229,341

Commitments and contingencies (Note 11)


 


Equity:
 
 
 
CPA®:17 – Global stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value; 50,000,000 shares authorized; none issued
—

 
—

Common stock, $0.001 par value; 900,000,000 shares authorized; 333,266,846 and 322,918,083 shares issued, respectively; and 325,903,988 and 317,353,899 shares outstanding, respectively
333

 
323

Additional paid-in capital
3,000,659

 
2,904,927

Distributions in excess of accumulated earnings
(538,316
)
 
(440,958
)
Accumulated other comprehensive loss
(54,084
)
 
(5,275
)
Less: treasury stock at cost, 7,362,858 and 5,564,184 shares, respectively
(68,812
)
 
(52,477
)
Total CPA®:17 – Global stockholders’ equity
2,339,780

 
2,406,540

Noncontrolling interests
78,162

 
77,488

Total equity
2,417,942

 
2,484,028

Total liabilities and equity
$
4,639,162

 
$
4,713,369


See Notes to Consolidated Financial Statements. 


CPA®:17 – Global 9/30/2014 10-Q – 2


CORPORATE PROPERTY ASSOCIATES 17 – GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except share and per share amounts) 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenues
 
 
 
 
 

 
 

Lease revenues:
 
 
 
 
 
 
 
Rental income
$
63,998

 
$
58,981

 
$
191,072

 
$
170,681

Interest income from direct financing leases
13,674

 
13,408

 
40,889

 
40,190

Total lease revenues
77,672

 
72,389

 
231,961

 
210,871

Other real estate income
10,758

 
11,643

 
39,031

 
36,093

Other operating income
8,147

 
5,707

 
22,697

 
15,174

Other interest income
1,410

 
1,880

 
4,234

 
5,199

 
97,987

 
91,619

 
297,923

 
267,337

Operating Expenses
 
 
 
 
 

 
 

Depreciation and amortization
25,340

 
23,595

 
76,796

 
69,287

Property expenses
15,940

 
13,687

 
48,083

 
37,258

General and administrative
6,544

 
4,847

 
17,853

 
14,596

Other real estate expenses
4,362

 
7,983

 
19,942

 
24,911

Acquisition expenses
—

 
8,510

 
1,401

 
10,305

 
52,186

 
58,622

 
164,075

 
156,357

Other Income and Expenses
 
 
 
 
 

 
 

Interest expense
(23,695
)
 
(22,807
)
 
(70,288
)
 
(66,468
)
Net income from equity investments in real estate
2,052

 
513

 
9,777

 
3,380

Other income and (expenses)
2,076

 
1,221

 
3,974

 
7,376

 
(19,567
)
 
(21,073
)
 
(56,537
)
 
(55,712
)
Income from continuing operations before income taxes and gain on sale of real estate
26,234

 
11,924

 
77,311

 
55,268

Provision for income taxes
(2,651
)
 
(710
)
 
(6,012
)
 
(2,280
)
Income from continuing operations before gain on sale of real estate
23,583

 
11,214

 
71,299

 
52,988

Income from discontinued operations, net of tax
—

 
249

 
—

 
740

Gain on sale of real estate, net of tax
790

 
78

 
13,338

 
659

Net Income
24,373

 
11,541

 
84,637

 
54,387

Net income attributable to noncontrolling interests (inclusive of Available Cash Distributions to a related party of $6,111, $3,557, $15,380, and $12,681, respectively)
(9,193
)
 
(6,515
)
 
(24,510
)
 
(21,734
)
Net Income Attributable to CPA®:17 – Global
$
15,180

 
$
5,026

 
$
60,127

 
$
32,653

Earnings Per Share
 
 
 
 
 

 
 

Income from continuing operations attributable to CPA®:17 – Global
$
0.05

 
$
0.02

 
$
0.19

 
$
0.10

Income from discontinued operations attributable to CPA®:17 – Global
—

 
—

 
—

 
—

Net income attributable to CPA®:17 – Global
$
0.05

 
$
0.02

 
$
0.19

 
$
0.10

Weighted-Average Shares Outstanding
325,550,047

 
314,353,314

 
322,692,768

 
311,634,668

Amounts Attributable to CPA®:17 – Global
 
 
 
 
 

 
 

Income from continuing operations, net of tax
$
15,180

 
$
4,777

 
$
60,127

 
$
31,913

Income from discontinued operations, net of tax
—

 
249

 
—

 
740

Net income attributable to CPA®:17 – Global
$
15,180

 
$
5,026

 
$
60,127

 
$
32,653

Distributions Declared Per Share
$
0.1625

 
$
0.1625

 
$
0.4875

 
$
0.4875


See Notes to Consolidated Financial Statements. 


CPA®:17 – Global 9/30/2014 10-Q – 3


CORPORATE PROPERTY ASSOCIATES 17 – GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
(in thousands) 

Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net Income
$
24,373

 
$
11,541

 
$
84,637

 
$
54,387

Other Comprehensive (Loss) Income
 
 
 
 
 
 
 
Foreign currency translation adjustments
(61,105
)
 
32,477

 
(68,537
)
 
15,614

Change in net unrealized gain (loss) on derivative instruments
23,036

 
(10,222
)
 
19,013

 
3,190

Change in unrealized gain on marketable securities
77

 
24

 
124

 
71

 
(37,992
)
 
22,279

 
(49,400
)
 
18,875

Comprehensive (Loss) Income
(13,619
)
 
33,820

 
35,237

 
73,262

 
 
 
 
 
 
 
 
Amounts Attributable to Noncontrolling Interests
 
 
 
 
 
 
 
Net income
(9,193
)
 
(6,515
)
 
(24,510
)
 
(21,734
)
Change in net unrealized gain on derivative instruments
(102
)
 
(142
)
 
(411
)
 
(396
)
Foreign currency translation adjustments
905

 
(408
)
 
1,002

 
(173
)
Comprehensive income attributable to noncontrolling interests
(8,390
)
 
(7,065
)
 
(23,919
)
 
(22,303
)
Comprehensive (Loss) Income Attributable to CPA®:17 – Global
$
(22,009
)
 
$
26,755

 
$
11,318

 
$
50,959

 
See Notes to Consolidated Financial Statements.


CPA®:17 – Global 9/30/2014 10-Q – 4


CORPORATE PROPERTY ASSOCIATES 17 – GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
Nine Months Ended September 30, 2014 and Year Ended December 31, 2013
(in thousands, except share and per share amounts) 
 
 CPA®:17 – Global
 
 
 
 
 
Total
Outstanding
Shares
 
Common
Stock 
 
Additional
Paid-In
Capital
 
Distributions
in Excess of
Accumulated
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Stock
 
Total
CPA®:17
– Global
Stockholders
 
Noncontrolling
Interests
 
Total
Balance at January 1, 2013
306,903,020

 
$
310

 
$
2,786,855

 
$
(277,224
)
 
$
(35,366
)
 
$
(34,293
)
 
$
2,440,282

 
$
74,225

 
$
2,514,507

Shares issued, net of offering costs
10,252,652

 
11

 
96,842

 
 
 
 
 
 
 
96,853

 
 
 
96,853

Shares issued to affiliates
2,116,767

 
2

 
21,230

 
 
 
 
 
 
 
21,232

 
 
 
21,232

Distributions declared ($0.6500 per share)
 
 
 
 
 
 
(203,598
)
 
 
 
 
 
(203,598
)
 
 
 
(203,598
)
Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
—

 
(26,760
)
 
(26,760
)
Net income
 
 
 
 
 
 
39,864

 
 
 
 
 
39,864

 
29,305

 
69,169

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
29,701

 
 
 
29,701

 
183

 
29,884

Change in net unrealized gain on derivative instruments
 
 
 
 
 
 
 
 
296

 
 
 
296

 
535

 
831

Change in unrealized gain on marketable securities
 
 
 
 
 
 
 
 
94

 
 
 
94

 
 
 
94

Repurchase of shares
(1,918,540
)
 
 
 
 
 
 
 
 
 
(18,184
)
 
(18,184
)
 
 
 
(18,184
)
Balance at December 31, 2013
317,353,899

 
323

 
2,904,927

 
(440,958
)
 
(5,275
)
 
(52,477
)
 
2,406,540

 
77,488

 
2,484,028

Shares issued through distribution reinvestment and stock purchase plan
8,293,992

 
8

 
76,017

 
 
 
 
 
 
 
76,025

 
 
 
76,025

Shares issued to affiliates
2,054,771

 
2

 
19,715

 
 
 
 
 
 
 
19,717

 
 
 
19,717

Distributions declared ($0.4875 per share)
 
 
 
 
 
 
(157,485
)
 
 
 
 
 
(157,485
)
 
 
 
(157,485
)
Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
—

 
(23,245
)
 
(23,245
)
Net income
 
 
 
 
 
 
60,127

 
 
 
 
 
60,127

 
24,510

 
84,637

Other comprehensive loss (income):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
(67,535
)
 
 
 
(67,535
)
 
(1,002
)
 
(68,537
)
Change in net unrealized gain on derivative instruments
 
 
 
 
 
 
 
 
18,602

 
 
 
18,602

 
411

 
19,013

Change in unrealized gain on marketable securities
 
 
 
 
 
 
 
 
124

 
 
 
124

 
 
 
124

Repurchase of shares
(1,798,674
)
 
 
 
 
 
 
 
 
 
(16,335
)
 
(16,335
)
 
 
 
(16,335
)
Balance at September 30, 2014
325,903,988

 
$
333

 
$
3,000,659

 
$
(538,316
)
 
$
(54,084
)
 
$
(68,812
)
 
$
2,339,780

 
$
78,162

 
$
2,417,942

 
See Notes to Consolidated Financial Statements.



CPA®:17 – Global 9/30/2014 10-Q – 5


CORPORATE PROPERTY ASSOCIATES 17 – GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Nine Months Ended September 30,
 
2014
 
2013
Cash Flows — Operating Activities
 
 
 
Net income
$
84,637

 
$
54,387

Adjustments to net income:
 
 
 
Depreciation and amortization, including intangible assets and deferred financing costs
78,843

 
72,119

Non-cash asset management fee expense and directors’ compensation
19,717

 
15,482

Straight-line rent adjustment and amortization of rent-related intangibles
(14,413
)
 
(15,254
)
Gain on sale of real estate
(13,338
)
 
(78
)
Unrealized (gain) loss on foreign currency transactions and others
(1,459
)
 
424

Realized gain on foreign currency transactions and others
(1,372
)
 
(3,251
)
(Income) loss from equity investments in real estate in excess of distributions received
(1,064
)
 
2,891

Deferred income taxes
1,863

 
—

Accretion of commercial mortgage-backed securities and other
(346
)
 
(510
)
Loss on extinguishment of debt
—

 
538

Settlement of derivative asset
—

 
2,964

Net changes in other operating assets and liabilities
264

 
6,113

Net Cash Provided by Operating Activities
153,332

 
135,825

Cash Flows — Investing Activities
 
 
 
Capital contributions to equity investments in real estate
(157,050
)
 
(93,115
)
Acquisitions of real estate and direct financing leases
(93,848
)
 
(275,156
)
Return of capital from equity investments in real estate
74,513

 
5,325

Proceeds from sale of real estate
68,789

 
93

Changes in investing restricted cash
(16,082
)
 
(17,705
)
Investment in securities
(8,225
)
 
—

Payment of deferred acquisition fees to an affiliate
(5,467
)
 
(10,556
)
Value added taxes, or VAT, paid in connection with acquisition of real estate
(4,996
)
 
(28,959
)
VAT refunded in connection with acquisition of real estate
1,498

 
32,618

Net Cash Used in Investing Activities
(140,868
)
 
(387,455
)
Cash Flows — Financing Activities
 
 
 
Distributions paid
(156,096
)
 
(147,310
)
Proceeds from mortgage financing
81,902

 
175,826

Proceeds from issuance of shares, net of issuance costs
76,025

 
73,044

Scheduled payments and prepayments of mortgage principal
(44,630
)
 
(23,268
)
Distributions to noncontrolling interests
(23,245
)
 
(20,155
)
Purchase of treasury stock
(16,335
)
 
(13,488
)
Changes in financing restricted cash
(3,563
)
 
(5,056
)
Payment of financing costs and mortgage deposits, net of deposits refunded
(750
)
 
(2,560
)
Contributions from noncontrolling interests
—

 
2

Net Cash (Used in) Provided by Financing Activities
(86,692
)
 
37,035

Change in Cash and Cash Equivalents During the Period
 
 
 
Effect of exchange rate changes on cash
(7,934
)
 
4,067

Net decrease in cash and cash equivalents
(82,162
)
 
(210,528
)
Cash and cash equivalents, beginning of period
418,108

 
652,330

Cash and cash equivalents, end of period
$
335,946

 
$
441,802


See Notes to Consolidated Financial Statements.


CPA®:17 – Global 9/30/2014 10-Q – 6


CORPORATE PROPERTY ASSOCIATES 17 – GLOBAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Organization
 
Organization
 
Corporate Property Associates 17 – Global Incorporated, or CPA®:17 – Global, and, together with its consolidated subsidiaries, we, us, or our, is a publicly-owned, non-listed real estate investment trust, or REIT, that invests primarily in commercial properties leased to companies domestically and internationally. We were formed in 2007 and are managed by W. P. Carey Inc., or WPC, and its subsidiaries (collectively, the advisor). As a REIT, we are not subject to United States, or U.S., federal income taxation as long as we satisfy certain requirements, principally relating to the nature of our income, the level of our distributions, and other factors. We earn revenue principally by leasing the properties we own to single corporate tenants, primarily 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 because of 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®:17 Limited Partnership, or the Operating Partnership, and at September 30, 2014, we owned 99.99% of general and limited partnership interests in the Operating Partnership. The remaining interest in the Operating Partnership is held by a subsidiary of WPC.

At September 30, 2014, our portfolio was comprised of full or partial ownership interests in 359 fully-occupied properties, substantially all of which were triple-net leased to 109 tenants, and totaled approximately 35 million square feet. In addition, our portfolio was comprised of full or partial ownership interests in 75 operating properties, which primarily included 71 self-storage properties, for an aggregate of approximately 6 million square feet. As opportunities arise, we may also make other types of commercial real estate related investments.

Note 2. Basis of Presentation

Basis of Presentation
 
Our interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of our consolidated financial position, results of operations, and cash flows in accordance with accounting principles generally accepted in the U.S., or GAAP.

In the opinion of management, the unaudited financial information for the interim periods presented in this Report reflects all normal and recurring adjustments necessary for a fair statement of financial position, results of operations, and cash flows. Our interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 2013, which are included in the 2013 Annual Report, as certain disclosures that would substantially duplicate those contained in the audited consolidated financial statements have not been included in this Report. Operating results for interim periods are not necessarily indicative of operating results for an entire year.

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

The unaudited consolidated financial statements included in this Report have been retrospectively adjusted to reflect the disposition (or planned disposition) of certain properties as discontinued operations for all periods presented.



CPA®:17 – Global 9/30/2014 10-Q – 7


Notes to Consolidated Financial Statements (Unaudited)

Basis of Consolidation
 
Our consolidated financial statements reflect all of our accounts, including those of our controlled subsidiaries and our tenancy-in-common interests, as described below. The portion of equity in a consolidated subsidiary that is not attributable, directly or indirectly, to us is presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated.

We have investments in tenancy-in-common interests in various domestic and international properties. Consolidation of these investments is not required as such interests do not qualify as VIEs and do not meet the control requirement required for consolidation. Accordingly, we account for these investments using the equity method of accounting. We use the equity method of accounting because the shared decision-making involved in a tenancy-in-common interest investment provides us with significant influence on the operating and financial decisions of these investments.

Additionally, we own interests in single-tenant, net-leased properties leased to companies through noncontrolling interests in partnerships and limited liability companies that we do not control but over which we exercise significant influence. We account for these investments under the equity method of accounting. At times, the carrying value of our equity investments may fall below zero for certain investments. We intend to fund our share of the jointly-owned investments’ 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 operating deficits.
 
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 can cause us to consider an entity a VIE.

We previously determined that the I Shops LLC investment was a VIE and that we were its primary beneficiary. In April 2014, we deconsolidated the retail project (Note 4).

Reclassifications 

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

Recent Accounting Requirements

The following Accounting Standards Updates, or ASUs, promulgated by the Financial Accounting Standards Board, are applicable to us:

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



CPA®:17 – Global 9/30/2014 10-Q – 8


Notes to Consolidated Financial Statements (Unaudited)

ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360). ASU 2014-08 changes the requirements for reporting discontinued operations. A discontinued operation may include a component of an entity or a group of components of an entity, or a business. Under this new guidance, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a “strategic shift that has or will have a major effect on an entity’s operations and financial results.” The new guidance also requires disclosures including pre-tax profit or loss and significant gains or losses arising from dispositions that represent an “individually significant component of an entity,” but do not meet the criteria to be reported as discontinued operations under ASU 2014-08. In the ordinary course of business, we sell properties, which, under prior accounting guidance, we generally reported as discontinued operations; however, under ASU 2014-08, such property dispositions typically would not meet the criteria to be reported as discontinued operations. We elected to early adopt ASU 2014-08 prospectively for all dispositions after December 31, 2013. Consequently, individually significant properties that were sold during 2014 were not reclassified to discontinued operations in the consolidated financial statements, but are disclosed in Note 13 to the consolidated financial statements. By contrast, and as required by the new guidance, the consolidated financial statements for the prior year periods reflect all dispositions through December 31, 2013 as discontinued operations, which were deemed discontinued operations under the prior accounting guidance. This ASU did not have a significant impact on our financial position or results of operations for any of the periods presented.

ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 requires an entity to present an unrecognized tax benefit relating to a net operating loss carryforward, a similar tax loss or a tax credit carryforward as a reduction to a deferred tax asset, except in certain situations. To the extent the net operating loss carryforward, similar tax loss or tax credit carryforward is not available as of the reporting date under the governing tax law to settle any additional income taxes that would result from the disallowance of the tax position, or the governing tax law does not require the entity to use and the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented as a liability and should not net with a deferred tax asset. ASU 2013-11 became effective for us at the beginning of 2014. The adoption of ASU 2013-11 did not have a material impact on our financial condition or results of operations.



CPA®:17 – Global 9/30/2014 10-Q – 9


Notes to Consolidated Financial Statements (Unaudited)

Note 3. Agreements and Transactions with Related Parties
 
Transactions with the Advisor
 
We have an advisory agreement with the advisor whereby the advisor performs certain services for us under a fee arrangement. The current advisory agreement is scheduled to expire on December 31, 2014 unless otherwise extended. We also have certain agreements with affiliates regarding jointly-owned investments. In addition, we reimbursed the advisor for organization and offering costs incurred in connection with our follow-on offering through its closing on January 31, 2013 and for general and administrative duties performed on our behalf.

The following tables present a summary of fees we paid, expenses we reimbursed, and distributions we made to the advisor and other affiliates in accordance with the advisory agreement and the operating partnership agreement (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Amounts Included in the Consolidated Statements of Income
 
 
 
 
 

 
 

Asset management fees
$
6,468

 
$
5,658

 
$
19,934

 
$
16,131

Available Cash Distribution
6,111

 
3,557

 
15,380

 
12,681

Personnel and overhead reimbursements
2,936

 
2,262

 
8,557

 
6,529

Acquisition expenses
—

 
5,720

 
1,191

 
6,891

Office rent reimbursements
270

 
366

 
972

 
949

Interest expense on deferred acquisition fees and loan from affiliate
121

 
204

 
401

 
646

 
$
15,906

 
$
17,767

 
$
46,435

 
$
43,827

Acquisition Fees Capitalized
 
 
 
 
 
 
 
Current acquisition fees
$
307

 
$
1,824

 
$
1,662

 
$
4,011

Deferred acquisition fees
247

 
1,460

 
937

 
2,678

 
$
554

 
$
3,284

 
$
2,599

 
$
6,689


 
September 30, 2014
 
December 31, 2013
Due to Affiliates
 
 
 
Deferred acquisition fees, including interest
$
8,900

 
$
15,573

Asset management fees payable
2,213

 
1,972

Reimbursable costs
1,266

 
264

Subordinated disposition fees
202

 
202

Accounts (receivable) payable
(27
)
 
2,200

 
$
12,554

 
$
20,211


Acquisition and Disposition Fees

We pay the advisor acquisition fees for structuring and negotiating investments and related mortgage financing on our behalf, a portion of which is payable upon acquisition of investments with the remainder subordinated to the achievement of a preferred return, a non-compounded cumulative distribution of 5% per annum (based initially on our invested capital). Acquisition fees payable to the advisor with respect to our long-term, net-lease investments are 4.5% of the total cost of those investments and are comprised of a current portion of 2.5%, typically paid upon acquisition, and a deferred portion of 2%, typically paid over three years and subject to the 5% preferred return described above. For certain types of investments that are not considered long-term, net-lease investments, initial acquisition fees may range from 0% to 1.75% of the equity invested plus the related acquisition fees, with no portion of the fee being deferred. Unpaid installments of deferred acquisition fees are included in Due to affiliates in the consolidated financial statements. Unpaid installments of deferred acquisition fees bear interest at an annual rate of 5%.



CPA®:17 – Global 9/30/2014 10-Q – 10


Notes to Consolidated Financial Statements (Unaudited)

The advisor may be entitled to receive a disposition fee in an amount 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; however, payment of such fees is subordinated to the 5% preferred return. These fees, which are paid at the discretion of our board of directors, are deferred and are payable to the advisor only in connection with a liquidity event.

Asset Management Fees and Available Cash Distribution

As defined in the advisory agreement, we pay the advisor asset management fees that vary based on the nature of the underlying investment. We pay 0.5% per annum of average market value for long-term net leases and certain other types of real estate investments, and 1.5% to 1.75% per annum of average equity value for certain types of securities. The asset management fees are payable in cash or shares of our common stock at the option of the advisor. If the advisor elects to receive all or a portion of its fees in shares, the number of shares issued is determined by dividing the dollar amount of fees by our most recently published estimated net asset value per share, or NAV, which was $9.50 as of December 31, 2013. For both 2014 and 2013, the advisor elected to receive its asset management fees in shares of our common stock. At September 30, 2014, the advisor owned 8,089,323 shares (2.5%) of our common stock. We also distribute to the advisor, depending on the type of investments we own, up to 10% of available cash of 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. Asset management fees and Available Cash Distributions are included in Property expenses and Net income attributable to noncontrolling interests, respectively, in the consolidated financial statements.
 
Personnel and Overhead Reimbursements

Under the terms of the advisory agreement, the advisor allocates a portion of its personnel and overhead expenses to us and the other publicly-owned, non-listed REITs that are managed by the advisor under the Corporate Property Associates brand name, or the CPA® REITs, and Carey Watermark Investors Incorporated, or CWI. The advisor allocates these expenses based on the average of our trailing four quarters of reported revenues and those of WPC, the CPA® REITs, and CWI.

We reimburse the advisor for various expenses it incurs in the course of providing services to us. We reimburse certain third-party expenses paid by the advisor on our behalf, including property-specific costs, professional fees, office expenses, and business development expenses. In addition, we reimburse the 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 the advisor for the cost of personnel if these personnel provide services for transactions for which the advisor receives a transaction fee, such as acquisitions and dispositions. Personnel and overhead reimbursements are included in General and administrative expenses in the consolidated financial statements.

The 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. If in any year our operating expenses exceed the 2%/25% guidelines, the advisor will have an obligation to reimburse us for such excess, subject to certain conditions. If our independent directors find that the excess expenses were justified based on any unusual and nonrecurring factors that they deem sufficient, the advisor may be paid in future years for the full amount or any portion of such excess expenses, but only to the extent that the reimbursement would not cause our operating expenses to exceed this limit in any such year. We record the reimbursement as a reduction of asset management fees at such time that a reimbursement is fixed, determinable and irrevocable. Our operating expenses have not exceeded the amount that would require the advisor to reimburse us.
 
Jointly-Owned Investments and Other Transactions with Affiliates

At September 30, 2014, we owned interests ranging from 7% to 85% in jointly-owned investments, with the remaining interests generally held by affiliates. We consolidate certain of these investments and account for the remainder under the equity method of accounting. We also owned interests in jointly-controlled tenancy-in-common interests in properties, which we account for under the equity method of accounting.

On March 31, 2014, we and our affiliate, Corporate Property Associates 18 – Global Incorporated, or CPA®:18 – Global, a publicly-owned, non-listed REIT that is also managed by the advisor, acquired an office facility located in Warsaw, Poland through a jointly-owned investment for $147.9 million, of which our share was $74.0 million. This office facility is subject to multiple leases, of which Bank Pekao S.A. is the largest tenant and accounts for 98% of the contractual rent. We account for this investment under the equity method of accounting (Note 6).



CPA®:17 – Global 9/30/2014 10-Q – 11


Notes to Consolidated Financial Statements (Unaudited)

Note 4. Net Investments in Properties and Real Estate Under Construction
 
Real Estate
 
Real estate, which consists of land and buildings leased to others, at cost, and which are subject to operating leases, is summarized as follows (in thousands):
 
September 30, 2014
 
December 31, 2013
Land
$
514,756

 
$
553,389

Buildings
1,867,816

 
1,848,926

Less: Accumulated depreciation
(164,792
)
 
(129,051
)
 
$
2,217,780

 
$
2,273,264

 
During the nine months ended September 30, 2014, we entered into the following investments, which were deemed to be asset acquisitions because we entered into new leases with the sellers, at a total cost of $16.9 million, including net lease intangible assets of $4.1 million (Note 7) and acquisition-related costs and fees of $1.2 million, which were capitalized:

•
a domestic investment of $4.4 million for a manufacturing facility located in New Concord, Ohio on April 21, 2014; and
•
an international investment of $12.5 million for an office facility located in Krakow, Poland on September 9, 2014 (amount is based on the exchange rate of the euro on the date of acquisition).

Additionally, on February 7, 2014, we acquired an investment in an office building and an adjacent plot of land located in Tucson, Arizona at a cost of $19.0 million, comprised primarily of land of $2.5 million, buildings of $11.2 million, net lease intangible assets of $6.0 million (Note 7), and a purchase option of $0.6 million to acquire an adjacent office building. We also assumed a non-recourse mortgage loan of $10.3 million (Note 10). We deemed this investment to be a business combination because we assumed the existing lease on the property. In connection with this investment, we expensed acquisition-related costs and fees of $1.0 million, which are included in Acquisition expenses in the consolidated financial statements.

The impact on the carrying value of our Real estate due to the strengthening of the U.S. dollar relative to foreign currencies during the nine months ended September 30, 2014 was a $75.0 million decrease from December 31, 2013 to September 30, 2014.

Operating Real Estate
 
Operating real estate, which consists primarily of our domestic hotel and self-storage operations, at cost, is summarized as follows (in thousands):
 
September 30, 2014
 
December 31, 2013
Land
$
66,066

 
$
66,066

Buildings
206,125

 
217,304

Less: Accumulated depreciation
(20,224
)
 
(15,354
)
 
$
251,967

 
$
268,016


Partial Sale

On December 1, 2011, we entered into a contract with I Shops LLC, a real estate developer, to finance the renovation of a hotel and construction of a shopping center in Orlando, Florida. Additionally, as a condition to providing the construction loan, we entered into a contract with the developer that granted us the option to acquire a 15% equity interest in the parent company that owns I Shops LLC. We consolidated I Shops LLC, which held title to the property that secured our loan, because we had (i) control over the decisions that most significantly impacted the developer’s economic performance and (ii) the obligation to absorb losses and right to receive benefits from I Shops LLC. The property included an operating hotel and vacant land. We had accounted for the construction loan as real estate under construction. During 2013 and 2014, the hotel renovation was completed and the shopping center was placed into service. We have an additional option to purchase two retail properties located within the shopping center from I Shops LLC, but as of September 30, 2014, we have not exercised this option.



CPA®:17 – Global 9/30/2014 10-Q – 12


Notes to Consolidated Financial Statements (Unaudited)

On April 24, 2014, the developer repaid $68.3 million of the outstanding $84.6 million loan balance. The remaining balance of the loan was related to the two retail properties that had been under construction. Upon this substantial repayment of the loan, I Shops LLC no longer met the criteria for consolidation and was deconsolidated, with the exception of the two construction-in-progress retail properties. These transactions, which we refer to in this Report as the I Shops Partial Sale, were accounted for as a partial sale resulting in a reduction in assets of $55.4 million, of which $27.9 million was included in Real estate, at cost; $25.8 million was included in Operating real estate, at cost; and $4.8 million was reclassified from Real estate, at cost to Real estate under construction. We had recognized a gain on disposition of real estate of $12.5 million associated with the completed hotel and the portions of the shopping center that had been transferred to the developer.

In September 2014, the two retail properties were placed into service. We expect to exchange the remaining loan balance for those properties in January 2015, thus the remaining loan balance was still outstanding as of September 30, 2014.

Real Estate Under Construction
 
The following table provides the activity of our Real estate under construction (in thousands):
 
Nine Months Ended
 
Year Ended
 
September 30, 2014
 
December 31, 2013
Beginning balance
$
127,935

 
$
71,285

Capitalized funds
68,120

 
90,007

Placed into service
(76,704
)
 
(42,225
)
Capitalized interest
4,769

 
5,208

Building improvements and other
(846
)
 
3,660

Ending balance
$
123,274

 
$
127,935


Capitalized Funds

During the nine months ended September 30, 2014, total capitalized funds were primarily comprised of $53.3 million in construction draws related to five ongoing build-to-suit projects, $9.7 million for the initial funding of two new build-to-suit projects, and $4.8 million that was reclassified to Real estate under construction from Real estate, at cost, as a result of the I Shops Partial Sale. This reclassification was made to account for the two retail properties that we have an option to purchase from I Shops LLC, which we have not exercised as of September 30, 2014. See discussion above under Partial Sale. The amount capitalized also included acquisition-related costs and fees of $1.6 million related to the two new build-to-suit projects. Additionally, of the total capitalized funds, $4.4 million was unpaid and has been included in Accounts payable, accrued expenses and other liabilities in the consolidated financial statements at September 30, 2014.

During the year ended December 31, 2013, costs attributable to five build-to-suit projects comprised the balance of Real estate under construction, including capitalized acquisition-related costs and fees of $2.3 million.

Placed into Service

During the nine months ended September 30, 2014, we placed into service two build-to-suit projects in the amount of $76.7 million. Of the total, $61.8 million was reclassified to Real estate, at cost and $14.9 million was reclassified to Operating real estate, at cost, which was subsequently deconsolidated as a result of the I Shops Partial Sale. See discussion above under Partial Sale.

During the year ended December 31, 2013, we placed into service three build-to-suit projects, of which two were completed and one was partially-completed, in the amount of $42.2 million. Of the total, $26.1 million was reclassified to Real estate, at cost, and $12.6 million was reclassified to Operating real estate, at cost. The remaining $3.5 million was related to improvements on an existing building that was reclassified to Real estate, at cost at December 31, 2013.

Capitalized Interest

Capitalized interest includes amortization of the mortgage discount and deferred financing costs and interest costs incurred during construction, totaling $4.8 million and $5.2 million for the nine months ended September 30, 2014 and the year ended December 31, 2013, respectively.


CPA®:17 – Global 9/30/2014 10-Q – 13


Notes to Consolidated Financial Statements (Unaudited)


Ending Balance

At September 30, 2014, we had three open build-to-suit projects. At December 31, 2013, we had three open build-to-suit projects. The aggregate unfunded commitment on the remaining open projects totaled approximately $21.0 million and $46.7 million at September 30, 2014 and December 31, 2013, respectively.

Note 5. Finance Receivables
 
Assets representing rights to receive money on demand or at fixed or determinable dates are referred to as finance receivables. Our finance receivables portfolio consists of our Net investments in direct financing leases and Note receivable. Operating leases are not included in finance receivables as such amounts are not recognized as an asset in the consolidated financial statements.
 
Note Receivable

On December 14, 2010, we provided financing of $40.0 million to China Alliance Properties Limited, a subsidiary of Shanghai Forte Land Co., Ltd, or Forte. The financing was provided through a collateralized loan that is guaranteed by Forte’s parent company, Fosun International Limited, and has an interest rate of 11% and matures on December 14, 2015. At both September 30, 2014 and December 31, 2013, the balance of the note receivable was $40.0 million. Our Note receivable is included in Other assets, net in the consolidated financial statements.
 
Net Investment in Direct Financing Lease

On April 21, 2014, we entered into a net lease financing transaction for a manufacturing facility located in Bluffton, Indiana for $3.7 million, including capitalized acquisition-related fees and expenses of $0.3 million.

Credit Quality of Finance Receivables
 
We generally seek investments in facilities that we believe are critical to a tenant’s business and that we believe have a low risk of tenant default. At both September 30, 2014 and December 31, 2013, none of the balances of our finance receivables were past due and we had not established any allowances for credit losses. Additionally, there were no modifications of finance receivables during the nine months ended September 30, 2014 or the year ended December 31, 2013. We evaluate the credit quality of our finance receivables utilizing an internal five-point credit rating scale, with one representing the highest credit quality and five representing the lowest. The credit quality evaluation of our finance receivables was last updated in the third quarter of 2014.
 
A summary of our finance receivables by internal credit quality rating is as follows (dollars in thousands):
 
 
Number of Tenants / Obligors at 
 
Carrying Value at
Internal Credit Quality Indicator
 
September 30, 2014
 
December 31, 2013
 
September 30, 2014
 
December 31, 2013
1
 
—
 
—
 
$
—

 
$
—

2
 
1
 
1
 
2,256

 
2,250

3
 
9
 
8
 
431,621

 
430,713

4
 
3
 
3
 
87,684

 
86,953

5
 
—
 
—
 
—

 
—

 
 
 
 
 
 
$
521,561

 
$
519,916


At September 30, 2014 and December 31, 2013, Other assets, net included $3.2 million and $0.8 million, respectively, of accounts receivable related to amounts billed under our direct financing leases.



CPA®:17 – Global 9/30/2014 10-Q – 14


Notes to Consolidated Financial Statements (Unaudited)

Note 6. Equity Investments in Real Estate
 
We own equity interests in net-leased properties that are generally leased to companies through noncontrolling interests (i) in partnerships and limited liability companies that we do not control but over which we exercise significant influence or (ii) as tenants-in-common subject to common control. Generally, the underlying investments are jointly-owned with affiliates. We account for these investments under the equity method of accounting. Earnings for each investment are recognized in accordance with each respective investment agreement and where applicable, based upon an allocation of the investment’s net assets at book value as if the investment were hypothetically liquidated at the end of each reporting period. Investments in unconsolidated investments are required to be evaluated periodically. We periodically compare an investment’s carrying value to its estimated fair value and recognize an impairment charge to the extent that the carrying value exceeds fair value and such decline is determined to be other than temporary. Additionally, we provide funding to developers for the acquisition, development, and construction of real estate, or ADC Arrangement. Under ADC Arrangements, we have provided two loans to third-party developers of real estate projects, which we account for as equity investments as the characteristics of the arrangement with the third-party developers are more similar to a jointly-owned investment or partnership rather than a loan.

