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EX-32 - EXHIBIT 32 - Corporate Property Associates 17 - Global INCcpa172017q310-qexh32.htm
EX-31.2 - EXHIBIT 31.2 - Corporate Property Associates 17 - Global INCcpa172017q310-qexh312.htm
EX-31.1 - EXHIBIT 31.1 - Corporate Property Associates 17 - Global INCcpa172017q310-qexh311.htm
 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017

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
cpa17logoa02a20.jpg
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 þ No o

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

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

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

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

Registrant has 351,056,852 shares of common stock, $0.001 par value, outstanding at November 3, 2017.

 



INDEX
 

Forward-Looking Statements

This Quarterly Report on Form 10-Q, or this Report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of Part I of this Report, contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. It is important to note that our actual results could be materially different from those projected in such forward-looking statements. You should exercise caution in relying on forward-looking statements as they involve known and unknown risks, uncertainties, and other factors that may materially affect our future results, performance, achievements, or transactions. Information on factors that could impact actual results and cause them to differ from what is anticipated in the forward-looking statements contained herein is included in this Report as well as in our other filings with the Securities and Exchange Commission, or the SEC, including but not limited to those described in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC on March 9, 2017, or the 2016 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 9/30/2017 10-Q1




PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

CORPORATE PROPERTY ASSOCIATES 17 – GLOBAL INCORPORATED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
 
September 30, 2017
 
December 31, 2016
Assets
 
 
 
Investments in real estate:
 
 
 
Real estate — Land, buildings and improvements
$
2,753,505

 
$
2,745,424

Operating real estate — Land, buildings and improvements
259,949

 
258,971

Net investments in direct financing leases
508,511

 
508,392

In-place lease intangible assets
627,385

 
620,149

Other intangible assets
110,133

 
103,918

Assets held for sale

 
14,850

Investments in real estate
4,259,483

 
4,251,704

Accumulated depreciation and amortization
(593,753
)
 
(506,238
)
Net investments in real estate
3,665,730

 
3,745,466

Equity investments in real estate
532,132

 
451,105

Cash and cash equivalents
161,183

 
273,635

Other assets, net
287,071

 
228,717

Total assets
$
4,646,116

 
$
4,698,923

Liabilities and Equity
 
 
 
Debt:
 
 
 
Mortgage debt, net
$
1,946,726

 
$
2,022,250

Senior Credit Facility, net
49,863

 
49,751

Debt, net
1,996,589

 
2,072,001

Accounts payable, accrued expenses and other liabilities
125,697

 
128,911

Below-market rent and other intangible liabilities, net
62,012

 
82,799

Deferred income taxes
35,529

 
32,655

Due to affiliates
10,579

 
11,723

Distributions payable
56,605

 
55,830

Total liabilities
2,287,011

 
2,383,919

Commitments and contingencies (Note 11)


 


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

 

Common stock, $0.001 par value; 900,000,000 shares authorized; and 348,318,611 and 343,575,840 shares, respectively, issued and outstanding
348

 
343

Additional paid-in capital
3,157,802

 
3,106,456

Distributions in excess of accumulated earnings
(808,200
)
 
(732,613
)
Accumulated other comprehensive loss
(90,220
)
 
(156,676
)
Total stockholders’ equity
2,259,730

 
2,217,510

Noncontrolling interests
99,375

 
97,494

Total equity
2,359,105

 
2,315,004

Total liabilities and equity
$
4,646,116

 
$
4,698,923


See Notes to Consolidated Financial Statements.


CPA®:17 – Global 9/30/2017 10-Q2


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,
 
2017
 
2016
 
2017
 
2016
Revenues
 
 
 
 
 
 
 
Lease revenues:
 
 
 
 
 
 
 
Rental income
$
72,913

 
$
75,368

 
$
235,921

 
$
218,451

Interest income from direct financing leases
14,554

 
14,614

 
43,831

 
43,519

Total lease revenues
87,467

 
89,982

 
279,752

 
261,970

Other real estate income
9,631

 
10,792

 
28,543

 
37,281

Other operating income
7,054

 
7,604

 
20,484

 
22,175

Other interest income
3,244

 
1,698

 
8,135

 
5,061

 
107,396

 
110,076

 
336,914

 
326,487

Operating Expenses
 
 
 
 
 
 
 
Depreciation and amortization
28,637

 
31,244

 
87,519

 
87,559

Property expenses
17,031

 
17,591

 
54,361

 
53,967

General and administrative
3,849

 
3,895

 
11,225

 
12,223

Other real estate expenses
3,114

 
4,083

 
9,893

 
13,966

Acquisition and other expenses
406

 
1,446

 
716

 
6,786

Impairment charges
276

 
29,183

 
4,795

 
29,183

 
53,313

 
87,442

 
168,509

 
203,684

Other Income and Expenses
 
 
 
 
 
 
 
Interest expense
(21,776
)
 
(25,048
)
 
(66,619
)
 
(75,027
)
Other income and (expenses)
6,455

 
2,715

 
22,385

 
7,081

Equity in (losses) earnings of equity method investments in real estate
(3,906
)
 
2,780

 
349

 
6,532

Loss on extinguishment of debt
(13
)
 
(15,990
)
 
(1,980
)
 
(23,580
)
Gain on change in control of interests

 

 

 
49,922

 
(19,240
)
 
(35,543
)
 
(45,865
)
 
(35,072
)
Income (loss) before income taxes and (loss) gain on sale of real estate
34,843

 
(12,909
)
 
122,540

 
87,731

Provision for income taxes
(994
)
 
(2,333
)
 
(2,730
)
 
(6,530
)
Income (loss) before (loss) gain on sale of real estate, net of tax
33,849

 
(15,242
)
 
119,810

 
81,201

(Loss) gain on sale of real estate, net of tax
(39
)
 
82,287

 
2,871

 
132,702

Net Income
33,810

 
67,045

 
122,681

 
213,903

Net income attributable to noncontrolling interests (inclusive of Available Cash Distributions to a related party of $5,459, $5,276, $19,240 and $17,803, respectively)
(9,081
)
 
(8,827
)
 
(29,135
)
 
(28,404
)
Net Income Attributable to CPA®:17 – Global
$
24,729

 
$
58,218

 
$
93,546

 
$
185,499

Basic and Diluted Earnings Per Share
$
0.07

 
$
0.17

 
$
0.27

 
$
0.54

Basic and Diluted Weighted-Average Shares Outstanding
349,415,725

 
343,209,362

 
347,641,667

 
341,325,683

 
 
 
 
 
 
 
 
Distributions Declared Per Share
$
0.1625

 
$
0.1625

 
$
0.4875

 
$
0.4875


See Notes to Consolidated Financial Statements.


CPA®:17 – Global 9/30/2017 10-Q3


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

Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net Income
$
33,810

 
$
67,045

 
$
122,681

 
$
213,903

Other Comprehensive Income
 
 
 
 
 
 
 
Foreign currency translation adjustments
28,980

 
3,707

 
87,898

 
15,442

Realized and unrealized loss on derivative instruments
(6,793
)
 
(2,392
)
 
(19,485
)
 
(9,997
)
Change in unrealized gain on marketable securities
1

 
8

 
32

 
22

 
22,188

 
1,323

 
68,445

 
5,467

Comprehensive Income
55,998

 
68,368

 
191,126

 
219,370

 
 
 
 
 
 
 
 
Amounts Attributable to Noncontrolling Interests
 
 
 
 
 
 
 
Net income
(9,081
)
 
(8,827
)
 
(29,135
)
 
(28,404
)
Foreign currency translation adjustments
(608
)
 
(108
)
 
(1,989
)
 
(548
)
Comprehensive income attributable to noncontrolling interests
(9,689
)
 
(8,935
)
 
(31,124
)
 
(28,952
)
Comprehensive Income Attributable to CPA®:17 – Global
$
46,309

 
$
59,433

 
$
160,002

 
$
190,418

 
See Notes to Consolidated Financial Statements.


CPA®:17 – Global 9/30/2017 10-Q4


CORPORATE PROPERTY ASSOCIATES 17 – GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
Nine Months Ended September 30, 2017 and 2016
(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
 
Total CPA®:17
– Global Stockholders
 
Noncontrolling Interests
 
Total
Balance at January 1, 2017
343,575,840

 
$
343

 
$
3,106,456

 
$
(732,613
)
 
$
(156,676
)
 
$
2,217,510

 
$
97,494

 
$
2,315,004

Shares issued
7,570,420

 
8

 
76,853

 
 
 
 
 
76,861

 
 
 
76,861

Shares issued to affiliates
2,045,220

 
2

 
20,691

 
 
 
 
 
20,693

 
 
 
20,693

Shares issued to directors
9,891

 

 
100

 
 
 
 
 
100

 
 
 
100

Distributions declared ($0.4875 per share)
 
 
 
 
 
 
(169,133
)
 
 
 
(169,133
)
 
 
 
(169,133
)
Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 

 
(29,244
)
 
(29,244
)
Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 

 
1

 
1

Net income
 
 
 
 
 
 
93,546

 
 
 
93,546

 
29,135

 
122,681

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 

 
 
 

Foreign currency translation adjustments
 
 
 
 
 
 
 
 
85,909

 
85,909

 
1,989

 
87,898

Realized and unrealized loss on derivative instruments
 
 
 
 
 
 
 
 
(19,485
)
 
(19,485
)
 
 
 
(19,485
)
Change in unrealized gain on marketable securities
 
 
 
 
 
 
 
 
32

 
32

 
 
 
32

Repurchase of shares
(4,882,760
)
 
(5
)
 
(46,298
)
 
 
 
 
 
(46,303
)
 
 
 
(46,303
)
Balance at September 30, 2017
348,318,611

 
$
348

 
$
3,157,802

 
$
(808,200
)
 
$
(90,220
)
 
$
2,259,730

 
$
99,375

 
$
2,359,105

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2016
337,065,419

 
$
337

 
$
3,037,727

 
$
(700,912
)
 
$
(139,805
)
 
$
2,197,347

 
$
97,248

 
$
2,294,595

Shares issued
7,725,537

 
8

 
77,710

 
 
 
 
 
77,718

 
 
 
77,718

Shares issued to affiliates
1,105,507

 
1

 
11,253

 
 
 
 
 
11,254

 
 
 
11,254

Shares issued to directors
9,766

 

 
100

 
 
 
 
 
100

 
 
 
100

Distributions declared ($0.4875 per share)
 
 
 
 
 
 
(166,218
)
 
 
 
(166,218
)
 
 
 
(166,218
)
Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 

 
(28,178
)
 
(28,178
)
Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 

 
6

 
6

Net income
 
 
 
 
 
 
185,499

 
 
 
185,499

 
28,404

 
213,903

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
14,894

 
14,894

 
548

 
15,442

Realized and unrealized loss on derivative instruments
 
 
 
 
 
 
 
 
(9,997
)
 
(9,997
)
 
 
 
(9,997
)
Change in unrealized gain on marketable securities
 
 
 
 
 
 
 
 
22

 
22

 
 
 
22

Repurchase of shares
(3,157,473
)
 
(3
)
 
(30,217
)
 
 
 
 
 
(30,220
)
 
 
 
(30,220
)
Balance at September 30, 2016
342,748,756

 
$
343

 
$
3,096,573

 
$
(681,631
)
 
$
(134,886
)
 
$
2,280,399

 
$
98,028

 
$
2,378,427


See Notes to Consolidated Financial Statements.


CPA®:17 – Global 9/30/2017 10-Q5


CORPORATE PROPERTY ASSOCIATES 17 – GLOBAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Nine Months Ended September 30,
 
2017
 
2016
Cash Flows — Operating Activities
 
 
 
Net Cash Provided by Operating Activities
$
195,822

 
$
151,716

Cash Flows — Investing Activities
 
 
 
Capital contributions to equity investments in real estate
(151,554
)
 
(8,348
)
Proceeds from sale of real estate
111,222

 
258,339

Return of capital from equity investments in real estate
32,350

 
29,997

Proceeds from repayment of preferred equity interest
27,000

 

Acquisitions of real estate and direct financing leases
(11,331
)
 
(79,528
)
Funding for build-to-suit projects and expansions
(10,153
)
 
(2,649
)
Value added taxes refunded in connection with acquisition of real estate
7,334

 
23,769

Payment of deferred acquisition fees to an affiliate
(3,826
)
 
(2,283
)
Changes in investing restricted cash
3,022

 
(42,892
)
Capital expenditures on owned real estate
(2,526
)
 
(9,585
)
Value added taxes paid in connection with acquisition of real estate
(1,884
)
 
(232
)
Other investing activities, net
1,646

 
1,852

Proceeds from sale of securities

 
610

Net Cash Provided by Investing Activities
1,300

 
169,050

Cash Flows — Financing Activities
 
 
 
Scheduled payments and prepayments of mortgage principal
(349,983
)
 
(155,183
)
Proceeds from mortgage financing
203,478

 
204,018

Distributions paid
(168,358
)
 
(165,296
)
Proceeds from issuance of shares
76,861

 
77,717

Repayments of Senior Credit Facility
(68,990
)
 
(289,558
)
Proceeds from Senior Credit Facility
67,261

 
225,693

Repurchase of shares
(46,303
)
 
(30,219
)
Distributions to noncontrolling interests
(29,244
)
 
(28,178
)
Payment of financing costs and mortgage deposits, net of deposits refunded
(1,026
)
 
(1,884
)
Other financing activities, net
(600
)
 
(78
)
Changes in financing restricted cash
(14
)
 
(455
)
Contributions from noncontrolling interests
1

 
6

Net Cash Used in Financing Activities
(316,917
)
 
(163,417
)
Change in Cash and Cash Equivalents During the Period
 
 
 
Effect of exchange rate changes on cash
7,343

 
500

Net (decrease) increase in cash and cash equivalents
(112,452
)
 
157,849

Cash and cash equivalents, beginning of period
273,635

 
152,889

Cash and cash equivalents, end of period
$
161,183

 
$
310,738


See Notes to Consolidated Financial Statements.


CPA®:17 – Global 9/30/2017 10-Q6


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

Note 1. Organization

Corporate Property Associates 17 – Global Incorporated, or CPA®:17 – Global, together with its consolidated subsidiaries, is a publicly owned, non-traded real estate investment trust, or REIT, that invests primarily in commercial real estate properties leased to companies both domestically and internationally. We were formed in 2007 and are managed by W. P. Carey Inc., or WPC, through one of its subsidiaries, or collectively, our Advisor. As a REIT, we are not subject to U.S. federal income taxation as long as we satisfy certain requirements, principally relating to the nature of our income and the level of our distributions, among other factors. We earn revenue primarily by leasing the properties we own to single corporate tenants, predominantly on a triple-net leased basis, which requires the tenant to pay substantially all of the costs associated with operating and maintaining the property. Revenue is subject to fluctuation due to the timing of new lease transactions, lease terminations, lease expirations, contractual rent adjustments, tenant defaults, sales of properties, and changes in foreign currency exchange rates.
 
Substantially all of our assets and liabilities are held by CPA®:17 Limited Partnership, or the Operating Partnership, and at September 30, 2017, 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, 2017, our portfolio was comprised of full or partial ownership interests in 410 properties, substantially all of which were fully-occupied and triple-net leased to 116 tenants, and totaled approximately 44.6 million square feet. In addition, our portfolio was comprised of full or partial ownership interests in 38 operating properties, including 37 self-storage properties and one hotel property, for an aggregate of approximately 2.5 million square feet. As opportunities arise, we may also make other types of commercial real estate-related investments.

We operate in two reportable business segments: Net Lease and Self Storage. Our Net Lease segment includes our domestic and foreign investments in net-leased properties, whether they are accounted for as operating or direct financing leases. Our Self Storage segment is comprised of our investments in self-storage properties. In addition, we have investments in loans receivable, commercial mortgage-backed securities, or CMBS, one hotel, and other properties, which are included in our All Other category (Note 14). Our reportable business segments and All Other category are the same as our reporting units.

We raised aggregate gross proceeds of approximately $2.9 billion from our initial public offering, which closed in April 2011, and our follow-on offering, which closed in January 2013. In addition, from inception through September 30, 2017, $650.8 million of distributions to our shareholders were reinvested in our common stock through our Distribution Reinvestment Plan, or DRIP.

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 generally accepted accounting principles in the United States, or GAAP.

In the opinion of management, the unaudited financial information for the interim periods presented in this Report reflects all normal and recurring adjustments necessary for a fair statement of financial position, results of operations, and cash flows. Our interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 2016, which are included in the 2016 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.



CPA®:17 – Global 9/30/2017 10-Q7


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 interest, as described below. The portions of equity in consolidated subsidiaries that are not attributable, directly or indirectly, to us are presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated.

When we obtain an economic interest in an entity, we evaluate the entity to determine if it should be deemed a variable interest entity, or VIE, and, if so, whether we are the primary beneficiary and are therefore required to consolidate the entity. We apply accounting guidance for consolidation of VIEs to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Fixed price purchase and renewal options within a lease, as well as certain decision-making rights within a loan or joint-venture agreement, can cause us to consider an entity a VIE. Limited partnerships and other similar entities that operate as a partnership will be considered a VIE unless the limited partners hold substantive kick-out rights or participation rights. Significant judgment is required to determine whether a VIE should be consolidated. We review the contractual arrangements provided for in the partnership agreement or other related contracts to determine whether the entity is considered a VIE, and to establish whether we have any variable interests in the VIE. We then compare our variable interests, if any, to those of the other variable interest holders to determine which party is the primary beneficiary of the VIE based on whether the entity (i) has the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The liabilities of these VIEs are non-recourse to us and can only be satisfied from each VIE’s respective assets.