The following table sets forth our ownership interests in our equity investments in real estate and their respective carrying values along with those ADC Arrangements that are recorded as equity investments (dollars in thousands):
 
 
 
 
Ownership Interest at
 
Carrying Value at
Lessee/Equity Investee
 
Co-owner
 
September 30, 2014
 
September 30, 2014
 
December 31, 2013
Shelborne Property Associates, LLC (a)
 
Third Party
 
33%
 
$
146,184

 
$
129,575

C1000 Logistiek Vastgoed B.V. (b) (c) (d)
 
WPC
 
85%
 
74,836

 
84,119

U-Haul Moving Partners, Inc. and Mercury Partners, LP
 
WPC
 
12%
 
41,753

 
43,051

Bank Pekao S.A. (b) (e)
 
CPA®:18 – Global
 
50%
 
32,719

 
—

BG LLH, LLC (f)
 
Third Party
 
7%
 
30,691

 
—

IDL Wheel Tenant, LLC (g)
 
Third Party
 
N/A
 
29,709

 
6,017

BPS Nevada, LLC
 
Third Party
 
15%
 
24,128

 
23,278

Madison Storage NYC, LLC and Veritas Group IX-NYC, LLC (d) (h)
 
Third Party
 
45%
 
20,962

 
23,907

State Farm
 
CPA®:18 – Global
 
50%
 
20,248

 
20,913

Berry Plastics Corporation
 
WPC
 
50%
 
16,894

 
17,659

Tesco plc (b)
 
WPC
 
49%
 
15,483

 
17,965

Hellweg Die Profi-Baumärkte GmbH & Co. KG (b) (d)
 
WPC
 
37%
 
10,804

 
12,978

Agrokor d.d. (referred to as Agrokor 5) (b) (i)
 
CPA®:18 – Global
 
20%
 
10,457

 
19,217

Eroski Sociedad Cooperativa – Mallorca (b)
 
WPC
 
30%
 
8,990

 
9,639

Dick’s Sporting Goods, Inc.
 
WPC
 
45%
 
5,309

 
4,646

 
 
 
 
 
 
$
489,167

 
$
412,964

___________
(a)
Represents a domestic ADC Arrangement. We consider this investment a VIE. We provided funding of $14.6 million to this investment during the nine months ended September 30, 2014. At September 30, 2014, the unfunded balance on the loan related to this investment was $0.3 million. Additionally, during the first quarter of 2014, capital contributions were made by our partners that resulted in income attributed to us of $6.5 million based upon the hypothetical liquidation at book value method of accounting. This income was subsequently offset with our share of losses incurred by the lessee during the second and third quarters of 2014.
(b)
The carrying value of this investment is affected by the impact of fluctuations in the exchange rate of the euro.
(c)
This investment represents a tenancy-in-common interest, whereby the property is encumbered by debt for which we are jointly and severally liable. For this investment, the co-obligor is WPC and the amount due under the arrangement was approximately $86.8 million and $95.6 million at September 30, 2014 and December 31, 2013, respectively. Of these amounts, $73.7 million and $81.3 million represent the amounts we agreed to pay and are included within the carrying value of this investment at September 30, 2014 and December 31, 2013, respectively.
(d)
The decrease in carrying value is primarily due to distributions made to us.


CPA®:17 – Global 9/30/2014 10-Q – 15


Notes to Consolidated Financial Statements (Unaudited)

(e)
See Acquisition of Equity Investment below. Carrying value includes our share of the acquisition expenses and VAT paid. Subsequent to the acquisition, a $54.6 million distribution was made to us representing our share of new financing obtained by the investment.
(f)
(g)
Represents a domestic ADC Arrangement. We consider this investment a VIE. We provided funding of $23.0 million to this investment and capitalized $0.7 million of interest related to the loan during the nine months ended September 30, 2014. At September 30, 2014, the unfunded balance on the loan related to this investment was $20.0 million.
(h)
In addition to our 45% equity interest, we have a 40% indirect economic interest in this investment based upon certain contractual arrangements with our partner in this entity that enable or could require us to purchase their interest.
(i)
The decrease in carrying value is primarily due to a distribution made to us as a result of new financing obtained by the investment.

We recognized net income from equity investments in real estate of $2.1 million and $9.8 million for the three and nine months ended September 30, 2014, respectively, and $0.5 million and $3.4 million for the three and nine months ended September 30, 2013, respectively. For certain investments, net income from equity investments is based on the hypothetical liquidation at book value model as well as some depreciation and amortization adjustments related to basis differentials. Aggregate distributions from our interests in other unconsolidated real estate investments were $20.6 million and $18.1 million for the nine months ended September 30, 2014 and the year ended December 31, 2013, respectively. At September 30, 2014 and December 31, 2013, the unamortized basis differences on our equity investments were $32.1 million and $25.9 million, respectively, excluding acquisition fees of $6.5 million and $6.0 million, respectively. Net amortization of the basis differences reduced the carrying values of our equity investments by $1.2 million for both the three months ended September 30, 2014 and 2013 and $3.1 million and $2.9 million for the nine months ended September 30, 2014 and 2013, respectively.

Acquisition of Equity Investment

On March 31, 2014, we and CPA®:18 – Global acquired an office facility through a jointly-owned investment for a total cost of $147.9 million. Acquisition-related costs and fees totaling $8.4 million were expensed by the jointly-owned investment as this acquisition was deemed a business combination. We acquired a 50% interest in this venture for $74.0 million and account for this investment under the equity method of accounting.

Conversion to Equity Investment

On April 7, 2014, we made a follow-on equity investment of $20.4 million, including acquisition-related fees and costs of $0.4 million, to our existing equity holdings in BG LLH, LLC, which owns an interest in Lineage Logistics Holdings, LLC, an entity that owns and operates cold storage facilities in the United States. We formerly accounted for our existing equity holdings using the cost method of accounting. With our investment in April 2014, we were deemed to have a significant influence over BG LLH, LLC and accordingly, we changed our accounting for this investment to the equity method of accounting. We reclassified our existing holdings, totaling $8.3 million, from Other assets, net to Equity investments in real estate during the nine months ended September 30, 2014. In addition, we recorded equity income of $2.0 million related to the investment for the nine months ended September 30, 2014. We are currently assessing the purchase accounting related to a significant business combination executed by Lineage Logistics Holdings, LLC in 2014. The results of that assessment could have a material impact on our Net income from equity investments in real estate and our Net income. We expect to complete the assessment by the end of 2014. 



CPA®:17 – Global 9/30/2014 10-Q – 16


Notes to Consolidated Financial Statements (Unaudited)

Note 7. Intangible Assets and Liabilities
 
In connection with our acquisitions of properties, we have recorded net lease intangibles that are being amortized over periods ranging from one year to 53 years. In addition, we have several ground lease intangibles that are being amortized over periods of up to 94 years. In-place lease intangibles are included in In-place lease intangible assets, net in the consolidated financial statements. Tenant relationship, above-market rent, below-market ground lease (as lessee) intangibles, and goodwill are included in Other intangible assets, net in the consolidated financial statements. Below-market rent and above-market ground lease (as lessor) intangibles are included in Below-market rent and other intangible liabilities, net in the consolidated financial statements.
 
In connection with our investment activity during the nine months ended September 30, 2014, we recorded net lease intangibles comprised as follows (life in years, dollars in thousands):
 
Weighted-Average Life
 
Amount
Amortizable Intangible Assets
 
 
 
In-place lease
5.6
 
$
9,914

Above-market rent
20.0
 
455

 
 
 
$
10,369

Amortizable Intangible Liabilities
 
 
 
Below-market rent
11.2
 
$
(185
)

Intangible assets and liabilities are summarized as follows (in thousands):
 
September 30, 2014
 
December 31, 2013
 
Gross Carrying Amount
 
Accumulated
Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated
Amortization
 
Net Carrying Amount
Amortizable Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
In-place lease
$
536,028

 
$
(106,386
)
 
$
429,642

 
$
537,271

 
$
(80,027
)
 
$
457,244

Above-market rent
93,654

 
(15,649
)
 
78,005

 
97,109

 
(12,413
)
 
84,696

Tenant relationship
13,082

 
(4,487
)
 
8,595

 
13,552

 
(4,299
)
 
9,253

Below-market ground leases
7,124

 
(169
)
 
6,955

 
7,124

 
(79
)
 
7,045

 
649,888

 
(126,691
)
 
523,197

 
655,056

 
(96,818
)
 
558,238

Unamortizable Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
Goodwill
318

 
—

 
318

 
4,062

 
—

 
4,062

Total intangible assets
$
650,206

 
$
(126,691
)
 
$
523,515

 
$
659,118

 
$
(96,818
)
 
$
562,300

 
 
 
 
 
 
 
 
 
 
 
 
Amortizable Intangible Liabilities
 
 
 
 
 
 
 
 
 
 
 
Below-market rent
$
(111,819
)
 
$
12,002

 
$
(99,817
)
 
$
(110,606
)
 
$
8,163

 
$
(102,443
)
Above-market ground lease
(1,145
)
 
14

 
(1,131
)
 
(157
)
 
3

 
(154
)
Total intangible liabilities
$
(112,964
)
 
$
12,016

 
$
(100,948
)
 
$
(110,763
)
 
$
8,166

 
$
(102,597
)

Net amortization of intangibles, including the effect of foreign currency translation, was $9.4 million and $8.9 million for the three months ended September 30, 2014 and 2013, respectively, and $28.5 million and $26.3 million for the nine months ended September 30, 2014 and 2013, respectively. Amortization of below-market rent and above-market rent intangibles is recorded as an adjustment to Rental income; amortization of below-market ground lease intangibles is included in Property expenses; and amortization of in-place lease, above-market ground lease, and tenant relationship intangibles is included in Depreciation and amortization.
 


CPA®:17 – Global 9/30/2014 10-Q – 17


Notes to Consolidated Financial Statements (Unaudited)

Based on the intangible assets and liabilities recorded at September 30, 2014, scheduled annual net amortization of intangibles for the remainder of 2014, each of the next four calendar years following December 31, 2014, and thereafter is as follows (in thousands):
Years Ending December 31,
 
Net (Increase) Decrease in Rental Income
 
Increase to Amortization/Property Expense
 
Net
2014 (remaining)
 
$
(104
)
 
$
9,406

 
$
9,302

2015
 
(400
)
 
36,278

 
35,878

2016
 
(108
)
 
31,626

 
31,518

2017
 
115

 
28,967

 
29,082

2018
 
140

 
28,858

 
28,998

Thereafter
 
(21,455
)
 
308,926

 
287,471

 
 
$
(21,812
)
 
$
444,061

 
$
422,249


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

Items Measured at Fair Value on a Recurring Basis

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

Derivative Assets — Our derivative assets, which are included in Other assets, net in the consolidated financial statements, are comprised of interest rate swaps, foreign currency forward contracts, stock warrants, embedded derivatives, and a swaption (Note 9). The interest rate swaps, foreign currency forward contracts, and swaption 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. The stock warrants and embedded derivatives were measured at fair value using internal valuation models that incorporate market inputs and our own assumptions about future cash flows. We classified these assets as Level 3 because these assets are not traded in an active market.

Derivative Liabilities — Our derivative liabilities, which are included in Accounts payable, accrued expenses and other liabilities in the consolidated financial statements, are comprised of interest rate swaps, foreign currency forward contracts, and embedded derivatives (Note 9). These interest rate swaps and foreign currency forward contracts 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. The embedded derivatives were measured at fair value using internal valuation models that incorporate market inputs and our own assumptions about future cash flows. We classified these liabilities as Level 3 because these liabilities are not traded in an active market.
 
We did not have any transfers into or out of Level 1, Level 2, and Level 3 measurements during either the three or nine months ended September 30, 2014 or 2013. Gains and losses (realized and unrealized) included in earnings are reported in Other income and (expenses) in the consolidated financial statements.
 


CPA®:17 – Global 9/30/2014 10-Q – 18


Notes to Consolidated Financial Statements (Unaudited)

Our other financial instruments had the following carrying values and fair values as of the dates shown (in thousands):
 
 
 
September 30, 2014
 
December 31, 2013
 
Level
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Non-recourse debt (a)
3
 
$
1,918,805

 
$
1,966,503

 
$
1,915,601

 
$
1,944,865

Note receivable (a)
3
 
40,000

 
42,450

 
40,000

 
43,890

Other securities (b)
3
 
10,096

 
10,096

 
9,915

 
15,548

Deferred acquisition fees payable (c)
3
 
8,524

 
9,556

 
15,033

 
15,950

CMBS (d)
3
 
3,257

 
8,715

 
2,791

 
6,052

___________
(a)
We determined the estimated fair value of these financial instruments using a discounted cash flow model with rates that take into account the credit of the tenant/obligor 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.
(b)
Amounts at September 30, 2014 primarily reflect our interest in a foreign debenture, which is included in Other assets, net in the consolidated financial statements. Amounts at December 31, 2013 reflect equity securities and an interest in a foreign debenture, both of which were included in Other assets, net in the consolidated financial statements. As of September 30, 2014, we converted the equity securities to an equity investment in real estate (Note 6) and acquired an additional interest in the foreign debenture.
(c)
We determined the estimated fair value of our deferred acquisition fees based on an estimate of discounted cash flows using two significant unobservable inputs, which are the leverage adjusted unsecured spread and an illiquidity adjustment of 355 basis points and 75 basis points, respectively. Significant increases or decreases to these inputs in isolation would result in a significant change in the fair value measurement.
(d)
The carrying value of our commercial mortgage-backed securities, or CMBS, is inclusive of accretion related to the estimated cash flows expected to be received. There were no purchases, sales, or impairment charges recognized during either the three or nine months ended September 30, 2014 or 2013.

We estimated that our other financial assets and liabilities (excluding net investments in direct financing leases) had fair values that approximated their carrying values at both September 30, 2014 and December 31, 2013.
 
Items Measured at Fair Value on a Non-Recurring Basis (Including Impairment Charges)
 
We periodically assess whether there are any indicators that the value of our real estate investments may be impaired or that their carrying value may not be recoverable. For investments in real estate for which an impairment indicator is identified, we follow a two-step process to determine whether the investment is impaired and to determine the amount of the charge. First, we compare the carrying value of the property’s asset group to the future undiscounted net cash flows that we expect the property’s asset group will generate, including any estimated proceeds from the eventual sale of the property’s asset group. If this amount is less than the carrying value, the property’s asset group is considered to be impaired. We then measure the impairment charge as the excess of the carrying value of the property’s asset group over the estimated fair value of the property’s asset group, which is primarily determined using market information such as recent comparable sales or broker quotes. If relevant market information is not available or is not deemed appropriate, we perform a future net cash flow analysis discounted for inherent risk associated with each investment. We determined that the significant inputs used to value these investments fall within Level 3 for fair value accounting. As a result of our assessments, we calculated impairment charges based on market conditions and assumptions that existed at the time. The valuation of real estate is subject to significant judgment and actual results may differ materially if market conditions or the underlying assumptions change.
 
We did not recognize any impairment charges for either the three or nine months ended September 30, 2014 or 2013.



CPA®:17 – Global 9/30/2014 10-Q – 19


Notes to Consolidated Financial Statements (Unaudited)

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


CPA®:17 – Global 9/30/2014 10-Q – 20


Notes to Consolidated Financial Statements (Unaudited)

The following table sets forth certain information regarding our derivative instruments (in thousands):
Derivatives Designated
as Hedging Instruments
 
 
 
Asset Derivatives Fair Value at 
 
Liability Derivatives Fair Value at
 
Balance Sheet Location
 
September 30, 2014
 
December 31, 2013
 
September 30, 2014
 
December 31, 2013
Foreign currency forward contracts
 
Other assets, net
 
$
10,268

 
$
2,002

 
$
—

 
$
—

Interest rate swaps
 
Other assets, net
 
605

 
1,895

 
—

 
—

Foreign currency collars
 
Other assets, net
 
—

 
429

 
—

 
—

Foreign currency forward contracts
 
Accounts payable, accrued expenses and other liabilities
 
—

 
—

 
(77
)
 
(11,928
)
Interest rate swaps
 
Accounts payable, accrued expenses and other liabilities
 
—

 
—

 
(13,950
)
 
(12,911
)
Derivatives Not Designated
as Hedging Instruments
 
 
 


 


 


 


Embedded derivatives (a)
 
Accounts payable, accrued expenses and other liabilities
 
—

 
—

 
—

 
(2,164
)
Embedded derivatives (a) (b)
 
Other assets, net
 
2,260

 
2,314

 
—

 
—

Stock warrants (c)
 
Other assets, net
 
1,848

 
1,782

 
—

 
—

Foreign currency forward contract (d)
 
Accounts payable, accrued expenses and other liabilities
 
—

 
—

 
(471
)
 
—

Foreign currency forward contracts (d) (e)
 
Other assets, net
 
4,510

 
1,521

 
—

 
—

Swaption (f)
 
Other assets, net
 
693

 
1,205

 
—

 
—

Total derivatives
 
 
 
$
20,184

 
$
11,148

 
$
(14,498
)
 
$
(27,003
)
___________
(a)
In connection with the ADC Arrangement with IDL Wheel Tenant, LLC, we agreed to fund to the developer a portion of the loan in the euro and we locked the euro to U.S. dollar exchange rate at $1.278 at the time of the transaction (Note 6). This component of the loan is deemed to be an embedded derivative that requires separate measurement.
(b)
In December 2013, there was an amendment to the loan commitment for the refinancing of Agrokor d.d., referred to as the Agrokor 4 portfolio, which provided for an effective net settlement provision.
(c)
As part of the purchase of an interest in Hellweg Die Profi-Baumärkte GmbH & Co. KG, or Hellweg 2, from our then affiliate, Corporate Property Associates 14 Incorporated, or CPA®:14, in May 2011, we acquired warrants from CPA®:14, which were granted by Hellweg 2 to CPA®:14. These warrants give us participation rights to any distributions made by Hellweg 2 and we are entitled to a cash distribution that equals a certain percentage of the liquidity event price of Hellweg 2 should a liquidity event occur.
(d)
In September 2014, a new forward contract was executed to offset an existing forward contract that has not yet reached its maturity. These two offsetting forward contracts will mature in July 2015.
(e)
In connection with an investment located in Japan, we entered into a foreign currency forward contract that protects against fluctuations in foreign currency rates related to the Japanese yen, but it did not qualify for hedge accounting.
(f)
In connection with the non-recourse debt financing related to our Cuisine Solutions, Inc. investment, we executed a swap and purchased a swaption, which grants us the right to enter into a new swap with a predetermined fixed rate should there be an extension of the loan maturity date.

All derivative transactions with an individual counterparty are governed by a master International Swap and Derivatives Association agreement, which can be considered as a master netting arrangement; however, we report all our derivative instruments on a gross basis on our consolidated financial statements. At both September 30, 2014 and December 31, 2013, no cash collateral had been posted nor received for any of our derivative positions.



CPA®:17 – Global 9/30/2014 10-Q – 21


Notes to Consolidated Financial Statements (Unaudited)

The following tables present the impact of our derivative instruments in the consolidated financial statements (in thousands):
 
 
Amount of Gain (Loss) Recognized in
Other Comprehensive Loss on Derivatives (Effective Portion)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Derivatives in Cash Flow Hedging Relationships 
 
2014
 
2013
 
2014
 
2013
Interest rate cap (a)
 
$
227

 
$
315

 
$
913

 
$
879

Interest rate swaps
 
500

 
(744
)
 
(3,920
)
 
7,712

Foreign currency collars
 
(91
)
 
(1,410
)
 
(290
)
 
(1,471
)
Foreign currency forward contracts
 
18,208

 
(7,449
)
 
17,799

 
(4,012
)
 
 
 
 
 
 
 
 
 
Derivative formerly in a Net Investment Hedging Relationship (b)
 
 
 
 
 
 
 
 
Foreign currency forward contract
 
4,192

 
(934
)
 
4,511

 
82

Total
 
$
23,036

 
$
(10,222
)
 
$
19,013

 
$
3,190

___________
(a)
Includes gains attributable to noncontrolling interests of $0.1 million for both the three months ended September 30, 2014 and 2013 and $0.4 million for both the nine months ended September 30, 2014 and 2013.
(b)
In September 2014, a new forward contract was executed to offset this existing forward contract that has not yet reached its maturity. As a result of this transaction, this existing forward contract was de-designated as a hedging instrument. However, the effective portion of the change in fair value (through the date of de-designation) and the settlement of this contract are reported in the foreign currency translation adjustment section of Other comprehensive (loss) income until the underlying investment is sold, at which time we will reclassify the gain or loss to earnings.
 
 
 
 
Amount of Gain (Loss) Reclassified from
Other Comprehensive Loss into Income (Effective Portion)
Derivatives in Cash Flow
Hedging Relationships

 
Location of Gain (Loss) Reclassified to Income
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013 (c)
 
2014
 
2013 (c)
Interest rate cap
 
Interest expense
 
$
(226
)
 
$
(316
)
 
$
(913
)
 
$
(881
)
Interest rate swaps
 
Interest expense
 
(1,811
)
 
(1,595
)
 
(5,259
)
 
(4,501
)
Foreign currency collars
 
Other income and (expenses)
 
557

 
188

 
751

 
1,129

Foreign currency forward contracts
 
Other income and (expenses)
 
526

 
353

 
425

 
724

Total
 
 
 
$
(954
)
 
$
(1,370
)
 
$
(4,996
)
 
$
(3,529
)
___________
(c)
The amounts included in this column for the periods presented herein have been revised to reverse the signs that were incorrectly presented when originally filed. In addition, similar revisions will be made to the columns for the years ended December 31, 2013 and 2012 in the Form 10-K for the year ended December 31, 2014; and the column for the quarter ended March 31, 2014 in the Form 10-Q for the quarter ended March 31, 2015 when filed.

Amounts reported in Other comprehensive (loss) income related to 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 income and (expenses) when the hedged foreign currency contracts are settled. At September 30, 2014, we estimated that an additional $7.8 million and $2.3 million will be reclassified as interest expense and other income, respectively, during the next 12 months.



CPA®:17 – Global 9/30/2014 10-Q – 22


Notes to Consolidated Financial Statements (Unaudited)

 
 
 
 
Amount of Gain (Loss) Recognized in Income on Derivatives
Derivatives Not in 
Hedging Relationships
 
Location of Gain (Loss) Recognized in Income
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Embedded credit derivatives
 
Other income and (expenses)
 
$
725

 
$
(1,093
)
 
$
1,006

 
$
(540
)
Foreign currency forward contracts
 
Other income and (expenses)
 
445

 
59

 
327

 
822

Stock warrants
 
Other income and (expenses)
 
132

 
66

 
66

 
231

Swaption
 
Other income and (expenses)
 
(83
)
 
58

 
(512
)
 
237

Derivatives in Hedging Relationships
 
 
 
 
 
 
 
 
 
 
Interest rate swaps (a)
 
Interest expense
 
91

 
(50
)
 
216

 
154

Total
 
 
 
$
1,310

 
$
(960
)
 
$
1,103

 
$
904

___________
(a)
Relates to the ineffective portion of the hedging relationship.
 
See below for information on our purposes for entering into derivative instruments and for information on derivative instruments owned by unconsolidated investments, which are excluded from the tables above.
 
Interest Rate Swaps and Swaption
 
We are exposed to the impact of interest rate changes primarily through our borrowing activities. To limit this exposure, we attempt to obtain mortgage financing on a long-term, fixed-rate basis. However, from time to time, we or our investment partners may obtain variable-rate, non-recourse mortgage loans and, as a result, may enter into interest rate swap agreements and swaptions with counterparties. Interest rate swaps, which effectively convert the variable-rate debt service obligations of the 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. A swaption gives us the right but not the obligation to enter into an interest rate swap, of which the terms and conditions are set on the trade date, on a specified date in the future. Our objective in using these derivatives is to limit our exposure to interest rate movements.
 
The interest rate swaps and swaption that we had outstanding on our consolidated subsidiaries at September 30, 2014 are summarized as follows (currency in thousands):
Interest Rate Derivatives
 
Number of Instruments
 
Notional
Amount
 
Fair Value at
September 30, 2014 (a)
Designated as Cash Flow Hedging Instruments
 
 
 
 
 
 
Interest rate swaps
 
6
 
€
185,947

 
$
(8,546
)
Interest rate swaps
 
13
 
$
234,621

 
(4,799
)
Not Designated as Hedging Instrument
 
 
 
 
 
 
Swaption
 
1
 
$
13,230

 
693

 
 
 
 
 
 
$
(12,652
)
____________
(a)
Fair value amount is based on the exchange rate of the euro at September 30, 2014, as applicable.



CPA®:17 – Global 9/30/2014 10-Q – 23


Notes to Consolidated Financial Statements (Unaudited)

The interest rate swap that one of our unconsolidated jointly-owned investments had outstanding at September 30, 2014 and was designated as cash flow hedge is summarized as follows (currency in thousands):
Interest Rate Derivative
 
 Ownership Interest in Investee at
September 30, 2014
 
Number of Instruments
 
Notional
Amount
 
Fair Value at
September 30, 2014 (a)
Interest rate swap
 
85%
 
1
 
€
11,851

 
$
(605
)
____________
(a)
Fair value amount is based on the exchange rate of the euro at September 30, 2014.

Foreign Currency Contracts
 
We are exposed to foreign currency exchange rate movements, primarily in the euro and, to a lesser extent, the British pound sterling and the Japanese yen. 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 of the difference in the timing and amount of the rental obligation and the debt service. Realized and unrealized gains and losses recognized in earnings related to foreign currency transactions are included in Other income and (expenses) in the consolidated financial statements.

In order to hedge certain of our foreign currency cash flow exposures, we enter into foreign currency forward contracts and collars. A foreign currency forward contract is a commitment to deliver a certain amount of currency at a certain price on a specific date in the future. By entering into forward contracts and holding them to maturity, we are locked into a future currency exchange rate for the term of the contract.

The following table presents the foreign currency derivative contracts we had outstanding and their designations at September 30, 2014 (currency in thousands):
Foreign Currency Derivatives
 
Number of Instruments
 
Notional
Amount
 
Fair Value at
September 30, 2014 (a)
Designated as Cash Flow Hedging Instruments
 
 
 
 
 
 
Foreign currency forward contracts
 
101
 
€
202,155

 
$
8,301

Foreign currency forward contracts
 
13
 
¥
604,232

 
1,890

Not Designated as Hedging Instruments
 
 
 
 
 
 
Foreign currency forward contracts
 
2
 
€
90,000

 
2,215

Foreign currency forward contracts
 
1
 
¥
610,129

 
1,824

 
 
 
 
 
 
$
14,230

___________
(a)
Fair value amounts are based on the exchange rate of the euro or the Japanese yen, as applicable, at September 30, 2014.
 
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 collateral received, if any. No collateral was received as of September 30, 2014. At September 30, 2014, our total credit exposure was $12.7 million, inclusive of noncontrolling interest, and the maximum exposure to any single counterparty was $5.1 million.

Some of the agreements we have with our derivative counterparties contain certain credit contingent provisions that could result in a declaration of default against us regarding our derivative obligations if we either default or are capable of being declared in default on certain of our indebtedness. At September 30, 2014, we had not been declared in default on any of our derivative obligations. The estimated fair value of our derivatives that were in a net liability position was $16.3 million and $25.1 million at September 30, 2014 and December 31, 2013, respectively, which included accrued interest and any adjustment for nonperformance risk. If we had breached any of these provisions at either September 30, 2014 or December 31, 2013, we could have been required to settle our obligations under these agreements at their aggregate termination value of $17.1 million and $27.1 million, respectively.



CPA®:17 – Global 9/30/2014 10-Q – 24


Notes to Consolidated Financial Statements (Unaudited)

Information about Geographic Areas

Our portfolio is comprised of domestic and international investments. At the end of the reporting period, our international investments were comprised of investments primarily in Europe and, to a lesser extent, Asia. With the exception of Italy, no other country comprised more than 10% of our total lease revenues or total long-lived assets at September 30, 2014. Foreign currency exposure and risk management are discussed above. The following tables present information about our investments on a geographic basis (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Domestic
 
 
 
 
 
 
 
 
Revenues
$
68,871

 
$
64,343

 
$
208,850

 
$
190,195

 
Income from continuing operations before income taxes and after gain on sale of real estate, net of tax
16,786

 
8,667

 
59,628

 
32,389

 
Net income attributable to noncontrolling interests
(9,042
)
 
(6,401
)
 
(24,009
)
 
(21,219
)
 
Net income attributable to CPA®:17 – Global
6,353

 
3,888

 
32,940

 
11,277

Italy
 
 
 
 
 
 
 
 
Revenues
$
7,750

 
$
7,660

 
$
23,700

 
$
22,935

 
Income from continuing operations before income taxes and after gain on sale of real estate, net of tax
1,813

 
1,665

 
5,698

 
5,524

 
Net income attributable to noncontrolling interests
—

 
—

 
—

 
—

 
Net income attributable to CPA®:17 – Global
1,732

 
1,666

 
5,555

 
5,524

Other International
 
 
 
 
 
 
 
 
Revenues
$
21,366

 
$
19,616

 
$
65,373

 
$
54,207

 
Income from continuing operations before income taxes and after gain on sale of real estate, net of tax
8,425

 
1,670

 
25,323

 
18,014

 
Net income attributable to noncontrolling interests
(151
)
 
(114
)
 
(501
)
 
(515
)
 
Net income (loss) attributable to CPA®:17 – Global
7,095

 
(528
)
 
21,632

 
15,852

Total
 
 
 
 
 
 
 
 
Revenues
$
97,987

 
$
91,619

 
$
297,923

 
$
267,337

 
Income from continuing operations before income taxes and after gain on sale of real estate, net of tax
27,024

 
12,002

 
90,649

 
55,927

 
Net income attributable to noncontrolling interests
(9,193
)
 
(6,515
)
 
(24,510
)
 
(21,734
)
 
Net income attributable to CPA®:17 – Global
15,180

 
5,026

 
60,127

 
32,653

 
 
September 30, 2014
 
December 31, 2013
Domestic
 
 
 
 
Long-lived assets (a)
$
2,409,063

 
$
2,195,465

 
Non-recourse debt
1,353,774

 
1,319,094

Italy
 
 
 
 
Long-lived assets (a)
$
311,787

 
$
343,876

 
Non-recourse debt
205,339

 
223,937

Other International
 
 
 
 
Long-lived assets (a)
$
842,899

 
$
1,022,754

 
Non-recourse debt
359,692

 
372,570

Total
 
 
 
 
Long-lived assets (a)
$
3,563,749

 
$
3,562,095

 
Non-recourse debt
1,918,805

 
1,915,601

___________
(a)
Consists of Net investments in real estate. 



CPA®:17 – Global 9/30/2014 10-Q – 25


Notes to Consolidated Financial Statements (Unaudited)

For the nine months ended September 30, 2014, the following tenants represented 5% or more of total lease revenues:

•
Metro Cash & Carry Italia S.p.A (10%);
•
The New York Times Company (9%);
•
Agrokor d.d. (8%);
•
KBR, Inc. (7%); and
•
General Parts Inc., Golden State Supply LLC, Straus-Frank Enterprises LLC, General Parts Distribution LLC and Worldpac Inc. (6%).

Note 10. Non-Recourse Debt
 
Non-recourse debt consists of mortgage notes payable, which are collateralized by the assignment of real estate properties with an aggregate carrying value of $2.9 billion at both September 30, 2014 and December 31, 2013. At September 30, 2014, our mortgage notes payable bore interest at fixed annual rates ranging from 2.0% to 8.0% and variable contractual annual rates ranging from 2.7% to 6.1%, with maturity dates ranging from 2014 to 2039.

During the nine months ended September 30, 2014, we obtained three new non-recourse mortgage financings totaling $57.0 million with a weighted-average annual interest rate and term of 3.5% and seven years, respectively, of which $53.3 million related to investments we acquired during prior years and $3.7 million related to an investment we acquired during the current year. We also assumed a non-recourse mortgage loan of $10.3 million, including unamortized premium of $1.3 million, in connection with a new investment acquired during the nine months ended September 30, 2014. Additionally, we refinanced two non-recourse mortgage loans totaling $22.1 million with new financings totaling $24.9 million, with a weighted-average annual interest rate and term of 7.0% and 14 years, respectively, and recognized a total of $0.3 million in losses on the extinguishment of the refinanced debts.

Scheduled Debt Principal Payments
 
Scheduled debt principal payments during the remainder of 2014, each of the next four calendar years following December 31, 2014, and thereafter are as follows (in thousands):
Years Ending December 31,
 
Total
2014 (remainder)
 
$
8,805

2015
 
69,779

2016
 
282,058

2017
 
354,270

2018
 
155,422

Thereafter through 2039
 
1,051,889

 
 
1,922,223

Unamortized discount, net 
 
(3,418
)
Total
 
$
1,918,805

 
Certain amounts in the table above are based on the applicable foreign currency exchange rate at September 30, 2014. The impact on the carrying value of our Non-recourse debt due to the strengthening of the U.S. dollar relative to foreign currencies during the nine months ended September 30, 2014 was a decrease of $45.1 million from December 31, 2013 to September 30, 2014.