At September 30, 2017, we considered 21 entities to be VIEs, eight of which we consolidated as we are considered the primary beneficiary and one of which we accounted for as a loan receivable. The following table presents a summary of selected financial data of the consolidated VIEs, included in the consolidated balance sheets (in thousands):
 
 
 
        As Revised (a) (b)
 
       As Revised (a) (c)
 
       As Revised (a) (d)
 
September 30, 2017
 
March 31, 2017
 
December 31, 2016
 
December 31, 2015
Real estate — Land, buildings and improvements
$
108,706

 
$
104,488

 
$
225,347

 
$
225,270

Operating real estate — Land, buildings and improvements

 

 
11,388

 

Net investments in direct financing leases
311,975

 
315,582

 
315,251

 
303,112

In-place lease intangible assets
8,549

 
7,949

 
8,795

 
7,909

Accumulated depreciation and amortization
(24,801
)
 
(21,631
)
 
(25,000
)
 
(19,049
)
Other assets, net
41,055

 
41,161

 
52,565

 
54,888

Total assets
449,271

 
450,876

 
590,526

 
578,989

 
 
 
 
 
 
 
 
Mortgage debt, net
$
127,969

 
$
129,414

 
$
192,839

 
$
187,639

Accounts payable, accrued expenses and other liabilities
6,969

 
6,922

 
11,187

 
12,352

Deferred income taxes
17,358

 
16,344

 
15,687

 
10,675

Total liabilities
152,676

 
153,051

 
220,077

 
211,060

___________
(a)
In the second quarter of 2017, we reclassified certain line items in our consolidated balance sheets, as described below. As a result, prior period amounts for certain line items included within Net investments in real estate have been reclassified to conform to the current period presentation.
(b)
The consolidated financial statements as of and for the three months ended March 31, 2017 accurately reflect the correct accounting treatment for VIEs. In the second quarter of 2017, we identified an error in the notes to the consolidated financial statements as of March 31, 2017 related to the VIE tabular disclosure above in which we improperly classified four consolidated entities as VIEs. We concluded that the disclosure error to the table above was not material to the notes to the consolidated financial statements. As such, we have corrected the information as of March 31, 2017 in the table above to correctly exclude these four entities, which reduced (i) Real estate — land, buildings and improvements by $111.1 million; (ii) in-place lease intangible assets by $21.8 million; (iii) accumulated depreciation and amortization by $22.4 million; (iv) other assets, net by $13.2 million; (v) total assets by $123.7 million; (vi) mortgage debt, net by $72.5 million; (vii) accounts payable, accrued expenses and other liabilities by $3.2 million; and (viii) total liabilities by $76.0 million.


CPA®:17 – Global 9/30/2017 10-Q8


Notes to Consolidated Financial Statements (Unaudited)

(c)
The consolidated financial statements as of and for the year ended December 31, 2016 accurately reflect the correct accounting treatment for VIEs. In the second quarter of 2017, we identified an error in the notes to the consolidated financial statements as of December 31, 2016 related to the VIE tabular disclosure above in which we improperly classified four consolidated entities as VIEs. We concluded that the disclosure error to the table above was not material to the notes to the consolidated financial statements. As such, we have corrected the information as of December 31, 2016 in the table above to correctly exclude these four entities, which reduced (i) Real estate — land, buildings and improvements by $111.1 million; (ii) in-place lease intangible assets by $21.8 million; (iii) accumulated depreciation and amortization by $21.6 million; (iv) other assets, net by $13.0 million; (v) total assets by $124.4 million; (vi) mortgage debt, net by $73.0 million; (vii) accounts payable, accrued expenses and other liabilities by $3.3 million; and (viii) total liabilities by $76.6 million.
(d)
The consolidated financial statements as of and for the year ended December 31, 2015 accurately reflect the correct accounting treatment for VIEs. In the second quarter of 2017, we identified an error in the notes to the consolidated financial statements as of December 31, 2015 related to the VIE tabular disclosure above in which we improperly classified four consolidated entities as VIEs. We concluded that the disclosure error to the table above was not material to the notes to the consolidated financial statements. As such, we have corrected the information as of December 31, 2015 in the table above to correctly exclude these four entities, which reduced (i) Real estate — land, buildings and improvements by $111.1 million; (ii) in-place lease intangible assets by $21.8 million; (iii) accumulated depreciation and amortization by $18.2 million; (iv) other assets, net by $11.8 million; (v) total assets by $126.5 million; (vi) mortgage debt, net by $75.2 million; (vii) accounts payable, accrued expenses and other liabilities by $3.3 million; and (viii) total liabilities by $78.8 million.

At September 30, 2017 and December 31, 2016, we had 12 and 13 unconsolidated VIEs, respectively, which we account for under the equity method of accounting. We do not consolidate these entities because we are not the primary beneficiary and the nature of our involvement in the activities of these entities allows us to exercise significant influence on, but does not give us power over, decisions that significantly affect the economic performance of these entities. As of September 30, 2017 and December 31, 2016, the net carrying amount of our investments in these entities was $404.6 million and $377.4 million, respectively, and our maximum exposure to loss in these entities was limited to our investments.

At September 30, 2017, we had an investment in a tenancy-in-common interest in a portfolio of international properties. Consolidation of this investment is not required as such interest does not qualify as a VIE and does not meet the control requirement for consolidation. Accordingly, we account for this investment 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 this investment.

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. At September 30, 2017, none of our equity investments had carrying values below zero.

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

In the second quarter of 2017, we reclassified in-place lease intangible assets, net and other intangible assets, net to be included within Net investments in real estate in our consolidated balance sheets. The accumulated amortization on these assets is now included in Accumulated depreciation and amortization in our consolidated balance sheets. In addition, we reclassified goodwill, which was previously included in other intangibles, net to be included in Other assets, net. Prior period balances have been reclassified to conform to the current period presentation.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 does not apply to our lease revenues, which constitute a majority of our revenues, but will primarily apply to revenues generated from our operating properties. We will adopt this guidance for our interim and annual periods beginning January 1, 2018 using one of two methods: retrospective restatement for each reporting period presented at the time of adoption, or retrospectively with the cumulative effect of initially applying this guidance recognized at the date of initial application. We have not decided which method of adoption we will use. We are evaluating the impact of the new standard and have not yet determined if it will have a material impact on our business or our consolidated financial statements.



CPA®:17 – Global 9/30/2017 10-Q9


Notes to Consolidated Financial Statements (Unaudited)

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 outlines a new model for accounting by lessees, whereby their rights and obligations under substantially all leases, existing and new, would be capitalized and recorded on the balance sheet. For lessors, however, the accounting remains largely unchanged from the current model, with the distinction between operating and financing leases retained, but updated to align with certain changes to the lessee model and the new revenue recognition standard. The new standard also replaces existing sale-leaseback guidance with a new model applicable to both lessees and lessors. In addition, it also requires lessors to record gross revenues and expenses associated with activities that do not transfer services to the lessee (such as real estate taxes and insurance). Additionally, the new standard requires extensive quantitative and qualitative disclosures. The new standard must be adopted using a modified retrospective transition of the new guidance and provides for certain practical expedients. Transition will require application of the new model at the beginning of the earliest comparative period presented. We will adopt this guidance for our interim and annual periods beginning January 1, 2019. Early application will be permitted for all entities. The ASU is expected to impact our consolidated financial statements as we have land lease arrangements for which we are the lessee. We are evaluating the impact of the new standard and have not yet determined if it will have a material impact on our business or our consolidated financial statements.

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

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 intends to reduce diversity in practice for certain cash flow classifications, including, but not limited to (i) debt prepayment or debt extinguishment costs, (ii) contingent consideration payments made after a business combination, (iii) proceeds from the settlement of insurance claims, and (iv) distributions received from equity method investees. ASU 2016-15 will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early application of the guidance permitted. We are in the process of evaluating the impact of adopting ASU 2016-15 on our consolidated financial statements and will retrospectively adopt the standard for the fiscal year beginning January 1, 2018.

In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control. ASU 2016-17 changes how a reporting entity that is a decision maker should consider indirect interests in a VIE held through an entity under common control. If a decision maker must evaluate whether it is the primary beneficiary of a VIE, it will only need to consider its proportionate indirect interest in the VIE held through a common control party. ASU 2016-17 amends ASU 2015-02, which we adopted on January 1, 2016, and which currently directs the decision maker to treat the common control party’s interest in the VIE as if the decision maker held the interest itself. ASU 2016-17 is effective for public business entities in fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We adopted ASU 2016-17 as of January 1, 2017 on a prospective basis. The adoption of this standard did not have a material impact on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 intends to reduce diversity in practice for the classification and presentation of changes in restricted cash on the statement of cash flows. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We are in the process of evaluating the impact of adopting ASU 2016-18 on our consolidated financial statements and will retrospectively adopt the standard for the fiscal year beginning January 1, 2018.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 intends to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business: inputs, processes, and outputs. While an integrated set of assets and activities, collectively referred to as a “set,” that is a business usually has outputs, outputs are not


CPA®:17 – Global 9/30/2017 10-Q10


Notes to Consolidated Financial Statements (Unaudited)

required to be present. ASU 2017-01 provides a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. ASU 2017-01 will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We elected to early adopt ASU 2017-01 on January 1, 2017 on a prospective basis. While our acquisitions have historically been classified as either business combinations or asset acquisitions, certain acquisitions that were classified as business combinations by us likely would have been considered asset acquisitions under the new standard. As a result, transaction costs are more likely to be capitalized since we expect most of our future acquisitions to be classified as asset acquisitions under this new standard. In addition, goodwill that was previously allocated to businesses that were sold or held for sale will no longer be allocated and written off upon sale if future sales were deemed to be sales of assets and not businesses.