Note 11. Commitments and Contingencies
 
At September 30, 2014, 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®:17 – Global 9/30/2014 10-Q – 26


Notes to Consolidated Financial Statements (Unaudited)

Note 12. Equity

Reclassifications Out of Accumulated Other Comprehensive Loss

The following tables present a reconciliation of changes in Accumulated other comprehensive loss by component for the periods presented (in thousands):
 
Three Months Ended September 30, 2014
 
Gains and Losses
on Derivative Instruments
 
Gains and Losses on Marketable Securities
 
Foreign Currency Translation Adjustments
 
Total
Beginning balance
$
(29,911
)
 
$
(344
)
 
$
13,360

 
$
(16,895
)
Other comprehensive income (loss) before reclassifications
22,082

 
77

 
(61,105
)
 
(38,946
)
Amounts reclassified from accumulated other comprehensive loss to:
 
 
 
 
 
 
 
Interest expense
2,037

 
—

 
—

 
2,037

Other income and (expenses)
(1,083
)
 
—

 
—

 
(1,083
)
Total
954

 
—

 
—

 
954

Net current-period Other comprehensive income (loss)
23,036

 
77

 
(61,105
)
 
(37,992
)
Net current-period Other comprehensive (income) loss attributable to noncontrolling interests
(102
)
 
—

 
905

 
803

Ending balance
$
(6,977
)
 
$
(267
)
 
$
(46,840
)
 
$
(54,084
)

 
Three Months Ended September 30, 2013
 
Gains and Losses
on Derivative Instruments
 
Gains and Losses on Marketable Securities
 
Foreign Currency Translation Adjustments
 
Total
Beginning balance
$
(12,730
)
 
$
(423
)
 
$
(25,636
)
 
$
(38,789
)
Other comprehensive (loss) income before reclassifications
(11,592
)
 
24

 
32,477

 
20,909

Amounts reclassified from accumulated other comprehensive loss to:
 
 
 
 
 
 
 
Interest expense
1,911

 
—

 
—

 
1,911

Other income and (expenses)
(541
)
 
—

 
—

 
(541
)
Total
1,370

 
—

 
—

 
1,370

Net current-period Other comprehensive (loss) income
(10,222
)
 
24

 
32,477

 
22,279

Net current-period Other comprehensive (income) loss attributable to noncontrolling interests
(142
)
 
—

 
(408
)
 
(550
)
Ending balance
$
(23,094
)
 
$
(399
)
 
$
6,433

 
$
(17,060
)



CPA®:17 – Global 9/30/2014 10-Q – 27


Notes to Consolidated Financial Statements (Unaudited)

 
Nine Months Ended September 30, 2014
 
Gains and Losses
on Derivative Instruments
 
Gains and Losses on Marketable Securities
 
Foreign Currency Translation Adjustments
 
Total
Beginning balance
$
(25,579
)
 
$
(391
)
 
$
20,695

 
$
(5,275
)
Other comprehensive income (loss) before reclassifications
14,017

 
124

 
(68,537
)
 
(54,396
)
Amounts reclassified from accumulated other comprehensive loss to:
 
 
 
 
 
 
 
Interest expense
6,172

 
—

 
—

 
6,172

Other income and (expenses)
(1,176
)
 
—

 
—

 
(1,176
)
Total
4,996

 
—

 
—

 
4,996

Net current-period Other comprehensive income (loss)
19,013

 
124

 
(68,537
)
 
(49,400
)
Net current-period Other comprehensive (income) loss attributable to noncontrolling interests
(411
)
 
—

 
1,002

 
591

Ending balance
$
(6,977
)
 
$
(267
)
 
$
(46,840
)
 
$
(54,084
)

 
Nine Months Ended September 30, 2013
 
Gains and Losses
on Derivative Instruments
 
Gains and Losses on Marketable Securities
 
Foreign Currency Translation Adjustments
 
Total
Beginning balance
$
(25,888
)
 
$
(470
)
 
$
(9,008
)
 
$
(35,366
)
Other comprehensive (loss) income before reclassifications
(339
)
 
71

 
15,614

 
15,346

Amounts reclassified from accumulated other comprehensive loss to:
 
 
 
 
 
 
 
Interest expense
5,382

 
—

 
—

 
5,382

Other income and (expenses)
(1,853
)
 
—

 
—

 
(1,853
)
Total
3,529

 
—

 
—

 
3,529

Net current-period Other comprehensive income
3,190

 
71

 
15,614

 
18,875

Net current-period Other comprehensive (income) loss attributable to noncontrolling interests
(396
)
 
—

 
(173
)
 
(569
)
Ending balance
$
(23,094
)
 
$
(399
)
 
$
6,433

 
$
(17,060
)

Distributions Declared

During the third quarter of 2014, our board of directors declared a quarterly distribution of $0.1625 per share, which was paid on October 15, 2014 to stockholders of record on September 30, 2014, in the amount of $53.0 million.



CPA®:17 – Global 9/30/2014 10-Q – 28


Notes to Consolidated Financial Statements (Unaudited)

Note 13. Property Dispositions and Discontinued Operations
 
From time to time, we may decide to sell a property. We have an active capital recycling program, with a goal of extending the average lease term through reinvestment, improving portfolio credit quality through dispositions and acquisitions of assets, increasing the asset criticality factor in our portfolio, and/or executing strategic dispositions of assets. We may make a decision to dispose of a property when it is vacant as a result of tenants vacating space, tenants electing not to renew their leases, tenant insolvency, or lease rejection in the bankruptcy process. In such cases, we assess whether we can obtain the highest value from the property by selling it, as opposed to re-leasing it. We may also sell a property when we receive an unsolicited offer or negotiate a price for an investment that is consistent with our strategy for that investment. When it is appropriate to do so, we classify the property as an asset held for sale on our consolidated balance sheet. For those properties sold or classified as held-for-sale prior to January 1, 2014, the current and prior period results of operations of the property have been reclassified as discontinued operations under current accounting guidance (Note 2).

Property Dispositions Included in Continuing Operations

During the nine months ended September 30, 2014, we recognized a gain on sale of real estate of $12.5 million in connection with the I Shops Partial Sale (Note 4).

Property Dispositions Included in Discontinued Operations

The results of operations for properties that have been sold prior to January 1, 2014, and with which we have no continuing involvement, are reflected in the consolidated financial statements as discontinued operations and are summarized as follows (in thousands, net of tax):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenues
$
—

 
$
1,325

 
$
—

 
$
3,702

Expenses
—

 
(1,076
)
 
—

 
(2,962
)
Income from discontinued operations
$
—

 
$
249

 
$
—

 
$
740


On October 8, 2013, we sold a hotel for $20.0 million, net of selling costs, and recognized a gain on the sale of $8.0 million. We repaid the related outstanding non-recourse mortgage loan of $5.1 million at the time of the sale and recognized a loss on the extinguishment of debt of $1.0 million.



CPA®:17 – Global 9/30/2014 10-Q – 29


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
MD&A is intended to provide the reader with information that will assist in understanding our financial statements and the reasons for changes in certain key components of our financial statements from period to period. MD&A also provides the reader with our perspective on our financial position and liquidity, as well as certain other factors that may affect our future results. Our MD&A should be read in conjunction with the 2013 Annual Report.

Business Overview
 
As described in more detail in Item 1 of the 2013 Annual Report, we are a publicly-owned, non-listed REIT that invests primarily in commercial properties leased to companies domestically and internationally. As opportunities arise, we also make other types of commercial real estate related investments. 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, the level of our distributions, and other factors. We earn revenue principally by leasing the properties we own to single corporate tenants, primarily 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 because of the timing of new lease transactions, lease terminations, lease expirations, contractual rent adjustments, tenant defaults, sales of properties, and foreign currency exchange rates. We were formed in 2007 and are managed by the advisor. We hold substantially all of our assets and conduct substantially all of our business through our Operating Partnership. We are the general partner of, and own 99.99% of the interests in, the Operating Partnership. The remaining interest in the Operating Partnership is held by a subsidiary of WPC.

Significant Development

NAV

We currently intend to obtain an estimated NAV based primarily on an independent valuation of our real estate assets and our indebtedness as of December 31, 2014 using methodologies consistent with those used to calculate our previously-reported NAV as of December 31, 2013. We will announce the December 31, 2014 NAV in our public filings when it becomes available. The NAV may be higher or lower than our previously-reported NAV of $9.50.



CPA®:17 – Global 9/30/2014 10-Q – 30


Portfolio Overview

We intend to continue to acquire a diversified portfolio of income-producing commercial properties and other real estate-related assets as we use the remaining net proceeds from our follow-on offering. We expect to make these investments both domestically and outside of the U.S. Portfolio information is provided on a consolidated basis to facilitate the review of our accompanying consolidated financial statements. In addition, we provide such information on a pro rata basis to better illustrate the economic impact of our various net-leased, jointly-owned investments.

Portfolio Summary
 
September 30, 2014
 
December 31, 2013
Number of net-leased properties
359

 
352

Number of operating properties (a)
75

 
75

Number of tenants (b)
109

 
99

Total square footage (in thousands) (c)
40,820

 
39,665

Occupancy (b)
100.0
%
 
100.0
%
Weighted-average lease term (in years) (b)
14.2

 
15.3

Number of countries
10

 
10

Total assets (in thousands) (d)
$
4,639,162

 
$
4,713,369

Net investments in real estate (in thousands) (d)
3,563,749

 
3,562,095

 
Nine Months Ended September 30,
 
2014
 
2013
Acquisition volume — consolidated (in millions) (d) (e) (f)
$
75.2

 
$
252.0

Acquisition volume — pro rata (in millions) (c) (f)
173.7

 
391.0

Financing obtained — consolidated (in millions) (d) (g)
81.9

 
186.4

Financing obtained — pro rata (in millions) (c) (g)
108.8

 
283.8

Average U.S. dollar/euro exchange rate (h)
1.3566

 
1.3173

Increase in the U.S. CPI (i)
2.1
%
 
2.0
%
__________
(a)
Operating properties are primarily comprised of full or partial ownership interests in 71 self-storage properties and two shopping centers, all of which are managed by third parties. One of the shopping centers is accounted for under the equity method of accounting and the other shopping center is a build-to-suit project under construction.
(b)
Excludes operating properties.
(c)
Represents pro rata basis. See Terms and Definitions below for a description of pro rata amounts.
(d)
Represents consolidated basis.
(e)
Includes build-to-suit transactions, which are reflected as the total commitment for the build-to-suit funding.
(f)
The amount for the nine months ended September 30, 2014 includes acquisition-related costs, which were expensed in the consolidated financial statements.
(g)
Financing obtained during the nine months ended September 30, 2014 and 2013 included total refinancings of $24.9 million and $9.7 million, respectively. Financing on a pro rata basis includes our share of the non-recourse mortgage financings related to State Farm, Bank Pekao S.A., and Agrokor 5 (Note 6).
(h)
The average conversion rate for the U.S. dollar in relation to the euro increased during the nine months ended September 30, 2014 as compared to the same period in 2013, resulting in a positive impact on earnings in the current year period for our euro-denominated investments.
(i)
Many of our domestic lease agreements include contractual increases indexed to the change in the U.S. Consumer Price Index, or CPI.



CPA®:17 – Global 9/30/2014 10-Q – 31


Net-Leased Portfolio

The tables below represent information about our net-leased portfolio on a consolidated and pro rata basis and, accordingly, exclude all operating properties at September 30, 2014. See Terms and Definitions below for a description of pro rata amounts.

Top Ten Tenants by ABR
(in thousands, except percentages)
 
 
Consolidated
 
Pro Rata
Tenant/Lease Guarantor
 
ABR
 
Percent
 
ABR 
 
Percent
Metro Cash & Carry Italia S.p.A. (a)
 
$
29,154

 
10
%
 
$
29,154

 
9
%
The New York Times Company
 
26,057

 
9
%
 
14,331

 
4
%
Agrokor d.d. (a)
 
24,138

 
9
%
 
25,565

 
8
%
General Parts Inc., Golden State Supply LLC, Straus-Frank Enterprises LLC, General Parts Distribution LLC and Worldpac Inc.
 
17,653

 
6
%
 
17,653

 
6
%
KBR, Inc.
 
13,956

 
5
%
 
13,956

 
4
%
Blue Cross and Blue Shield of Minnesota, Inc.
 
11,732

 
4
%
 
11,732

 
4
%
Eroski Sociedad Cooperativa (a)
 
10,399

 
4
%
 
11,150

 
3
%
Terminal Freezers, LLC
 
9,041

 
3
%
 
9,041

 
3
%
DTS Distribuidora Television Digital SA (a)
 
8,979

 
3
%
 
8,979

 
3
%
RLJ-McLarty-Landers Automotive Holdings, LLC
 
6,546

 
2
%
 
6,544

 
2
%
Total
 
$
157,655

 
55
%
 
$
148,105

 
46
%
__________
(a)
ABR amounts are subject to fluctuations in foreign currency exchange rates.

Portfolio Diversification by Geography and Property Type
(in thousands, except percentages)
 
 
 
 
Consolidated
 
Pro Rata
Region
 
ABR
 
Percent
 
ABR
 
Percent
U.S.
 
 
 
 
 
 
 
 
 
East
 
$
54,549

 
19
%
 
$
42,207

 
13
%
 
South
 
51,625

 
18
%
 
57,114

 
18
%
 
Midwest
 
48,526

 
17
%
 
53,463

 
17
%
 
West
 
27,849

 
9
%
 
28,819

 
9
%
 
 
U.S. Total
 
182,549

 
63
%
 
181,603

 
57
%
 
 
 
 
 
 
 
 
 
 
 
International
 
 
 
 
 
 
 
 
 
Italy
 
29,154

 
10
%
 
29,154

 
9
%
 
Croatia
 
24,138

 
8
%
 
25,565

 
8
%
 
Spain
 
19,379

 
7
%
 
20,129

 
6
%
 
Poland
 
11,597

 
4
%
 
16,421

 
5
%
 
Germany
 
10,115

 
4
%
 
19,401

 
6
%
 
United Kingdom
 
5,864

 
2
%
 
5,864

 
2
%
 
Other (a)
 
5,566

 
2
%
 
21,932

 
7
%
 
 
International Total
 
105,813

 
37
%
 
138,466

 
43
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
288,362

 
100
%
 
$
320,069

 
100
%



CPA®:17 – Global 9/30/2014 10-Q – 32


 
 
 
 
Consolidated
 
Pro Rata
Property Type
 
ABR
 
Percent
 
ABR
 
Percent
Office
 
$
94,322

 
33
%
 
$
90,243

 
28
%
Warehouse/Distribution
 
67,655

 
23
%
 
85,710

 
27
%
Retail
 
57,350

 
20
%
 
70,484

 
22
%
Industrial
 
46,730

 
16
%
 
47,174

 
15
%
Other (b)
 
22,305

 
8
%
 
26,458

 
8
%
 
 
 
 
$
288,362

 
100
%
 
$
320,069

 
100
%
________
(a)
Consolidated includes ABR in the Netherlands and Japan. Pro rata includes ABR from the aforementioned countries and Hungary.
(b)
Consolidated includes ABR from tenants with the following property types: education, automotive dealership, sports, and land. Pro rata includes ABR from the aforementioned property types in addition to self-storage.

Portfolio Diversification by Tenant Industry
(in thousands, except percentages)
 
 
Consolidated
 
Pro Rata
Industry Type
 
ABR
 
Percent
 
ABR
 
Percent
Retail Stores
 
$
65,558

 
23
%
 
$
78,777

 
25
%
Business and Commercial Services
 
40,557

 
14
%
 
40,476

 
12
%
Grocery
 
34,537

 
12
%
 
53,162

 
17
%
Media: Printing and Publishing
 
29,684

 
10
%
 
17,959

 
5
%
Automobile
 
16,543

 
6
%
 
15,358

 
5
%
Healthcare, Education, and Childcare
 
12,637

 
4
%
 
12,637

 
4
%
Insurance
 
11,732

 
4
%
 
15,280

 
5
%
Machinery
 
10,637

 
4
%
 
10,637

 
3
%
Broadcasting and Entertainment
 
8,979

 
3
%
 
8,979

 
3
%
Leisure, Amusement, and Entertainment
 
8,571

 
3
%
 
8,617

 
3
%
Beverages, Food, and Tobacco
 
8,518

 
3
%
 
8,518

 
3
%
Telecommunications
 
6,159

 
2
%
 
6,187

 
2
%
Transportation - Cargo
 
5,864

 
2
%
 
5,864

 
2
%
Textiles, Leather, and Apparel
 
5,065

 
2
%
 
3,039

 
1
%
Banking
 
4,605

 
2
%
 
9,355

 
3
%
Electronics
 
4,295

 
2
%
 
3,057

 
1
%
Consumer Non-Durable Goods
 
4,142

 
1
%
 
4,142

 
1
%
Chemicals, Plastics, Rubber, and Glass
 
3,933

 
1
%
 
7,524

 
2
%
Other (a)
 
6,346

 
2
%
 
10,501

 
3
%
 
 
$
288,362

 
100
%
 
$
320,069

 
100
%
__________
(a)
Includes ABR from tenants in the following industries: aerospace and defense; mining, metals, and primary metal industries; building and real estate; construction and building; finance; consumer and durable goods; consumer services; and transportation - personal.



CPA®:17 – Global 9/30/2014 10-Q – 33


Lease Expirations
(in thousands, except percentages and number of leases)


Consolidated

Pro Rata
Year of Lease Expiration

Number of Leases Expiring

ABR

Percent

Number of Leases Expiring

ABR

Percent
Remaining 2014

1


$
84


—
%

1


$
84


—
%
2015

9


340


—
%

10


342


—
%
2016

9


3,092


1
%

10


3,190


1
%
2017

4


574


—
%

4


574


—
%
2018

3


26,180


9
%

6


14,481


5
%
2019

3


288


—
%

3


343


—
%
2020

2


120


—
%

2


120


—
%
2021

3


1,556


1
%

3


1,091


—
%
2022

1


2,709


1
%

2


4,139


1
%
2023

1


76


—
%

2


4,826


2
%
2024

5


12,963


4
%

9


18,627


6
%
2025

11


10,966


4
%

11


10,966


3
%
2026

10


12,674


4
%

16


25,656


8
%
2027

23


30,674


11
%

23


30,674


10
%
Thereafter

78


186,066


65
%

83


204,956


64
%


163


$
288,362


100
%

185


$
320,069


100
%

Self-Storage Summary

Our self-storage properties had an average occupancy rate of 85% at September 30, 2014. As of September 30, 2014, our self-storage portfolio was comprised as follows (square footage in thousands):
State
 
Number of Properties
 
Square Footage
California
 
29

 
2,079

Illinois
 
13

 
900

Florida
 
7

 
486

Texas
 
5

 
437

Hawaii
 
4

 
259

Louisiana
 
3

 
196

Georgia
 
2

 
79

Alabama
 
1

 
130

North Carolina
 
1

 
80

Mississippi
 
1

 
61

Consolidated Total
 
66

 
4,707

New York
 
5

 
272

Pro Rata Total (a)
 
71

 
4,979

__________
(a)
See Terms and Definitions below for a description of pro rata amounts.



CPA®:17 – Global 9/30/2014 10-Q – 34


Terms and Definitions

Pro Rata Metrics — The portfolio information above contains certain metrics prepared under the pro rata consolidation method. We refer to these metrics as pro rata metrics. We have a number of investments, usually with our affiliates, in which our economic ownership is less than 100%. Under the full consolidation method, we report 100% of the assets, liabilities, revenues, and expenses of those investments that are deemed to be under our control or for which we are deemed to be the primary beneficiary, even if our ownership is less than 100%. Also, for all other jointly-owned investments, we report our net investment and our net income or loss from that investment. Under the pro rata consolidation method, we generally present our proportionate share, based on our economic ownership of these jointly-owned investments, of the assets, liabilities, revenues, and expenses of those investments.

ABR — ABR represents contractual minimum annualized base rent for our net-leased properties. ABR is not applicable to operating properties.

Financial Highlights
(in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Total revenues
$
97,987

 
$
91,619

 
$
297,923

 
$
267,337

Net income attributable to CPA®:17 – Global
15,180

 
5,026

 
60,127

 
32,653

 
 
 
 
 
 
 
 
Cash distributions paid
52,485

 
50,689

 
156,096

 
147,310

 
 
 
 
 
 
 
 
Net cash provided by operating activities
 
 
 
 
153,332

 
135,825

Net cash used in investing activities
 
 
 
 
(140,868
)
 
(387,455
)
Net cash (used in) provided by financing activities
 
 
 
 
(86,692
)
 
37,035

 
 
 
 
 
 
 
 
Supplemental financial measures:
 
 
 
 
 
 
 
Funds from operations (a)
46,120

 
32,055

 
149,900

 
111,131

Modified funds from operations (a)
40,864

 
36,387

 
141,256

 
105,812

__________
(a)
We consider the performance metrics listed above, including Funds from operations, or FFO, and Modified funds from operations, or MFFO, which are supplemental measures that are not defined by GAAP, or non-GAAP, to be important measures in the evaluation of our results of operations and capital resources. We evaluate our results of operations with a primary focus on the ability to generate cash flow necessary to meet our objective of funding distributions to stockholders. See Supplemental Financial Measures below for our definitions of these non-GAAP measures and reconciliations to their most directly comparable GAAP measures.

Total revenues, Net income attributable to CPA®:17 – Global, Net cash provided by operating activities, FFO, and MFFO all increased for the three and nine months ended September 30, 2014 as compared to the same periods in 2013, primarily reflecting the increase in the number of our investments during 2014 and 2013.



CPA®:17 – Global 9/30/2014 10-Q – 35


Results of Operations

We evaluate our results of operations with a primary focus on our ability to generate cash flow necessary to meet our objectives of funding distributions to stockholders and increasing our equity in our real estate. As a result, our assessment of operating results gives less emphasis to the effect of unrealized gains and losses, which may cause fluctuations in net income for comparable periods but have no impact on cash flows, and to other non-cash charges, such as depreciation and impairment charges.

The following table presents the comparative results of operations (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
Revenues
 
 
 
 
 
 
 
 
 
 
 
Lease revenues
$
77,672

 
$
72,389

 
$
5,283

 
$
231,961

 
$
210,871

 
$
21,090

Operating property revenues
11,878

 
12,642

 
(764
)
 
42,482

 
39,028

 
3,454

Reimbursable tenant costs
7,006

 
4,655

 
2,351

 
19,003

 
12,171

 
6,832

Interest income and other
1,431

 
1,933

 
(502
)
 
4,477

 
5,267

 
(790
)
 
20,315

 
19,230

 
1,085

 
65,962

 
56,466

 
9,496

 
97,987

 
91,619

 
6,368

 
297,923

 
267,337

 
30,586

Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
 
 
 
 
Net-leased properties
22,095

 
19,641

 
2,454

 
65,941

 
57,031

 
8,910

Operating properties
3,245

 
3,954

 
(709
)
 
10,855

 
12,256

 
(1,401
)
 
25,340

 
23,595

 
1,745

 
76,796

 
69,287

 
7,509

Property expenses:
 
 
 
 
 
 
 
 
 
 
 
Asset management fees
6,468

 
5,660

 
808

 
19,934

 
16,137

 
3,797

Operating properties
4,595

 
8,261

 
(3,666
)
 
20,639

 
25,683

 
(5,044
)
Reimbursable tenant costs
7,006

 
4,655

 
2,351

 
19,003

 
12,171

 
6,832

Net-leased properties
2,233

 
3,094

 
(861
)
 
8,449

 
8,178

 
271

 
20,302

 
21,670

 
(1,368
)
 
68,025

 
62,169

 
5,856

General and administrative
6,544

 
4,847

 
1,697

 
17,853

 
14,596

 
3,257

Acquisition expenses
—

 
8,510

 
(8,510
)
 
1,401

 
10,305

 
(8,904
)
 
52,186

 
58,622

 
(6,436
)
 
164,075

 
156,357

 
7,718

 
 
 
 
 
 
 
 
 
 
 
 
Operating Income
45,801

 
32,997

 
12,804

 
133,848

 
110,980

 
22,868

 
 
 
 
 
 
 
 
 
 
 
 
Other Income and Expenses
 
 
 
 
 
 
 
 
 
 
 
Interest expense
(23,695
)
 
(22,807
)
 
(888
)
 
(70,288
)
 
(66,468
)
 
(3,820
)
Net income from equity investments in real estate
2,052

 
513

 
1,539

 
9,777

 
3,380

 
6,397

Other income and (expenses)
2,076

 
1,221

 
855

 
3,974

 
7,376

 
(3,402
)
 
(19,567
)
 
(21,073
)
 
1,506

 
(56,537
)
 
(55,712
)
 
(825
)
Income from continuing operations before income taxes and gain on sale of real estate
26,234

 
11,924

 
14,310

 
77,311

 
55,268

 
22,043

Provision for income taxes
(2,651
)
 
(710
)
 
(1,941
)
 
(6,012
)
 
(2,280
)
 
(3,732
)
Income from continuing operations before gain on sale of real estate
23,583

 
11,214

 
12,369

 
71,299

 
52,988

 
18,311

Income from discontinued operations, net of tax
—

 
249

 
(249
)
 
—

 
740

 
(740
)
Gain on sale of real estate, net of tax
790

 
78

 
712

 
13,338

 
659

 
12,679

Net Income
24,373

 
11,541

 
12,832

 
84,637

 
54,387

 
30,250

Net income attributable to noncontrolling interests
(9,193
)
 
(6,515
)
 
(2,678
)
 
(24,510
)
 
(21,734
)
 
(2,776
)
Net Income Attributable to CPA®:17 – Global
$
15,180

 
$
5,026

 
$
10,154

 
$
60,127

 
$
32,653

 
$
27,474

MFFO
$
40,864

 
$
36,387

 
$
4,477

 
$
141,256

 
$
105,812

 
$
35,444

 


CPA®:17 – Global 9/30/2014 10-Q – 36


Lease Composition and Leasing Activities

As of September 30, 2014, approximately 53.3% of our net leases, based on ABR, provide for adjustments based on formulas indexed to changes in the CPI, or other similar indices for the jurisdiction in which the property is located, some of which have caps and/or floors. In addition, 46.1% of our net leases on that same basis have fixed rent adjustments, for which ABR is scheduled to increase by an average of 1.5% in the next 12 months. We own international investments and, therefore, lease revenues from these investments are subject to fluctuations in exchange rate movements in foreign currencies, primarily the euro.

During both the three months ended September 30, 2014 and 2013, we did not modify any existing leases.

During the nine months ended September 30, 2014, we extended two leases with existing tenants totaling 2,466 square feet of leased space. The average new rent for these leases was $19.65 per square foot and the average former rent was $19.16 per square foot. There were no tenant improvement allowances or concessions related to these leases.

During the nine months ended September 30, 2013, we modified one existing lease with an existing tenant to add approximately 1.0 million square feet of leased space at the same rental rate per square foot. The average rent for this lease was $3.22 per square foot. There were no tenant improvement allowances or concessions related to this lease.



CPA®:17 – Global 9/30/2014 10-Q – 37


Property Level Contribution

Property level contribution includes lease and operating property revenues, less property expenses and depreciation and amortization. When a property is leased on a net-lease basis, reimbursable tenant costs are recorded as both income and property expense and, therefore, have no impact on the property level contribution. The following table presents the property level contribution for our consolidated leased and operating properties as well as a reconciliation to our net operating income (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
Same Store Net-leased Properties
 
 
 
 
 
 
 
 
 
 
 
Lease revenues
$
69,230

 
$
68,524

 
$
706

 
$
208,516

 
$
204,693

 
$
3,823

Depreciation and amortization
(18,406
)
 
(18,335
)
 
(71
)
 
(55,595
)
 
(55,176
)
 
(419
)
Property expenses
(1,996
)
 
(2,664
)
 
668

 
(6,995
)
 
(7,717
)
 
722

Property level contribution
48,828

 
47,525

 
1,303

 
145,926

 
141,800

 
4,126

Recently Acquired Net-leased Properties
 
 
 
 
 
 
 
 
 
 
 
Lease revenues
8,442

 
3,865

 
4,577

 
23,445

 
6,178

 
17,267

Depreciation and amortization
(3,689
)
 
(1,306
)
 
(2,383
)
 
(10,346
)
 
(1,855
)
 
(8,491
)
Property expenses
(237
)
 
(430
)
 
193

 
(1,454
)
 
(461
)
 
(993
)
Property level contribution
4,516

 
2,129

 
2,387

 
11,645

 
3,862

 
7,783

Operating Properties
 
 
 
 
 
 
 
 
 
 
 
Revenues
11,878

 
10,310

 
1,568

 
34,567

 
29,066

 
5,501

Property expenses
(4,578
)
 
(4,387
)
 
(191
)
 
(14,029
)
 
(12,810
)
 
(1,219
)
Depreciation and amortization
(3,245
)
 
(3,630
)
 
385

 
(10,118
)
 
(11,503
)
 
1,385

Property level contribution
4,055

 
2,293

 
1,762

 
10,420

 
4,753

 
5,667

Properties Sold
 
 
 
 
 
 
 
 
 
 
 
Revenues
—

 
2,332

 
(2,332
)
 
7,915

 
9,962

 
(2,047
)
Property expenses
(17
)
 
(3,874
)
 
3,857

 
(6,610
)
 
(12,873
)
 
6,263

Depreciation and amortization
—

 
(324
)
 
324

 
(737
)
 
(753
)
 
16

Property level contribution
(17
)
 
(1,866
)
 
1,849

 
568

 
(3,664
)
 
4,232

Total Property Level Contribution
 
 
 
 
 
 
 
 
 
 
 
Lease revenues
77,672

 
72,389

 
5,283

 
231,961

 
210,871

 
21,090

Property expenses
(2,233
)
 
(3,094
)
 
861

 
(8,449
)
 
(8,178
)
 
(271
)
Operating property revenues
11,878

 
12,642

 
(764
)
 
42,482

 
39,028

 
3,454

Operating property expenses
(4,595
)
 
(8,261
)
 
3,666

 
(20,639
)
 
(25,683
)
 
5,044

Depreciation and amortization
(25,340
)
 
(23,595
)
 
(1,745
)
 
(76,796
)
 
(69,287
)
 
(7,509
)
Property Level Contribution
57,382

 
50,081

 
7,301

 
168,559

 
146,751

 
21,808

Add other income:
 
 
 
 
 
 
 
 
 
 
 
Non-rent related revenue and other
1,431

 
1,933

 
(502
)
 
4,477

 
5,267

 
(790
)
Less other expenses:
 
 
 
 
 
 
 
 
 
 
 
Asset management fees
(6,468
)
 
(5,660
)
 
(808
)
 
(19,934
)
 
(16,137
)
 
(3,797
)
Acquisition expenses
—

 
(8,510
)
 
8,510

 
(1,401
)
 
(10,305
)
 
8,904

General and administrative
(6,544
)
 
(4,847
)
 
(1,697
)
 
(17,853
)
 
(14,596
)
 
(3,257
)
Operating Income
$
45,801

 
$
32,997

 
$
12,804

 
$
133,848

 
$
110,980

 
$
22,868




CPA®:17 – Global 9/30/2014 10-Q – 38


Same Store Net-leased Properties

Same store net-leased properties are those we acquired prior to January 1, 2013. At September 30, 2014, there were 209 same-store net-leased properties.

For the three and nine months ended September 30, 2014 as compared to the same periods in 2013, property level contribution for same store net-leased properties increased by $1.3 million and $4.1 million, respectively, primarily due to an increase in lease revenues of $0.7 million and $3.8 million, respectively, as a result of CPI-related rent increases.

Recently Acquired Net-leased Properties

Recently acquired net-leased properties are those that we acquired subsequent to December 31, 2012.

For the three and nine months ended September 30, 2014 as compared to the same periods in 2013, property level contribution from recently acquired leased properties increased by $2.4 million and $7.8 million, respectively, as a result of eight properties acquired after September 30, 2013 through September 30, 2014.

Operating Properties

Other real estate operations represent primarily the results of operations (revenues and operating expenses) of our 66 self-storage properties. Eight self-storage properties were acquired during 2013, with the remaining self-storage properties acquired during prior years.

For the three and nine months ended September 30, 2014 as compared to the same periods in 2013, property level contribution from operating properties increased by $1.8 million and $5.7 million, respectively, as a result of one self-storage property acquired after September 30, 2013 through September 30, 2014.

Properties Sold

Properties sold represent only those properties that did not qualify for classification as discontinued operations. The results of operations for properties that were sold prior to January 1, 2014 are included within discontinued operations in the consolidated financial statements.

In April 2014, we sold a hotel that had been classified as an operating property in the consolidated financial statements (Note 4). For the three months ended September 30, 2013, property level contribution from the sold hotel was a loss of $1.9 million. For the nine months ended September 30, 2014 and 2013, property level contribution from the sold hotel was income of $0.6 million and a loss of $3.7 million, respectively. Prior year losses incurred by the hotel were a result of a significant renovation-related disruption during which a portion of total rooms were unavailable, which negatively impacted our net operating income. The related gain is included in Gain on sale of real estate, net of tax, which is disclosed below.

Other Revenues and Expenses

Property Expenses — Asset Management Fees
 
For the three and nine months ended September 30, 2014 as compared to the same periods in 2013, asset management fees increased by $0.8 million and $3.8 million, respectively, as a result of investment volume growth in 2014 and 2013 and an increase in the estimated fair value of our real estate, both of which increased the asset base from which the advisor earns a fee.

General and Administrative
 
For the three and nine months ended September 30, 2014 as compared to the same periods in 2013, general and administrative expenses increased by $1.7 million and $3.3 million, respectively, primarily due to increases in management expenses of $0.7 million and $2.0 million, respectively, and increases in professional expenses of $0.8 million and $0.6 million, respectively.

Management expenses increased primarily as a result of the increase in our revenue base from which the advisor allocates costs of personnel and overhead pursuant to the terms of the advisory agreement. Management expenses include our reimbursements to the advisor for the allocated costs of personnel and overhead in providing management of our day-to-day operations,


CPA®:17 – Global 9/30/2014 10-Q – 39


including accounting and legal services, stockholder services, corporate management, and property management and operations.

Professional expenses increased due to higher audit and tax professional fees as a result of investment volume growth in 2014 and 2013. Professional fees include legal, accounting, and investor-related expenses incurred in the normal course of business.
 
Net Income from Equity Investments in Real Estate
 
Net income from equity investments in real estate is recognized in accordance with each respective investment agreement and, where applicable, based upon an allocation of the investment’s net assets at book value as if the investment were hypothetically liquidated at the end of each reporting period. The table below presents the details of our net income from equity investments (in thousands). Same store equity investments represent investments we accounted for under the equity method and acquired prior to January 1, 2013. Recently acquired equity investments are those that we acquired subsequent to December 31, 2012.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Type
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
Same store equity investments
 
$
1,405

 
$
920

 
$
485

 
$
11,963

 
$
3,787

 
$
8,176

Recently acquired equity investments
 
647

 
(407
)
 
1,054

 
(2,186
)
 
(407
)
 
(1,779
)
Total net income from equity investments in real estate
 
$
2,052

 
$
513

 
$
1,539

 
$
9,777

 
$
3,380

 
$
6,397


For the three months ended September 30, 2014 as compared to the same period in 2013, net income from same store equity investments increased by $0.5 million, primarily due to a decrease in current year tax provision on one of our jointly-owned investments and a decrease in interest expense as a result of a loan payoff during the fourth quarter of 2013 on one of our jointly-owned investments.

For the nine months ended September 30, 2014 as compared to the same period in 2013, net income from same store equity investments increased by $8.2 million, primarily due to capital contributions made by our partners in one of our investments that resulted in income attributed to us of $6.5 million based upon the hypothetical liquidation at book value method of accounting (Note 6) and an increase in income of $1.3 million as a result of a decrease in interest expense due to a loan payoff during the fourth quarter of 2013 on one of our jointly-owned investments.

For the three months ended September 30, 2014 as compared to the same period in 2013, net income from our recently acquired equity investments increased by $1.1 million, primarily as a result of recognizing our share of earnings from an investment that was previously accounted for under the cost method of accounting (Note 6).

For the nine months ended September 30, 2014 as compared to the same period in 2013, net income from our recently acquired equity investments decreased by $1.8 million, primarily as result of our $4.2 million share of acquisition expenses recorded by the entity that leases its property to Bank Pekao S.A., which was acquired in March 2014, partially offset by $2.0 million representing our share of earnings from an investment that was previously accounted for under the cost method of accounting (Note 6).

Other Income and (Expenses)
 
Other income and (expenses) primarily consists of gains and losses on foreign currency transactions and derivative instruments. We and certain of our foreign consolidated subsidiaries have intercompany debt or advances that are not denominated in the investment’s functional currency. For intercompany transactions that are of a long-term investment nature, the gain or loss is recognized as a cumulative translation adjustment in Other comprehensive income or loss. We also recognize gains or losses on foreign currency transactions when we repatriate cash from our foreign investments. In addition, we have certain derivative instruments, including common stock warrants and foreign currency contracts that are not designated as hedges for accounting purposes, for which realized and unrealized gains and losses are included in earnings. The timing and amount of such gains or losses cannot always be estimated and are subject to fluctuation.
 
For the three months ended September 30, 2014, we recognized net Other income of $2.1 million, primarily due to net gains of $2.3 million recognized on our derivatives and interest income of $0.6 million recognized on our average cash balances, partially offset by $0.7 million of net foreign currency transaction losses on our foreign investments.