In January 2017, the FASB issued ASU 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 removes step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. ASU 2017-04 will be effective for public business entities in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years in which a goodwill impairment test is performed, with early adoption permitted. We adopted ASU 2017-04 as of April 1, 2017 on a prospective basis. The adoption of this standard did not have a material impact on our consolidated financial statements.

In February 2017, the FASB issued ASU 2017-05, Other Income — Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20). ASU 2017-05 clarifies that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. The amendments define the term “in substance nonfinancial asset,” in part, as a financial asset promised to a counterparty in a contract if substantially all of the fair value of the assets (recognized and unrecognized) that are promised to the counterparty in the contract is concentrated in nonfinancial assets. If substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets, then all of the financial assets promised to the counterparty are in substance nonfinancial assets within the scope of Subtopic 610-20. This amendment also clarifies that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. For example, a parent company may transfer control of nonfinancial assets by transferring ownership interests in a consolidated subsidiary. ASU 2017-05 is effective for periods beginning after December 15, 2017, with early application permitted for fiscal years beginning after December 15, 2016. We are in the process of evaluating the impact of ASU 2017-05 on our consolidated financial statements and will adopt the standard for the fiscal year beginning January 1, 2018.

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

Note 3. Agreements and Transactions with Related Parties

Transactions with Our Advisor

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



CPA®:17 – Global 9/30/2017 10-Q11


Notes to Consolidated Financial Statements (Unaudited)

The following tables present a summary of fees we paid, expenses we reimbursed, and distributions we made to our Advisor and other affiliates in accordance with the relevant agreements (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Amounts Included in the Consolidated Statements of Income
 
 
 
 
 
 
 
Asset management fees
$
7,362

 
$
7,489

 
$
22,026

 
$
22,456

Available Cash Distributions
5,459

 
5,276

 
19,240

 
17,803

Personnel and overhead reimbursements
2,134

 
2,293

 
6,735

 
7,318

Director compensation
153

 
153

 
259

 
258

Interest expense on deferred acquisition fees and loan from affiliate
67

 
47

 
199

 
176

Acquisition expenses

 
1,403

 

 
2,844

 
$
15,175

 
$
16,661

 
$
48,459

 
$
50,855

Acquisition Fees Capitalized
 
 
 
 
 
 
 
Current acquisition fees
$
149

 
$

 
$
3,972

 
$
550

Deferred acquisition fees
119

 

 
3,177

 
440

Personnel and overhead reimbursements
77

 
108

 
563

 
221

 
$
345

 
$
108

 
$
7,712

 
$
1,211


The following table presents a summary of amounts included in Due to affiliates in the consolidated financial statements (in thousands):
 
September 30, 2017
 
December 31, 2016
Due to Affiliates
 
 
 
Deferred acquisition fees, including interest
$
5,662

 
$
6,584

Asset management fees payable
2,460

 
2,250

Reimbursable costs
2,088

 
2,299

Accounts payable
224

 
360

Current acquisition fees
145

 
230

 
$
10,579

 
$
11,723


Acquisition and Disposition Fees

We pay our 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, which is a non-compounded cumulative distribution of 5.0% per annum (based initially on our invested capital). Acquisition fees payable to our Advisor with respect to our long-term, net-leased 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 2.0%, typically paid over three years and subject to the 5.0% preferred return described above. The preferred return was achieved as of each of the cumulative periods ended September 30, 2017 and December 31, 2016. For certain types of non-long term net-leased investments, initial acquisition fees are between 1.0% and 1.75% of the equity invested plus the related acquisition fees, with no portion of the payment 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 5.0%. The cumulative total acquisition costs, including acquisition fees paid to the advisor, may not exceed 6.0% of the aggregate contract purchase price of all investments, which is measured at the end of each year. Our cumulative total acquisition costs have not exceeded the amount that would require our Advisor to reimburse us.



CPA®:17 – Global 9/30/2017 10-Q12


Notes to Consolidated Financial Statements (Unaudited)

Our Advisor may be entitled to receive a disposition fee equal to the lesser of (i) 50.0% of the competitive real estate commission (as defined in the advisory agreement) or (ii) 3.0% of the contract sales price of the investment being sold; however, payment of such fees is subordinated to the 5.0% preferred return. These fees are payable at the discretion of our board of directors.

Asset Management Fees

As described in the advisory agreement, we pay our 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. Asset management fees are payable in cash and/or shares of our common stock at our option, after consultation with our Advisor. If our Advisor receives all or a portion of its fees in shares, the number of shares issued is determined by dividing the dollar amount of fees by our most recently published estimated net asset value per share, or NAV, which was $10.11 as of December 31, 2016. For the nine months ended September 30, 2017, we paid our Advisor 100.0% of its asset management fees in shares of our common stock. For the year ended December 31, 2016, we paid our Advisor 50.0% of its asset management fees in cash and 50.0% in shares of our common stock. At September 30, 2017, our Advisor owned 13,919,229 shares (4.0%) of our common stock. Asset management fees are included in Property expenses in the consolidated financial statements.

Available Cash Distribution

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

Under the terms of the advisory agreement, our Advisor allocates a portion of its personnel and overhead expenses to us and the other entities that are managed by our Advisor, including Corporate Property Associates 18 – Global Incorporated; Carey Watermark Investors Incorporated; Carey Watermark Investors 2 Incorporated; and Carey European Student Housing Fund I, L.P.; collectively referred to as the Managed Programs. Prior to September 11, 2017, our Advisor also allocated a portion of its personnel and overhead expenses to Carey Credit Income Fund (now known as Guggenheim Credit Income Fund). Our Advisor allocates these expenses to us on the basis of our trailing four quarters of reported revenues in comparison to those of WPC and other entities managed by WPC and its affiliates.

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

Excess Operating Expenses

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



CPA®:17 – Global 9/30/2017 10-Q13


Notes to Consolidated Financial Statements (Unaudited)

Jointly Owned Investments and Other Transactions with Affiliates

At September 30, 2017, we owned interests ranging from 6% to 97% in jointly owned investments, with the remaining interests held by affiliates or by third parties. We consolidate certain of these investments and account for the remainder under the equity method of accounting. We also owned an interest in a jointly controlled tenancy-in-common interest in several properties, which we account for under the equity method of accounting (Note 6). At December 31, 2016, we had $0.9 million due from an affiliate related to one of our jointly owned investments, which has since been repaid.

Note 4. Real Estate, Operating Real Estate, and Assets Held for Sale

Real Estate — Land, Buildings and Improvements

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, 2017
 
December 31, 2016
Land
$
564,268

 
$
563,050

Buildings and improvements
2,188,256

 
2,182,374

Real estate under construction
981

 

Less: Accumulated depreciation
(336,331
)
 
(280,657
)
 
$
2,417,174

 
$
2,464,767


During the nine months ended September 30, 2017, the U.S. dollar weakened against the euro, as the end-of-period rate for the U.S. dollar in relation to the euro increased by 12.0% to $1.1806 from $1.0541. As a result, the carrying value of our real estate increased by $127.5 million from December 31, 2016 to September 30, 2017.

Depreciation expense, including the effect of foreign currency translation, on our real estate was $16.2 million and $15.9 million for the three months ended September 30, 2017 and 2016, respectively, and $48.4 million and $47.9 million for the nine months ended September 30, 2017 and 2016, respectively.

Acquisitions of Real Estate

On February 2, 2017, we acquired an office facility in Buffalo Grove, Illinois, which was deemed to be a real estate asset acquisition, at a total cost of $11.5 million, including land of $2.0 million, building of $7.5 million (including acquisition-related costs of $0.5 million, which were capitalized), and an intangible asset of $2.0 million (Note 7).

On July 19, 2017, we acquired a parcel of land located in Zary, Poland for $0.4 million, which is adjacent to an industrial facility we previously acquired. The land will be used to construct an expansion to the existing facility, which is expected to cost $5.9 million (amounts are based on the exchange rate of the euro on the date of acquisition) and to be completed in 2018.

Operating Real Estate — Land, Buildings and Improvements

Operating real estate, which consists of our wholly owned domestic self-storage operations, at cost, is summarized as follows (in thousands):
 
September 30, 2017
 
December 31, 2016
Land
$
55,645

 
$
55,645

Buildings and improvements
204,304

 
203,326

Less: Accumulated depreciation
(23,909
)
 
(18,876
)
 
$
236,040

 
$
240,095


Depreciation expense on our operating real estate was $1.7 million for both the three months ended September 30, 2017 and 2016, and $5.0 million and $6.1 million for the nine months ended September 30, 2017 and 2016, respectively.



CPA®:17 – Global 9/30/2017 10-Q14


Notes to Consolidated Financial Statements (Unaudited)

Dispositions and Assets Held for Sale

Below is a summary of our properties held for sale (in thousands):
 
September 30, 2017
 
December 31, 2016
Real estate, net
$

 
$
14,850

Assets held for sale
$

 
$
14,850


At December 31, 2016, we had a property classified as Assets held for sale. On March 13, 2017, we sold this property for $14.1 million, net of closing costs, to a third party. In addition, during the nine months ended September 30, 2017, we sold three net-leased properties, two of which were accounted for as direct financing leases (Note 5, Note 13).