CPA®:17 – Global 9/30/2014 10-Q – 40


For the nine months ended September 30, 2014, we recognized net Other income of $4.0 million, primarily due to net gains of $2.1 million recognized on our derivatives and interest income of $1.6 million recognized on our average cash balances.

For the three months ended September 30, 2013, we recognized net Other income of $1.2 million, primarily due to $1.5 million of net foreign currency transaction gains related to our foreign investments, partially offset by a $0.5 million loss on the extinguishment of debt.

For the nine months ended September 30, 2013, we recognized net Other income of $7.4 million, primarily due to $2.7 million of net foreign currency transactions gains related to our foreign investments, net gains of $2.6 million recognized on our derivatives, and interest income of $2.4 million recognized on our average cash balances. These items were partially offset by a $0.5 million loss on the extinguishment of debt.

Interest Expense
 
For the three and nine months ended September 30, 2014 as compared to the same periods in 2013, interest expense increased by $0.9 million and $3.8 million, respectively, primarily as a result of mortgage financing obtained or assumed in connection with our investment activity during 2014 and 2013.

Discontinued Operations
 
Income from discontinued operations, net of tax represents the net income (revenue less expenses) from the operations of properties that were sold or classified as held-for-sale prior to January 1, 2014 (Note 13).

During the three and nine months ended September 30, 2013, we recognized income from discontinued operations, net of tax of $0.2 million and $0.7 million, respectively, related to the sale of a hotel in the fourth quarter of 2013.

Gain on Sale of Real Estate, Net of Tax
 
For both the three and nine months ended September 30, 2014, we recognized a $0.8 million gain on sale of real estate, net of tax as a result of granting an easement at one of our properties. Additionally, for the nine months ended September 30, 2014, we recognized a $12.5 million gain on sale of real estate, net of tax as a result of the I Shops Partial Sale (Note 4).

Net Income Attributable to CPA®:17 – Global
 
For the three and nine months ended September 30, 2014 as compared to the same periods in 2013, the resulting net income attributable to CPA®:17 – Global increased by $10.2 million and $27.5 million, respectively.
 
Modified Funds from Operations

MFFO is a non-GAAP measure that we use to evaluate our business. For a definition of MFFO and reconciliation to net income attributable to CPA®:17 – Global, see Supplemental Financial Measures below.
 
For the three and nine months ended September 30, 2014 as compared to the same periods in 2013, MFFO increased by $4.5 million and $35.4 million, respectively, primarily as a result of the increase in the number of our investments during 2014 and 2013.



CPA®:17 – Global 9/30/2014 10-Q – 41


Financial Condition

Sources and Uses of Cash During the Period
 
We expect to continue to invest the proceeds of our follow-on offering in a diversified portfolio of income-producing commercial properties and other real estate related assets. We use the cash flow generated from our investments primarily to meet our operating expenses, service debt, and fund distributions to our stockholders. Our cash flows fluctuate from period to period due to a number of factors, which may include, among other things, the timing of purchases and sales of real estate, the timing of the receipt of the proceeds from and the repayment of non-recourse mortgage loans and receipt of lease revenues, the advisor’s annual election to receive fees in shares of our common stock or cash, the timing and characterization of distributions received from equity investments in real estate, the timing of payments of distributions of available cash to the advisor, and changes in foreign currency exchange rates. Despite these fluctuations, we believe our net leases and other real estate related assets will generate sufficient cash from operations and from equity distributions in excess of equity income in real estate to meet our normal recurring short-term and long-term liquidity needs. However, until we have fully invested the proceeds of our follow-on offering, we have used, and may in the future use, a portion of the offering proceeds to fund our operating activities and distributions to our stockholders (see Financing Activities below). We assess our ability to access capital on an ongoing basis. Our sources and uses of cash during the period are described below.

Operating Activities
 
Net cash provided by operating activities increased by $17.5 million during the nine months ended September 30, 2014 as compared to the same period in 2013, primarily reflecting the increase in the number of our investments during 2014 and 2013.

Investing Activities
 
Our investing activities are generally comprised of real estate-related transactions (purchases and sales), payment of deferred acquisition fees to the advisor related to asset acquisitions, and capitalized property-related costs. During the nine months ended September 30, 2014, we used $93.8 million to acquire three investments and to fund construction costs on build-to-suit projects (Note 4). We contributed $157.1 million to jointly-owned investments, primarily including $95.9 million to acquire equity interests in one new investment, $37.6 million to fund existing ADC Arrangements, and $20.4 million to acquire an additional interest in an existing investment (Note 6). We used $8.2 million to acquire an additional interest in a foreign debenture (Note 8). We received $74.5 million as a return of capital from our equity investments in real estate, primarily due to distributions totaling $62.6 million made to us as a result of new financings obtained by two of our investments (Note 6), and we received net proceeds of $68.8 million, primarily from the sale of real estate as a result of the I Shops Partial Sale (Note 4). We paid VAT totaling $5.0 million in connection with several international investments and recovered $1.5 million of VAT during the nine months ended September 30, 2014, including amounts paid in prior years. Payments of deferred acquisition fees to the advisor totaled $5.5 million. Net funds totaling $16.1 million were deposited in and released from lender-held investment accounts.
 
Financing Activities
 
During the nine months ended September 30, 2014, we paid distributions related to the fourth quarter of 2013 and the first and second quarters of 2014 totaling $156.1 million to our stockholders, which were comprised of cash distributions of $80.1 million and distributions that were reinvested in shares of our common stock by stockholders through our DRIP of $76.0 million. We paid distributions of $23.2 million to affiliates that hold noncontrolling interests in various investments jointly-owned with us. We received $81.9 million in proceeds from mortgage financings related to new and existing investments. We made scheduled and unscheduled mortgage principal installments totaling $44.6 million. Net funds totaling $3.6 million were deposited in and released from lender-held investment accounts.

Our objectives are to generate sufficient cash flow over time to provide our stockholders with distributions and to seek investments with potential for capital appreciation throughout varying economic cycles. During the nine months ended September 30, 2014, we declared distributions to our stockholders totaling $157.5 million, which were comprised of cash distributions of $81.7 million and $75.8 million of distributions reinvested by stockholders through our DRIP. We funded 97% of these distributions from Net cash provided by operating activities, with the remainder being funded from proceeds of our follow-on offering. Since inception, we have funded 94% of our cumulative distributions from Net cash provided by operating activities, with the remainder being funded from proceeds of our public offerings. In determining our distribution policy during the periods in which we are raising funds or investing capital, we place primary emphasis on projections of cash flow from operations, together with cash distributions from our unconsolidated investments, rather than on historical results of operations (though these and other factors may be a part of our consideration). In setting a distribution rate, we thus focus primarily on


CPA®:17 – Global 9/30/2014 10-Q – 42


expected returns from those investments we have already made, as well as our anticipated rate of return from future investments, to assess the sustainability of a particular distribution rate over time.

We maintain a quarterly redemption program pursuant to which we may, at the discretion of our board of directors, redeem shares of our common stock from stockholders seeking liquidity. During the nine months ended September 30, 2014, we received requests to redeem 1,798,674 shares of our common stock pursuant to our redemption plan, all of which were redeemed in the same period, at a weighted-average price of $9.08 per share, which is net of redemption fees, totaling $16.3 million.

Summary of Financing
 
The table below summarizes our non-recourse debt (dollars in thousands):
 
September 30, 2014
 
December 31, 2013
Carrying Value
 
 
 
Fixed rate
$
1,281,380

 
$
1,319,340

Variable rate:
 
 
 
Amount subject to interest rate swap and cap (a)
444,666

 
557,341

Non-recourse mortgages (a)
156,700

 
4,927

Amount of fixed rate debt subject to interest rate reset features
36,059

 
33,993

 
637,425

 
596,261

 
$
1,918,805

 
$
1,915,601

Percent of Total Debt
 
 
 
Fixed rate
67
%
 
69
%
Variable rate
33
%
 
31
%
 
100
%
 
100
%
Weighted-Average Interest Rate at End of Period
 
 
 
Fixed rate
5.3
%
 
5.3
%
Variable rate
4.0
%
 
4.0
%
___________
(a)
The interest rate cap, which was in effect at December 31, 2013, expired on August 31, 2014. However, we still own the non-recourse debt that had been hedged with this derivative and is subject to interest rate reset features.

Cash Resources
 
At September 30, 2014, our cash resources consisted of cash and cash equivalents totaling $335.9 million. Of this amount, $52.9 million, at then-current exchange rates, was held in foreign subsidiaries, but we could be subject to restrictions or significant costs should we decide to repatriate these amounts. We also had unleveraged properties that had an aggregate carrying value of $176.6 million at September 30, 2014, although there can be no assurance that we would be able to obtain financing for these properties. Our cash resources may be used for future investments and can be used for working capital needs, other commitments, and distributions to our stockholders.
 
Cash Requirements
 
During the next 12 months, we expect that our cash requirements will include acquiring new investments, funding capital commitments such as build-to-suit projects and ADC Arrangements, paying distributions to our stockholders and to our affiliates that hold noncontrolling interests in entities we control, and making scheduled and unscheduled mortgage loan principal payments, as well as other normal recurring operating expenses. Balloon payments totaling $43.6 million on our consolidated mortgage loan obligations and $13.0 million on our unconsolidated mortgage loan obligations are due during the next 12 months. Our advisor is actively seeking to refinance certain of these loans, although there can be no assurance that it will be able to do so on favorable terms, if at all. Capital and ground lease commitments totaling $45.3 million are expected to be funded during the next 12 months. We expect to fund future investments, capital commitments, any capital expenditures on existing properties, and scheduled and unscheduled debt maturities on our mortgage loans through the use of our cash reserves, cash generated from operations and the remaining net proceeds from our follow-on offering.



CPA®:17 – Global 9/30/2014 10-Q – 43


Off-Balance Sheet Arrangements and Contractual Obligations
 
The table below summarizes our debt, off-balance sheet arrangements, and other contractual obligations at September 30, 2014 and the effect that these arrangements and obligations are expected to have on our liquidity and cash flow in the specified future periods (in thousands):
 
Total
 
Less than
1 year
 
1-3 years
 
3-5 years
 
More than
5 years
Non-recourse debt — principal (a)
$
1,922,223

 
$
71,821

 
$
489,825

 
$
341,985

 
$
1,018,592

Deferred acquisition fees — principal
10,119

 
7,381

 
2,738

 
—

 
—

Interest on borrowings and deferred acquisition fees
514,743

 
92,864

 
161,766

 
112,927

 
147,186

Subordinated disposition fees (b)
202

 
—

 
—

 
202

 
—

Capital commitments (c)
42,384

 
42,000

 
—

 
384

 
—

Operating and other lease commitments (d)
77,920

 
3,263

 
6,676

 
6,945

 
61,036

Asset retirement obligations, net (e)
23,022

 
—

 
—

 
—

 
23,022

 
$
2,590,613

 
$
217,329

 
$
661,005

 
$
462,443

 
$
1,249,836

___________
(a)
Excludes $3.4 million of unamortized discount, net on two notes, which was included in Non-recourse debt at September 30, 2014.
(b)
Represents amounts that may be payable to the advisor in connection with sales of assets if minimum stockholder returns are satisfied (Note 3). There can be no assurance as to whether or when these fees will be paid.
(c)
Capital commitments include (i) current build-to-suit projects of $21.0 million (Note 4), (ii) capital commitments related to ADC Arrangements of $20.3 million (Note 6), and (iii) $1.1 million related to other construction commitments.
(d)
Operating commitments consist of rental obligations under ground leases. Other lease commitments consist of our share of future rents payable for the purpose of leasing office space pursuant to the advisory agreement. Amounts are allocated among WPC, the CPA® REITs, and CWI based on gross revenues and are adjusted quarterly.
(e)
Represents the future amount of obligations estimated for the removal of asbestos and environmental waste in connection with several of our acquisitions upon the retirement or sale of the assets.
 
Amounts in the table above that relate to our foreign operations are based on the exchange rate of the local currencies at September 30, 2014, which consisted primarily of the euro. At September 30, 2014, we had no material capital lease obligations for which we were the lessee, either individually or in the aggregate.

Equity Investments
 
We have interests in unconsolidated investments that primarily own single-tenant properties net leased to companies. Generally, the underlying investments are jointly-owned with our affiliates. At September 30, 2014, on a combined basis, these investments had total assets of approximately $1.8 billion, third-party non-recourse mortgage debt of $0.8 billion, and total asset retirement obligations of $1.7 million. At that date, our pro rata share of the aggregate debt for these investments was $353.2 million. In addition, we have a limited liability interest, with a carrying value of $30.7 million as of September 30, 2014, in a company that owns an interest in a cold storage operator. Cash requirements with respect to our share of these debt obligations are discussed above under Cash Requirements.



CPA®:17 – Global 9/30/2014 10-Q – 44


Supplemental Financial Measures
 
In the real estate industry, analysts and investors employ certain non-GAAP supplemental financial measures in order to facilitate meaningful comparisons between periods and among peer companies. Additionally, in the formulation of our goals and in the evaluation of the effectiveness of our strategies, we use FFO and MFFO, supplemental non-GAAP measures, which are uniquely defined by our management. We believe that these measures are useful to investors to consider because it may assist them to better understand and measure the performance of our business over time and against similar companies. A description of FFO and MFFO and reconciliations of FFO and MFFO to the most directly comparable GAAP measures are provided below.
 
Funds from Operations, or FFO, and Modified Funds from Operations, or MFFO
 
Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts, Inc., or NAREIT, an industry trade group, has promulgated a measure known as FFO, which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to nor a substitute for net income or loss as determined under GAAP.
 
We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004, or the White Paper. The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property, impairment charges on real estate, and depreciation and amortization; and after adjustments for unconsolidated partnerships and jointly-owned investments. Adjustments for unconsolidated partnerships and jointly-owned investments are calculated to reflect FFO.
 
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or is requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment, and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate-related depreciation and amortization as well as impairment charges of real estate-related assets, provides a more complete understanding of our performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. In particular, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time. An asset will only be evaluated for impairment if certain impairment indicators exist. Then a two-step process is performed, of which first is to determine whether an asset is impaired by comparing the carrying value, or book value, to the total estimated undiscounted future cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset, then measure the impairment loss as the excess of the carrying value over its estimated fair value. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO described above, investors are cautioned that, due to the fact that impairments are based on estimated future undiscounted cash flows and the relatively limited term of our operations, it could be difficult to recover any impairment charges. However, FFO and MFFO, as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating the operating performance of the company. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.
 
Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) were put into effect in 2009. These other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT’s definition of FFO have prompted an increase in cash-settled


CPA®:17 – Global 9/30/2014 10-Q – 45


expenses, such as acquisition fees, that are typically accounted for as operating expenses. Management believes these fees and expenses do not affect our overall long-term operating performance. Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start-up entities may also experience significant acquisition activity during their initial years, we believe that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after acquisition activity ceases. As disclosed in the prospectus for our follow-on offering dated April 7, 2011, or the Prospectus, we intend to begin the process of achieving a liquidity event (i.e., listing of our common stock on a national exchange, a merger or sale of our assets or another similar transaction) within eight to 12 years following the investment of substantially all of the net proceeds from our initial offering, which occurred in April 2011. Thus, we do not intend to continuously purchase assets and intend to have a limited life. Due to the above factors and other unique features of publicly registered, non-listed REITs, the Investment Program Association, or the IPA, an industry trade group, has standardized a measure known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered non-listed REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a non-listed REIT having the characteristics described above. MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended. We believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring properties and once our portfolio is in place. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance now that our offering has been completed and once all of our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance since our offering and most of our acquisitions are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. Investors are cautioned that MFFO should only be used to assess the sustainability of a company’s operating performance after a company’s offering has been completed and properties have been acquired, as it excludes acquisition costs that have a negative effect on a company’s operating performance during the periods in which properties are acquired.
 
We define MFFO consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations, or the Practice Guideline, issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income: acquisition fees and expenses; amounts relating to deferred rent receivables and amortization of above- and below-market leases and liabilities (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments); accretion of discounts and amortization of premiums on debt investments; nonrecurring impairments of real estate-related investments (i.e., infrequent or unusual, not reasonably likely to recur in the ordinary course of business); mark-to-market adjustments included in net income; nonrecurring gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives, or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and jointly-owned investments, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, nonrecurring unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized. While we are responsible for managing interest rate, hedge, and foreign exchange risk, we retain an outside consultant to review all our hedging agreements. Inasmuch as interest rate hedges are not a fundamental part of our operations, we believe it is appropriate to exclude such infrequent gains and losses in calculating MFFO, as such gains and losses are not reflective of on-going operations.
 
In calculating MFFO, we exclude acquisition-related expenses, restructuring expenses, amortization of above- and below-market leases, fair value adjustments of derivative financial instruments, deferred rent receivables, and the adjustments of such items related to noncontrolling interests. Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income. These expenses are paid in cash by a company. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by the company, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses, and other costs related to such property. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net


CPA®:17 – Global 9/30/2014 10-Q – 46


income in determining cash flow from operating activities. In addition, we view fair value adjustments of derivatives and gains and losses from dispositions of assets as infrequent items or items which are unrealized and may not ultimately be realized, and which are not reflective of on-going operations and are therefore typically adjusted for assessing operating performance.
 
Our management uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other non-listed REITs, which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to non-listed REITs, such as their limited life, limited and defined acquisition period, and targeted exit strategy, and hence that the use of such measures is useful to investors. For example, acquisition costs are generally funded from the proceeds of our offering and other financing sources and not from operations. By excluding expensed acquisition costs, the use of MFFO provides information consistent with management’s analysis of the operating performance of the properties. By excluding restructuring expenses we facilitate the evaluation of operating performance of a recurring nature. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such changes that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.

Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income or income from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance.
 
Neither the SEC, NAREIT, nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT, or another regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO accordingly.