I-drive Property Disposition and I-drive Wheel Restructuring

In 2012, we entered into a contract for the construction of a domestic build-to-suit project with IDL Master Tenant, LLC, a developer, for the construction of an entertainment complex, which we refer to as the I-drive Property, and an observation wheel, which we refer to as the I-drive Wheel, at the I-drive Property. We had accounted for the construction of the I-drive Property as Real estate under construction. The funding of the I-drive Wheel was provided in the form of a $50.0 million loan, which we refer to as the Wheel Loan, pursuant to the guidance of the acquisition, development and construction of real estate, or ADC Arrangement. We accounted for the Wheel Loan under the equity method of accounting as the characteristics of the arrangement with the third-party developer were more similar to a jointly owned investment or partnership rather than a loan (Note 6). During 2015, the construction on both the I-drive Property and the I-drive Wheel were completed and placed into service.

On March 17, 2017, the developer exercised its purchase option and acquired the I-drive Property for a purchase price of $117.5 million (Note 13). The $60.0 million non-recourse mortgage loan encumbering the I-drive Property was repaid at closing by the buyer (Note 10). In connection with the disposition, we provided seller financing in the form of a $34.0 million mezzanine loan (Note 5), which was considered to be a non-cash investing activity, and the sale was accounted for under the cost recovery method. As a result, the $2.1 million gain on sale was deferred and will be recognized upon recovery of the cost of the property. As a result of the sale of the I-drive Property, we no longer consider this entity to be a VIE at September 30, 2017.

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 loans receivable. Operating leases are not included in finance receivables as such amounts are not recognized as an asset in the consolidated financial statements. Our loans receivable are included in Other assets, net in the consolidated financial statements. Earnings from our loans receivable are included in Other interest income in the consolidated financial statements.

Net Investments in Direct Financing Leases

In June 2017, we sold two net-leased properties located in Lima and Miamisburg, Ohio, to Civitas Media, LLC for net proceeds of $6.1 million (Note 13). These properties were previously accounted for as direct financing leases. We retained the remaining four net-leased properties leased to this tenant.

Loans Receivable

In connection with the I-drive Property disposition (Note 4, Note 13), on March 17, 2017 we provided seller financing in the form of a $34.0 million mezzanine loan (Note 4) to the developer of the I-drive Property, which has an interest rate of 9.0% and is scheduled to mature in April 2019 with an option to extend to April 2020.

In addition to the sale of the I-drive Property, on March 17, 2017 we restructured the Wheel Loan (Note 4). Under the original ADC Arrangement that was accounted for as an equity method investment (Note 6), (i) we provided all the equity for the initial construction and carried all of the risk, (ii) all interest and fees on the Wheel Loan were added to the Wheel Loan balance, and (iii) we participated in the residual profits of the I-drive Wheel post-construction through rents we received pursuant to a ground lease. The Wheel Loan was amended as follows:

$5.0 million of principal was repaid.


CPA®:17 – Global 9/30/2017 10-Q15


Notes to Consolidated Financial Statements (Unaudited)

$10.0 million of principal was converted into separate loans to two individuals associated with the developer. These loans are guaranteed by their 80.0% equity interest in the I-Shops Property that we originally owned and sold back to the developer in 2014. The loans have an interest rate of 6.5% and are scheduled to mature in December 2018 with an option to extend to April 2020.
We reduced the interest rate to 6.5% on the remaining $35.0 million and extended the maturity in December 2018 with an option to extend to December 2020.

In connection with the restructuring of the Wheel Loan, we determined that the loan no longer meets ADC equity investment classification since (i) the construction is now completed, (ii) the borrowers have contributed cash and equity pledges as security which substantially reduced our risk, and (iii) we no longer participate in the residual profits through the ground lease rents (pursuant to the aforementioned I-drive Property disposition mentioned in Note 4). As a result, we reclassed the combined $45.0 million loan balance noted above to loan receivable, included in Other Assets, net which was a non-cash investing activity. A deferred gain of $16.4 million was recorded during the first quarter which was the difference between the fair value of the loan of $35.0 million and the $18.6 million carrying value of our previously held equity investment on March 17, 2017. The deferred gain related to the restructuring of the Wheel Loan will be recognized into income upon recovery of the cost of the Wheel Loan.

At September 30, 2017 and December 31, 2016, we had five and one loans receivable with outstanding balances of $110.5 million and $31.5 million, respectively, which are included in Other assets, net in the consolidated financial statements.

Credit Quality of Finance Receivables

We generally seek investments in facilities that we believe are critical to a tenant’s business and have a low risk of tenant default. At both September 30, 2017 and December 31, 2016, we had no significant finance receivable balances that were past due and we had not established any allowances for credit losses. Additionally, there were no modifications of finance receivables during the nine months ended September 30, 2017 or the year ended December 31, 2016. 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 2017.

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, 2017
 
December 31, 2016
 
September 30, 2017
 
December 31, 2016
1
 
 
 
$

 
$

2
 
2
 
2
 
62,551

 
61,949

3
 
8
 
9
 
379,168

 
412,075

4
 
8
 
5
 
165,515

 
65,868

5
 
1
 
 
11,777

 

 
 
 
 
 
 
$
619,011

 
$
539,892


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.

As required by current authoritative accounting guidance, 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 ADC Arrangements, under which we have provided 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.


CPA®:17 – Global 9/30/2017 10-Q16


Notes to Consolidated Financial Statements (Unaudited)


The following table presents Equity in (losses) earnings of equity method investments in real estate, which represents our proportionate share of the income or losses of these investments, as well as amortization of basis differences related to purchase accounting adjustments (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Equity (Losses) Earnings from Equity Investments:
 
 
 
 
 
 
 
Net Lease (a)
$
(414
)
 
$
4,056

 
$
7,016

 
$
12,369

All Other
(2,757
)
 
(174
)
 
(4,405
)
 
(2,035
)
Self Storage

 

 

 
(394
)
 
(3,171
)
 
3,882

 
2,611

 
9,940

Amortization of Basis Differences on Equity Investments:
 
 
 
 
 
 
 
Net Lease
(650
)
 
(667
)
 
(1,775
)
 
(2,307
)
All Other
(85
)
 
(435
)
 
(487
)
 
(1,062
)
Self Storage

 

 

 
(39
)
 
(735
)
 
(1,102
)
 
(2,262
)
 
(3,408
)
Equity in (losses) earnings of equity method investments in real estate
$
(3,906
)
 
$
2,780

 
$
349

 
$
6,532

__________
(a)
For the three and nine months ended September 30, 2017, amounts include impairment charges of $6.3 million and $8.8 million, respectively, related to our equity investments (Note 8).



CPA®:17 – Global 9/30/2017 10-Q17


Notes to Consolidated Financial Statements (Unaudited)

The following table sets forth our ownership interests in our equity method 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, 2017
 
September 30, 2017
 
December 31, 2016
Net Lease:
 
 
 
 
 
 
 
 
Hellweg Die Profi-Baumärkte GmbH & Co. KG (referred to as Hellweg 2) (a) (b) (c)
 
WPC
 
37%
 
$
107,956

 
$
10,125

Kesko Senukai (a) (d)
 
Third Party
 
70%
 
56,960

 

Jumbo Logistiek Vastgoed B.V. (a) (e)
 
WPC
 
85%
 
56,273

 
54,621

U-Haul Moving Partners, Inc. and Mercury Partners, LP (b)
 
WPC
 
12%
 
36,324

 
37,601

Bank Pekao S.A. (a) (b)
 
CPA®:18 – Global
 
50%
 
25,752

 
23,025

BPS Nevada, LLC (b) (f)
 
Third Party
 
15%
 
23,867

 
23,036

State Farm (b)
 
CPA®:18 – Global
 
50%
 
16,787

 
17,603

Berry Global Inc. (b)
 
WPC
 
50%
 
14,625

 
14,974

Tesco Global Aruhazak Zrt. (a) (b)
 
WPC
 
49%
 
11,078

 
10,807

Eroski Sociedad Cooperativa — Mallorca (a)
 
WPC
 
30%
 
7,448

 
6,576

Apply Sørco AS (referred to as Apply) (a) (g)
 
CPA®:18 – Global
 
49%
 
6,809

 
12,528

Konzum d.d. (referred to as Agrokor) (a) (b) (h)
 
CPA®:18 – Global
 
20%
 
5,122

 
7,079

Dick’s Sporting Goods, Inc. (b)
 
WPC
 
45%
 
3,883

 
4,367

 
 
 
 
 
 
372,884

 
222,342

All Other:
 
 
 
 
 
 
 
 
Shelborne Operating Associates, LLC (referred to as Shelborne) (b) (f) (i) (j)
 
Third Party
 
33%
 
121,193

 
127,424

BG LLH, LLC (b) (f)
 
Third Party
 
6%
 
38,055

 
36,756

IDL Wheel Tenant, LLC (k)
 
Third Party
 
N/A
 

 
37,124

BPS Nevada, LLC — Preferred Equity (b) (l)
 
Third Party
 
N/A
 

 
27,459

 
 
 
 
 
 
159,248

 
228,763

 
 
 
 
 
 
$
532,132

 
$
451,105

__________
(a)
The carrying value of this investment is affected by the impact of fluctuations in the exchange rate of the applicable foreign currency.
(b)
This investment is a VIE.
(c)
In January 2017, our Hellweg 2 jointly owned equity investment repaid non-recourse mortgage loans at maturity with an aggregate principal balance of approximately $243.8 million, of which we contributed $90.3 million (amounts are based on the exchange rate of the euro as of the date of repayment). This contribution was accounted for as a capital contribution to equity investments in real estate.
(d)
On May 23, 2017, we entered into a joint venture investment to acquire a 70% interest in a real estate portfolio for a total cost of $141.5 million (dollar amount is based on the exchange rate of the euro on the date of acquisition), which excludes our portion of mortgage financing totaling $88.0 million. This was structured as a sale-leaseback transaction in which the tenant retained the remaining 30% interest in the real estate portfolio. The portfolio includes 18 retail stores and one warehouse collectively located in Lithuania, Latvia, and Estonia, which we will account for as an equity method investment as the minority shareholders have significant influence. All major decisions that significantly impact the economic performance of the entity require a unanimous decision vote from each of the shareholders.
(e)
This investment represents a tenancy-in-common interest, whereby the property is encumbered by debt for which we are jointly and severally liable. The co-obligor is WPC and the amount due under the arrangement was approximately $75.4 million at September 30, 2017. Of this amount, $64.1 million represents the amount we are liable for and is included within the carrying value of this investment at September 30, 2017.
(f)
This investment is reported using the hypothetical liquidation at book value model.
(g)
During the three and nine months ended September 30, 2017, we recognized an impairment charge of $6.3 million related to our Apply equity method investment (Note 8).
(h)
During the nine months ended September 30, 2017, we recognized an impairment charge of $2.5 million related to our Agrokor equity method investment (Note 8).


CPA®:17 – Global 9/30/2017 10-Q18


Notes to Consolidated Financial Statements (Unaudited)

(i)
Represents a domestic ADC Arrangement. There was no unfunded balance on the loan related to this investment at September 30, 2017. On October 3, 2017, we restructured our Shelborne hotel investment by converting our loan to equity (Note 15).
(j)
During the three and nine months ended September 30, 2017, as a result of Hurricane Irma, we incurred damage at the hotel, which is expected to be covered by insurance after the estimated deductible of $1.7 million is paid. We recognized this charge within Equity in (losses) earnings of equity method investments in real estate on our consolidated financial statements.
(k)
As of December 31, 2016, the carrying value included our investment in the Wheel Loan (Note 5) that was considered to be a VIE and was reported using the hypothetical liquidation at book value model. The Wheel Loan was restructured on March 17, 2017 and, as a result, we have reclassified the equity investment to a loan receivable, included in Other assets, net and will no longer consider this to be a VIE.
(l)
This investment represents a preferred equity interest, with a preferred rate of return of 12%. On May 19, 2017, we received the full repayment of our preferred equity interest totaling $27.0 million; therefore, the preferred equity interest is now retired.

Aggregate distributions from our interests in unconsolidated real estate investments were $10.6 million and $24.5 million for the three months ended September 30, 2017 and 2016, respectively, and $44.3 million and $49.1 million, for the nine months ended September 30, 2017 and 2016, respectively. At September 30, 2017 and December 31, 2016, the unamortized basis differences on our equity investments were $23.8 million and $19.1 million, respectively.

Note 7. Intangible Assets and Liabilities

In-place lease intangibles are included in In-place lease intangible assets in the consolidated financial statements. Above-market rent and below-market ground lease (as lessee) intangibles are included in Other intangible assets in the consolidated financial statements. Goodwill is included in Other 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, 2017 (Note 4), we recorded an In-place lease intangible asset of $2.0 million, which has an expected life of 20 years.

Intangible assets and liabilities are summarized as follows (in thousands):
 
 
 
September 30, 2017
 
December 31, 2016
 
Amortization Period (Years)
 
Gross Carrying Amount
 
Accumulated
Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated
Amortization
 
Net Carrying Amount
Finite-Lived Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
In-place lease
2 - 53
 
$
627,385

 
$
(202,882
)
 
$
424,503

 
$
620,149

 
$
(181,598
)
 
$
438,551

Above-market rent
5 - 40
 
97,521

 
(29,969
)
 
67,552

 
91,895

 
(24,599
)
 
67,296

Below-market ground leases
55 - 94
 
12,612

 
(662
)
 
11,950

 
12,023

 
(508
)
 
11,515

 
 
 
737,518

 
(233,513
)
 
504,005

 
724,067

 
(206,705
)
 
517,362

Indefinite-Lived Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill
 
 
304

 

 
304

 
304

 

 
304

Total intangible assets
 
 
$
737,822

 
$
(233,513
)
 
$
504,309

 
$
724,371

 
$
(206,705
)
 
$
517,666

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finite-Lived Intangible Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Below-market rent
7 - 53
 
$
(81,973
)
 
$
21,049

 
$
(60,924
)
 
$
(120,725
)
 
$
39,025

 
$
(81,700
)
Above-market ground lease
49 - 88
 
(1,145
)
 
57

 
(1,088
)
 
(1,145
)
 
46

 
(1,099
)
Total intangible liabilities
 
 
$
(83,118
)
 
$
21,106

 
$
(62,012
)
 
$
(121,870
)
 
$
39,071

 
$
(82,799
)



CPA®:17 – Global 9/30/2017 10-Q19


Notes to Consolidated Financial Statements (Unaudited)

Amortization of below-market rent and above-market rent intangibles is recorded as an adjustment to Rental income; amortization of below-market ground lease and above-market ground lease intangibles is included in Property expenses; and amortization of in-place lease intangibles is included in Depreciation and amortization. Amortization of below- and above-market rent intangibles, including the effect of foreign currency translation, decreased Rental income by $0.3 million for the three months ended September 30, 2017 and increased Rental income by $4.1 million for the three months ended September 30, 2016, and $18.2 million and $4.3 million for the nine months ended September 30, 2017 and 2016, respectively. The nine months ended September 30, 2017 includes the impact of a below-market rent intangible liability write off of $15.7 million recognized in conjunction with the KBR lease modification (Note 13) that occurred during the current year. Net amortization expense of all of our other net intangible assets totaled $10.7 million and $13.6 million for the three months ended September 30, 2017 and 2016, respectively, and $34.0 million and $33.4 million for the nine months ended September 30, 2017 and 2016, respectively.

Note 8. Fair Value Measurements

The fair value of an asset is defined as the exit price, which is the amount that would either be received when an asset is sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a three-tier fair value hierarchy based on the inputs used in measuring fair value. These tiers are: Level 1, for which quoted market prices for identical instruments are available in active markets, such as money market funds, equity securities, and U.S. Treasury securities; Level 2, for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument, such as certain derivative instruments including interest rate caps, interest rate swaps, foreign currency forward contracts, and foreign currency collars; and Level 3, for securities 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 caps, interest rate swaps, foreign currency forward contracts, stock warrants, and foreign currency collars (Note 9). The interest rate caps, interest rate swaps, foreign currency forward contracts, and foreign currency collars 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 were measured at fair value using internal valuation models that incorporated market inputs and our own assumptions about future cash flows. We classified these assets as Level 3 because they are not traded in an active market.

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

We did not have any transfers into or out of Level 1, Level 2, and Level 3 measurements during the nine months ended September 30, 2017 and 2016. Gains and losses (realized and unrealized) included in earnings are reported within Other income and (expenses) on our consolidated financial statements.

Our other financial instruments had the following carrying values and fair values as of the dates shown (dollars in thousands):
 
 
 
September 30, 2017
 
December 31, 2016
 
Level
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Mortgage debt, net (a) (b)
3
 
$
1,946,726

 
$
1,978,924

 
$
2,022,250

 
$
2,053,353

Loans receivable (b)
3
 
110,500

 
110,500

 
31,500

 
31,500

CMBS (c)
3
 
5,851

 
7,149

 
4,027

 
7,470

___________


CPA®:17 – Global 9/30/2017 10-Q20


Notes to Consolidated Financial Statements (Unaudited)

(a)
The carrying value of Mortgage debt, net includes unamortized deferred financing costs of $8.5 million and $9.3 million at September 30, 2017 and December 31, 2016, respectively.
(b)
We determined the estimated fair value of these financial instruments using a discounted cash flow model that estimates the present value of the future loan payments by discounting such payments at current estimated market interest rates. The estimated market interest rates take into account interest rate risk and the value of the underlying collateral, which includes quality of the collateral, the credit quality of the tenant/obligor, and the time until maturity.
(c)
At September 30, 2017 and December 31, 2016, we had three separate tranches of CMBS investments. The carrying value of our CMBS is inclusive of impairment charges for both periods presented, as well as accretion related to the estimated cash flows expected to be received.

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, 2017 and December 31, 2016.