CPA®:17 – Global 9/30/2014 10-Q – 47


FFO and MFFO were as follows (in thousands): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net income attributable to CPA®:17 – Global
$
15,180

 
$
5,026

 
$
60,127

 
$
32,653

Adjustments:
 
 
 
 
 
 
 
Depreciation and amortization of real property
24,591

 
23,010

 
74,578

 
67,540

Gain on sale of real estate
(790
)
 
(78
)
 
(4,251
)
 
(78
)
Proportionate share of adjustments to equity in net income of partially-owned entities to arrive at FFO:
 
 
 
 
 
 
 
Depreciation and amortization of real property
7,301

 
4,274

 
19,943

 
11,501

Proportionate share of adjustments for noncontrolling interests to arrive at FFO
(162
)
 
(177
)
 
(497
)
 
(485
)
Total adjustments
30,940

 
27,029

 
89,773

 
78,478

FFO — as defined by NAREIT
46,120

 
32,055

 
149,900

 
111,131

Adjustments:
 
 
 
 
 
 
 
Straight-line and other rent adjustments (a)
(4,632
)
 
(4,648
)
 
(14,437
)
 
(15,255
)
Unrealized (gains) losses on foreign currency, derivatives, and other
(877
)
 
342

 
(1,825
)
 
(887
)
Acquisition expenses (b)
681

 
9,185

 
3,445

 
12,321

Realized gains on foreign currency, derivatives and other
(632
)
 
(1,067
)
 
(328
)
 
(3,964
)
Above- and below-market rent intangible lease amortization, net (c)
(91
)
 
86

 
(236
)
 
(80
)
Unrealized (gains) losses on mark-to-market adjustments
(81
)
 
6

 
(210
)
 
6

Accretion of discounts on debt investments, net
(47
)
 
(490
)
 
(336
)
 
(421
)
(Gains) losses on extinguishment of debt
(2
)
 
535

 
268

 
535

Proportionate share of adjustments to equity in net income of partially-owned entities to arrive at MFFO:
 
 
 
 
 
 
 
Above- and below-market rent intangible lease amortization, net (c)
318

 
311

 
926

 
931

Straight-line and other rent adjustments (a)
(99
)
 
(2
)
 
(437
)
 
(21
)
Acquisition expenses (b)
82

 
64

 
4,254

 
1,379

Unrealized losses on mark-to-market adjustments
49

 
—

 
161

 
—

Unrealized losses (gains) on foreign currency and derivatives
15

 
(59
)
 
15

 
(47
)
Realized losses (gains) on foreign currency, derivatives and other
12

 
(3
)
 
17

 
(1
)
Proportionate share of adjustments for noncontrolling interests to arrive at MFFO
48

 
72

 
79

 
185

Total adjustments
(5,256
)
 
4,332

 
(8,644
)
 
(5,319
)
MFFO
$
40,864

 
$
36,387

 
$
141,256

 
$
105,812

___________
(a)
Under GAAP, rental receipts are allocated to periods using an accrual basis. This may result in income recognition that is significantly different than underlying contract terms. By adjusting for these items (to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), management believes that MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments, provides insight on the contractual cash flows of such lease terms and debt investments, and aligns results with management’s analysis of operating performance.
(b)
Includes Acquisition expenses and amortization of deferred acquisition fees. In evaluating investments in real estate, management differentiates the costs to acquire the investment from the operations derived from the investment. Such information would be comparable only for non-listed REITs that have completed their acquisition activity and have other similar operating characteristics. By excluding expensed acquisition costs and amortization of deferred acquisition fees,


CPA®:17 – Global 9/30/2014 10-Q – 48


management believes MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties. Acquisition fees and expenses include payments to the advisor or third parties. Acquisition fees and expenses under GAAP are considered operating expenses and as expenses included in the determination of net income and income from continuing operations, both of which are performance measures under GAAP. All paid and accrued acquisition fees and expenses will have negative effects on returns to stockholders, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to the property.
(c)
Under GAAP, certain intangibles are accounted for at cost and reviewed at least annually for impairment, and certain intangibles are assumed to diminish predictably in value over time and amortized, similar to depreciation and amortization of other real estate related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, management believes that by excluding charges relating to amortization of these intangibles, MFFO provides useful supplemental information on the performance of the real estate.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 
Market Risk
 
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, and equity prices. The primary risks to which we are exposed are interest rate risk, foreign currency exchange risk and we are also exposed to further market risk as a result of concentrations of tenants in certain industries and/or geographic regions. Adverse market factors can affect the ability of tenants in a particular industry/region to meet their respective lease obligations. In order to manage this risk, we view our collective tenant roster as a portfolio and the advisor attempts to diversify our portfolio through its investment decisions so that we are not overexposed to a particular industry or geographic region.

Generally, we do not use derivative instruments to hedge credit/market risks or for speculative purposes. However, from time to time, we may enter into foreign currency derivative contracts to hedge our foreign currency cash flow exposures.
 
Interest Rate Risk
 
The value of our real estate, related fixed-rate debt obligations, and note receivable is subject to fluctuations based on changes in interest rates. The value of our real estate is also subject to fluctuations based on local and regional economic conditions and changes in the creditworthiness of lessees, all of which may affect our ability to refinance property-level mortgage debt when balloon payments are scheduled. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political conditions, and other factors beyond our control. An increase in interest rates would likely cause the fair value of our owned assets to decrease. Increases in interest rates may also have an impact on the credit profile of certain tenants.

We are exposed to the impact of interest rate changes primarily through our borrowing activities. To limit this exposure, we attempt to obtain mortgage financing on a long-term, fixed-rate basis. However, from time to time, we or our investment partners may obtain variable-rate mortgage loans and, as a result, may enter into interest rate swap agreements or interest rate cap agreements with lenders. Interest rate swap agreements effectively convert the variable-rate debt service obligations of the loan to a fixed rate, while interest rate cap agreements limit the underlying interest rate from exceeding a specified strike rate. Interest rate swaps are agreements in which one party exchanges a stream of interest payments for a counterparty’s stream of cash flows over a specific period. These interest rate swaps and caps (where applicable) are derivative instruments designated as cash flow hedges on the forecasted interest payments on the debt obligation. The notional, or face, amount on which the swaps or caps are based is not exchanged. Our objective in using these derivatives is to limit our exposure to interest rate movements. At September 30, 2014, we estimated that the total fair value of our interest rate swaps, which are included in Other assets, net and Accounts payable, accrued expenses and other liabilities in the consolidated financial statements, was in a net liability position of $13.3 million (Note 9).
 


CPA®:17 – Global 9/30/2014 10-Q – 49


At September 30, 2014, all of our debt either bore interest at fixed rates, bore interest at floating rates, was swapped to a fixed rate, or bore interest at fixed rates that were scheduled to convert to then-prevailing market fixed rates at certain future points during their term. The annual interest rates on our fixed-rate debt at September 30, 2014 ranged from 2.0% to 8.0%. The contractual annual interest rates on our variable-rate debt at September 30, 2014 ranged from 2.7% to 6.1%. Our debt obligations are more fully described under Financial Condition – Summary of Financing in Item 2 above. The following table presents principal cash outflows for the remainder of 2014, each of the next four calendar years following December 31, 2014, and thereafter, based upon expected maturity dates of our debt obligations outstanding at September 30, 2014 (in thousands):
 
2014 (Remainder)
 
2015
 
2016
 
2017
 
2018
 
Thereafter
 
Total
 
Fair value
Fixed-rate debt (a)
$
7,094

 
$
62,863

 
$
69,684

 
$
195,062

 
$
26,617

 
$
918,981

 
$
1,280,301

 
$
1,326,051

Variable-rate debt (a)
$
1,711

 
$
6,916

 
$
212,374

 
$
159,208

 
$
128,805

 
$
132,908

 
$
641,922

 
$
640,452

__________
(a)
Amounts are based on the exchange rate at September 30, 2014, as applicable.
 
The estimated fair value of our fixed-rate debt and our variable-rate debt that currently bears interest at fixed rates or has effectively been converted to a fixed rate through the use of interest rate swaps was $1.8 billion. A decrease or increase in interest rates of 1% would change the estimated fair value of this debt at September 30, 2014 by an aggregate increase of $70.2 million or an aggregate decrease of $86.0 million, respectively.
 
As more fully described under Financial Condition – Summary of Financing in Item 2 above, our variable-rate debt in the table above bore interest at fixed rates at September 30, 2014 but has interest rate reset features that will change the fixed interest rates to then-prevailing market fixed rates at certain points during their term. This debt is generally not subject to short-term fluctuations in interest rates.
 
Foreign Currency Exchange Rate Risk
 
We own investments in Europe and in Asia, and as a result are subject to risk from the effects of exchange rate movements primarily in the euro and, to a lesser extent, the British pound sterling and the Japanese yen, which may affect future costs and cash flows. Although all of our foreign investments through the third quarter of 2014 were conducted in these currencies, we may conduct business in other currencies in the future as we seek to invest the remaining net proceeds from our follow-on offering internationally. We manage foreign currency exchange rate movements by generally placing both our debt service obligation to the lender and the tenant’s rental obligation to us in the same currency. This reduces our overall exposure to the actual equity that we have invested and the equity portion of our cash flow. In addition, we may use currency hedging to further reduce the exposure to our equity cash flow. We are generally a net receiver of these currencies (we receive more cash than we pay out), therefore our foreign operations benefit from a weaker U.S. dollar and are adversely affected by a stronger U.S. dollar, relative to the foreign currency.

We obtain mortgage financing in the local currency. To the extent that currency fluctuations increase or decrease rental revenues as translated to U.S. dollars, the change in debt service, as translated to U.S. dollars, will partially offset the effect of fluctuations in revenue and mitigate the risk from changes in foreign currency exchange rates.
 
Scheduled future minimum rents, exclusive of renewals, under non-cancelable operating leases, for our foreign operations as of September 30, 2014, during the remainder of 2014, each of the next four calendar years following December 31, 2014, and thereafter, are as follows (in thousands):
Lease Revenues (a)
 
2014 (Remainder)
 
2015
 
2016
 
2017
 
2018
 
Thereafter
 
Total
Euro (c)
 
$
24,334

 
$
97,259

 
$
97,260

 
$
97,260

 
$
97,260

 
$
1,000,542

 
$
1,413,915

British pound sterling (d)
 
1,476

 
5,863

 
5,863

 
5,864

 
5,864

 
71,257

 
96,187

Japanese yen (e)
 
677

 
2,709

 
2,768

 
2,787

 
2,788

 
9,045

 
20,774

 
 
$
26,487

 
$
105,831

 
$
105,891

 
$
105,911

 
$
105,912

 
$
1,080,844

 
$
1,530,876

 


CPA®:17 – Global 9/30/2014 10-Q – 50


Scheduled debt service payments (principal and interest) for mortgage notes payable for our foreign operations as of September 30, 2014, during the remainder of 2014, each of the next four calendar years following December 31, 2014, and thereafter, are as follows (in thousands):
Debt Service (a) (b)
 
2014 (Remainder)
 
2015
 
2016
 
2017
 
2018
 
Thereafter
 
Total
Euro (c)
 
$
13,033

 
$
73,862

 
$
246,042

 
$
143,936

 
$
19,629

 
$
91,966

 
$
588,468

British pound sterling (d)
 
439

 
1,852

 
15,585

 
1,625

 
1,584

 
14,701

 
35,786

Japanese yen (e)
 
120

 
475

 
476

 
24,281

 
—

 
—

 
25,352

 
 
$
13,592

 
$
76,189

 
$
262,103

 
$
169,842

 
$
21,213

 
$
106,667

 
$
649,606

___________
(a)
Amounts are based on the applicable exchange rates at September 30, 2014. Contractual rents and debt obligations are denominated in the functional currency of the country of each property.
(b)
Interest on unhedged variable-rate debt obligations was calculated using the applicable annual interest rates and balances outstanding at September 30, 2014.
(c)
We estimate that, for a 1% increase or decrease in the exchange rate between the euro and the U.S. dollar, there would be a corresponding change in the projected estimated property-level cash flow at September 30, 2014 of $8.3 million.
(d)
We estimate that, for a 1% increase or decrease in the exchange rate between the British pound sterling and the U.S. dollar, there would be a corresponding change in the projected estimated property-level cash flow at September 30, 2014 of $0.6 million.
(e)
We estimate that, for a 1% increase or decrease in the exchange rate between the Japanese yen and the U.S. dollar, there would be a corresponding change in the projected estimated property-level cash flow at September 30, 2014 of less than $0.1 million.
 
As a result of scheduled balloon payments on international non-recourse mortgage loans, projected debt service obligations exceed projected lease revenues in 2016 and 2017. In 2016 and 2017, balloon payments totaling $232.0 million and $152.5 million, respectively, are due on three and eight non-recourse mortgage loans, respectively, that are collateralized by properties that we own with affiliates. We currently anticipate that, by their respective due dates, we will have refinanced certain of these loans, but there can be no assurance that we will be able to do so on favorable terms, if at all. If that has not occurred, we would expect to use our cash resources to make these payments, if necessary.

Concentration of Credit Risk
 
Concentrations of credit risk arise when a number of tenants are engaged in similar business activities or have similar economic risks or conditions that could cause them to default on their lease obligations to us. We regularly monitor our portfolio to assess potential concentrations of credit risk. While we believe our portfolio is reasonably well diversified, it does contain concentrations in excess of 10%, based on the percentage of our ABR as of September 30, 2014, in certain areas. There were no significant changes to our portfolio concentrations at September 30, 2014 as compared to December 31, 2013.

Item 4. Controls and Procedures.
 
Disclosure Controls and Procedures
 
Our disclosure controls and procedures include our controls and other procedures designed to provide reasonable assurance that information required to be disclosed in this and other reports filed under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized, and reported within the required time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosures. It should be noted that no system of controls can provide complete assurance of achieving a company’s objectives and that future events may impact the effectiveness of a system of controls.
 
Our chief executive officer and chief financial officer, after conducting an evaluation, together with members of our management, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2014, have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective as of September 30, 2014 at a reasonable level of assurance.
 
Changes in Internal Control Over Financial Reporting
 
There have been no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


CPA®:17 – Global 9/30/2014 10-Q – 51


PART II

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 
Unregistered Sales of Equity Securities
 
During the three months ended September 30, 2014, we issued 685,734 shares of our common stock to the advisor as consideration for asset management fees. These shares were issued at $9.50 per share, which represents our most recently published NAV as approved by our board of directors at the date of issuance. Since none of these transactions were considered to have involved a “public offering” within the meaning of Section 4(a)(2) of the Securities Act, the shares issued were deemed to be exempt from registration. In acquiring our shares, the advisor represented that such interests were being acquired by it for the purposes of investment and not with a view to the distribution thereof. From inception and through September 30, 2014, we have issued 8,089,323 shares of our common stock to the advisor as aggregate consideration for asset management fees.
 
Issuer Purchases of Equity Securities 

The following table provides information with respect to repurchases of our common stock during the three months ended September 30, 2014:


Total number of
shares purchased (a)

Average price
paid per share

Total number of shares
purchased as part of
publicly announced plans or program (a)

Maximum number (or
approximate dollar value)
of shares that may yet be
purchased under the plans or program (a)
2014 Period




July

—


$
—


N/A

N/A
August

—


—


N/A

N/A
September

616,292


9.15


N/A

N/A
Total

616,292








___________
(a)
Represents shares of our common stock repurchased under our redemption plan, pursuant to which we may elect to redeem shares at the request of our stockholders subject to certain exceptions, conditions, and limitations. The maximum amount of shares purchasable by us in any period depends on a number of factors and is at the discretion of our board of directors. We satisfied all of the above redemption requests received during the three months ended September 30, 2014. We generally receive fees in connection with share redemptions.



CPA®:17 – Global 9/30/2014 10-Q – 52


Item 6. Exhibits. 

The following exhibits are filed with this Report, except where indicated.
 
Exhibit No.
 
Description
 
Method of Filing
31.1

 
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Filed herewith
 
 
 
 
 
31.2

 
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Filed herewith
 
 
 
 
 
32

 
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
Filed herewith
101

 
The following materials from Corporate Property Associates 17 – Global Incorporated’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, 2014 and December 31, 2013, (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2014 and 2013, (iii) Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended September 30, 2014 and 2013, (iv) Consolidated Statements of Equity for the nine months ended September 30, 2014 and the year ended December 31, 2013, (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013, and (vi) Notes to Consolidated Financial Statements.
 
Filed herewith




CPA®:17 – Global 9/30/2014 10-Q – 53


SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
Corporate Property Associates 17 – Global Incorporated
Date:
November 13, 2014
 
 
 
 
By:
/s/ Catherine D. Rice
 
 
 
Catherine D. Rice
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial Officer)
 
 
 
 
Date:
November 13, 2014
 
 
 
 
By:
/s/ Hisham A. Kader
 
 
 
Hisham A. Kader
 
 
 
Chief Accounting Officer
 
 
 
(Principal Accounting Officer)
 



CPA®:17 – Global 9/30/2014 10-Q – 54


EXHIBIT INDEX
  
The following exhibits are filed with this Report, except where indicated.
  
Exhibit No.
 
Description
 
Method of Filing
31.1

 
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Filed herewith
 
 
 
 
 
31.2

 
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Filed herewith
 
 
 
 
 
32

 
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
Filed herewith
101

 
The following materials from Corporate Property Associates 17 – Global Incorporated’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, 2014 and December 31, 2013, (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2014 and 2013, (iii) Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended September 30, 2014 and 2013, (iv) Consolidated Statements of Equity for the nine months ended September 30, 2014 and the year ended December 31, 2013, (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013, and (vi) Notes to Consolidated Financial Statements.
 
Filed herewith


Corporate Property Associates 17 - Global INC Reports

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