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 held for use 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 not recoverable. 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, broker quotes, or third-party appraisals). 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 reporting. As a result of our assessments, we calculated impairment charges based on market conditions and assumptions. The valuation of real estate is subject to significant judgment and actual results may differ materially if market conditions or the underlying assumptions change.
 
The following table presents information about the assets for which we recorded an impairment charge that was measured at fair value on a non-recurring basis (in thousands):
 
Three Months Ended September 30, 2017
 
Three Months Ended September 30, 2016
 
Fair Value Measurements
 
Total Impairment Charges
 
Fair Value Measurements
 
Total Impairment Charges
Impairment Charges
 

 
 

 
 

 
 

Equity investments in real estate
$
6,809

 
$
6,295

 
$

 
$

Real estate

 

 
14,850

 
29,183

CMBS
637

 
276

 

 

 
 
 
$
6,571

 
 
 
$
29,183

 
Nine Months Ended September 30, 2017
 
Nine Months Ended September 30, 2016
 
Fair Value Measurements
 
Total Impairment Charges
 
Fair Value Measurements
 
Total Impairment Charges
Impairment Charges
 

 
 

 
 

 
 

Equity investments in real estate
$
11,589

 
$
8,805

 
$

 
$

Real estate
4,719

 
4,519

 
14,850

 
29,183

CMBS
637

 
276

 

 

 
 
 
$
13,600

 
 
 
$
29,183




CPA®:17 – Global 9/30/2017 10-Q21


Notes to Consolidated Financial Statements (Unaudited)

Impairment charges, and their related fair value measurements, recognized during the three and nine months ended September 30, 2017 and 2016 were as follows:

Equity Investments in Real Estate

During the three and nine months ended September 30, 2017, we recognized an other-than-temporary impairment charge of $6.3 million on our Apply investment, to reduce the carrying value of a property held by the jointly owned investment to its estimated fair value due to a lease restructuring with the tenant that was executed in September 2017 (Note 6). The fair value measurement related to the impairment charge was determined by estimating discounted cash flows using three significant unobservable inputs, which are the cash flow discount rate, the residual discount rate, and the residual capitalization rate equal to 9.3%7.8%, and 6.8%, respectively. Significant increases or decreases to these inputs in isolation would result in a significant change in the fair value measurement.

During the nine months ended September 30, 2017, we recognized an other-than-temporary impairment charge of $2.5 million on our Agrokor investment, to reduce the carrying value of a property held by the jointly owned investment to its estimated fair value due to a decline in market conditions (Note 6). The fair value measurement related to the impairment charge was determined by estimating discounted cash flows using three significant unobservable inputs, which are the cash flow discount rate, the residual discount rate, and the residual capitalization rate equal to 12.4%10.9%, and 10.4%, respectively. Significant increases or decreases to these inputs in isolation would result in a significant change in the fair value measurement.

Real Estate

During the nine months ended September 30, 2017, we were notified by the tenant currently occupying a property that we own with an affiliate, located in Waldaschaff, Germany, that the tenant will not be renewing its lease. As a result of this information, and with our expectation that we will not be able to replace the tenant upon the lease expiration, we recognized an impairment charge of $4.5 million, which included $1.5 million attributed to a noncontrolling interest (amounts are based on the exchange rate of the euro at the date of impairment). The fair value of the property after the impairment charge approximated $4.7 million. The fair value measurement related to the impairment charge was determined by estimating discounted cash flows using a cash flow discount rate of 9.75%, which is considered a significant unobservable input. Significant increases or decreases to this input would result in a significant change in the fair value measurement.

During both the three and nine months ended September 30, 2016, as a result of entering into a purchase agreement to sell one of our investments located in Houston, Texas, which was classified as held for sale prior to its sale in the first quarter of 2017, we recognized an impairment charge of $29.2 million to reduce the carrying value of the property to its estimated fair value (Note 13). The fair value measurements for the property approximated its estimated selling price, less estimated cost to sell. We used available information, including third-party broker information and internal discounted cash flow models (Level 3 inputs), in determining the fair value of this property.

CMBS

During both the three and nine months ended September 30, 2017, we incurred other-than-temporary impairment charges on certain tranches in our CMBS portfolio totaling $0.3 million to reduce their carrying values to their estimated fair values as a result of non-performance. The fair value measurements related to the impairment charges were derived from third-party appraisals, which were based on input from dealers, buyers, and other market participants, as well as updates on prepayments, losses, and delinquencies within our CMBS portfolio.




CPA®:17 – Global 9/30/2017 10-Q22


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 liabilities, including the Senior Credit Facility (Note 10). 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 Asia and are subject to risks associated with fluctuating foreign currency exchange rates.
 
Derivative Financial Instruments
 
When we use derivative instruments, it is generally to reduce our exposure to fluctuations in interest rates and foreign currency exchange rate movements. We have not entered into, and do not plan to enter into, financial instruments for trading or speculative purposes. In addition to entering into derivative instruments on our own behalf, we may also be a party to derivative instruments that are embedded in other contracts and we may be granted common stock warrants by lessees when structuring lease transactions, which are considered to be derivative instruments. The primary risks related to our use of derivative instruments include a counterparty to a hedging arrangement defaulting on its obligation and a downgrade in the credit quality of a counterparty to such an extent that our ability to sell or assign our side of the hedging transaction is impaired. While we seek to mitigate these risks by entering into hedging arrangements with large financial institutions that we deem to be creditworthy, it is possible that our hedging transactions, which are intended to limit losses, could adversely affect our earnings. Furthermore, if we terminate a hedging arrangement, we may be obligated to pay certain costs, such as transaction or breakage fees. We have established policies and procedures for risk assessment and the approval, reporting, and monitoring of derivative financial instrument activities.
 
We measure derivative instruments at fair value and record them as assets or liabilities, depending on our rights or obligations under the applicable derivative contract. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. For a derivative designated, and that qualified, as a cash flow hedge, the effective portion of the change in fair value of the derivative is recognized in Other comprehensive income 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 is reported in Other comprehensive income as part of the cumulative foreign currency translation adjustment. 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 is reported in Other comprehensive income as part of the cumulative foreign currency translation adjustment. The ineffective portion of the change in fair value of any derivative is immediately recognized in earnings.

All derivative transactions with an individual counterparty are governed by a master International Swap and Derivatives Association agreement, which can be considered as a master netting arrangement; however, we report all our derivative instruments on a gross basis on our consolidated financial statements. At both September 30, 2017 and December 31, 2016, no cash collateral had been posted or received for any of our derivative positions.



CPA®:17 – Global 9/30/2017 10-Q23


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, 2017
 
December 31, 2016
 
September 30, 2017
 
December 31, 2016
Foreign currency forward contracts
 
Other assets, net
 
$
19,618

 
$
38,735

 
$

 
$

Interest rate caps
 
Other assets, net
 
236

 
79

 

 

Interest rate swaps
 
Other assets, net
 
60

 
54

 

 

Foreign currency collars
 
Other assets, net
 

 
522

 

 

Interest rate swaps
 
Accounts payable, accrued expenses and other liabilities
 

 

 
(5,014
)
 
(6,011
)
Foreign currency collars
 
Accounts payable, accrued expenses and other liabilities
 

 

 
(1,117
)
 
(4
)
Derivatives Not Designated
as Hedging Instruments
 
 
 
 
 
 
 
 
 
 
Stock warrants
 
Other assets, net
 
1,749

 
1,848

 

 

Foreign currency forward contracts
 
Other assets, net
 
71

 

 

 

Swaption
 
Other assets, net
 

 
264

 

 

Interest rate swap
 
Accounts payable, accrued expenses and other liabilities
 

 

 
(144
)
 
(173
)
Total derivatives
 
 
 
$
21,734

 
$
41,502

 
$
(6,275
)
 
$
(6,188
)

The following tables present the impact of our derivative instruments in the consolidated financial statements (in thousands):
 
 
Amount of Gain (Loss) Recognized on Derivatives in Other Comprehensive Income (Effective Portion) (a)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Derivatives in Cash Flow Hedging Relationships 
 
2017
 
2016
 
2017
 
2016
Foreign currency forward contracts
 
$
(5,760
)
 
$
(4,179
)
 
$
(18,238
)
 
$
(9,324
)
Foreign currency collars
 
(603
)
 
(325
)
 
(1,605
)
 
(181
)
Interest rate caps
 
(110
)
 
(37
)
 
(473
)
 
(37
)
Interest rate swaps
 
(89
)
 
2,152

 
948

 
(437
)
Derivatives in Net Investment Hedging Relationships (b)
 
 
 
 
 
 
 
 
Foreign currency collars
 
(14
)
 
(13
)
 
(23
)
 
(21
)
Foreign currency forward contracts
 
3

 
(170
)
 
(204
)
 
(1,431
)
Total
 
$
(6,573
)
 
$
(2,572
)
 
$
(19,595
)
 
$
(11,431
)
 
 
 
 
Amount of Gain (Loss) Reclassified from
Other Comprehensive Income 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,
 
2017
 
2016
 
2017
 
2016
Foreign currency forward contracts
 
Other income and (expenses)
 
$
1,949

 
$
2,172

 
$
5,968

 
$
5,850

Interest rate swaps
 
Interest expense
 
(569
)
 
(1,869
)
 
(1,878
)
 
(5,492
)
Total
 
 
 
$
1,380

 
$
303

 
$
4,090

 
$
358

__________
(a)
Excludes net losses of $0.2 million and $0.1 million recognized on unconsolidated jointly owned investments for the three and nine months ended September 30, 2017, respectively. We did not recognize any substantial net gains or losses on unconsolidated jointly owned investments for both the three and nine months ended September 30, 2016.


CPA®:17 – Global 9/30/2017 10-Q24


Notes to Consolidated Financial Statements (Unaudited)

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

Amounts reported in Other comprehensive income related to interest rate swaps will be reclassified to Interest expense as interest is incurred on our variable-rate debt. Amounts reported in Other comprehensive 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, 2017, we estimated that an additional $1.9 million and $6.2 million will be reclassified as interest expense and as other income and (expenses), respectively, during the next 12 months.

The following table presents the impact of our derivative instruments in the consolidated financial statements (in thousands):
 
 
 
 
Amount of Gain (Loss) Recognized in Income on Derivatives
Derivatives Not in Cash Flow Hedging Relationships
 
Location of Gain (Loss) Recognized in Income
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Swaption
 
Other income and (expenses)
 
$
(85
)
 
$
(20
)
 
$
(220
)
 
$
(251
)
Stock warrants
 
Other income and (expenses)
 
66

 
165

 
(99
)
 
66

Foreign currency forward contracts
 
Other income and (expenses)
 
(34
)
 

 
(26
)
 

Interest rate swap
 
Interest expense
 
(18
)
 

 
8

 

Derivatives in Cash Flow Hedging Relationships
 
 
 
 
 
 
 
 
 
 
Interest rate swaps (a)
 
Interest expense
 
21

 
147

 
113

 
243

Foreign currency collar
 
Other income and (expenses)
 
(2
)
 
(5
)
 
(7
)
 
(5
)
Total
 
 
 
$
(52
)
 
$
287

 
$
(231
)
 
$
53

__________
(a)
Relates to the ineffective portion of the hedging relationship.
 
See below for information regarding why we enter into our derivative instruments and concerning derivative instruments owned by unconsolidated investments, which are excluded from the tables above.
 
Interest Rate Swaps, Caps, 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 have obtained, and may in the future obtain, variable-rate, non-recourse mortgage loans and, as a result, we have entered into, and may continue to enter into, interest rate swap agreements, interest rate cap agreements or swaptions with counterparties. Interest rate swaps, which effectively convert the variable-rate debt service obligations of a loan to a fixed rate, are agreements in which one party exchanges a stream of interest payments for a counterparty’s stream of cash flow over a specific period. The notional, or face, amount on which the swaps are based is not exchanged. Interest rate caps limit the effective borrowing rate of variable-rate debt obligations while allowing participants to share downward shifts in interest rates. 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.
 


CPA®:17 – Global 9/30/2017 10-Q25


Notes to Consolidated Financial Statements (Unaudited)

The interest rate swaps, caps, and swaption that our consolidated subsidiaries had outstanding at September 30, 2017 are summarized as follows (currency in thousands):
Interest Rate Derivatives
 
Number of Instruments
 
Notional Amount
 
Fair Value at
September 30, 2017 (a)
Designated as Cash Flow Hedging Instruments
 
 
 
 
 
 
 
Interest rate swaps
 
12
 
123,996

USD
 
$
(4,235
)
Interest rate swaps
 
6
 
75,057

EUR
 
(719
)
Interest rate caps
 
4
 
139,203

EUR
 
204

Interest rate cap
 
1
 
6,394

GBP
 
22

Interest rate cap
 
1
 
75,000

USD
 
10

Not Designated as Hedging Instrument
 
 
 
 
 
 
 
Interest rate swap
 
1
 
4,872

EUR
 
(144
)
 
 
 
 
 
 
 
$
(4,862
)
__________
(a)
Fair value amount is based on the exchange rate of the euro or British pound sterling at September 30, 2017, as applicable.

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

In order to hedge certain of our foreign currency cash flow exposures, we enter into foreign currency forward contracts and collars. A foreign currency forward contract is a commitment to deliver a certain amount of currency at a certain price on a specific date in the future. A foreign currency collar consists of a written call option and a purchased put option to sell the foreign currency at a range of predetermined exchange rates. By entering into forward contracts and holding them to maturity, we are locked into a future currency exchange rate for the term of the contract. A foreign currency collar guarantees that the exchange rate of the currency will not fluctuate beyond the range of the options’ strike prices. Our foreign currency forward contracts and foreign currency collars have maturities of 77 months or less.

The following table presents the foreign currency derivative contracts we had outstanding and their designations at September 30, 2017 (currency in thousands):
Foreign Currency Derivatives
 
Number of Instruments
 
Notional Amount
 
Fair Value at
September 30, 2017
Designated as Cash Flow Hedging Instruments
 
 
 
 
 
 
 
Foreign currency forward contracts
 
47
 
95,676

EUR
 
$
17,022

Foreign currency collars
 
2
 
15,100

EUR
 
(1,071
)
Foreign currency collars
 
3
 
2,000

NOK
 
(21
)
Not Designated as Hedging Instruments
 
 
 
 
 
 
 
Foreign currency forward contracts
 
10
 
7,240

NOK
 
71

Designated as Net Investment Hedging Instruments
 
 
 
 
 
 
 
Foreign currency forward contracts
 
2
 
660,156

JPY
 
2,552

Foreign currency forward contracts
 
2
 
4,329

NOK
 
42

Foreign currency collar
 
1
 
2,500

NOK
 
(23
)
 
 
 
 
 
 
 
$
18,572

 


CPA®:17 – Global 9/30/2017 10-Q26


Notes to Consolidated Financial Statements (Unaudited)

Credit Risk-Related Contingent Features

We measure our credit exposure on a counterparty basis as the net positive aggregate estimated fair value of our derivatives, net of any collateral received. No collateral was received as of September 30, 2017. At September 30, 2017, our total credit exposure was $18.0 million and the maximum exposure to any single counterparty was $6.1 million.

Some of the agreements with our derivative counterparties contain cross-default provisions that could trigger a declaration of default on our derivative obligations if we default, or are capable of being declared in default, on certain of our indebtedness. At September 30, 2017, 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 $6.5 million and $6.7 million at September 30, 2017 and December 31, 2016, respectively, which included accrued interest and any nonperformance risk adjustments. If we had breached any of these provisions at September 30, 2017 or December 31, 2016, we could have been required to settle our obligations under these agreements at their aggregate termination value of $6.7 million and $7.3 million, respectively.

Portfolio Concentration 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. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Portfolio Overview for more information about our portfolio concentration risk.

For the nine months ended September 30, 2017, our KBR Inc., tenant contributed 13.0% of our total revenues, which included $15.7 million for the nine months ended September 30, 2017 as a result of a write-off of a below-market lease intangible liability that increased rental income (Note 13).

Note 10. Debt

Mortgage Debt, Net

At September 30, 2017, our mortgage notes payable bore interest at fixed annual rates ranging from 1.9% to 7.4% and variable contractual annual rates ranging from 1.3% to 6.0%, with maturity dates ranging from 2017 to 2039.

Financing Activity During 2017

During the nine months ended September 30, 2017, we drew down on two non-recourse mortgage loans totaling $25.1 million that have a weighted-average interest rate of 3.1% and term of seven years. In addition, we refinanced two non-recourse mortgage loans totaling $157.7 million with new loans of $180.0 million that have a weighted-average interest rate of 2.8% and term of three years.

During the nine months ended September 30, 2017, we repaid eight non-recourse mortgage loans totaling $160.5 million, seven of which were scheduled to mature in 2017 and one of which was scheduled to mature in 2018 (amount is based on the exchange rate of the euro as of the date of repayment, as applicable). Of that amount, $60.0 million pertained to the non-recourse mortgage loan that was paid down in connection with the I-drive Property disposition (Note 4, Note 13), on which we recognized a loss on extinguishment of debt of $1.3 million. In addition, in connection with our disposition of a property located in Pordenone, Italy, which was part of a larger portfolio of properties located throughout Italy leased to a single tenant, we repaid a portion of the principal balance of the mortgage loan on that portfolio for a total of $9.3 million (amount is based on the exchange rate of the euro as of the date of repayment).

In March 2017, we completed the sale of the KBR II property (Note 13), which had a non-recourse mortgage loan of $31.2 million at the time of sale. This mortgage loan, which has an interest rate 4.9% and is scheduled to mature in January 2024, has since been recollateralized with two of our existing net-lease properties. As a result of the swapping of the collateral of this loan, this debt is now considered to be a recourse mortgage loan to us in the event of a default.



CPA®:17 – Global 9/30/2017 10-Q27


Notes to Consolidated Financial Statements (Unaudited)

Senior Credit Facility

On August 26, 2015, we entered into a Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, and a syndicate of other lenders, which we refer to herein as the Credit Agreement. The Credit Agreement was amended on March 31, 2016 to clarify the Restricted Payments covenant (see below); no other terms were changed. The Credit Agreement provides for a $200.0 million senior unsecured revolving credit facility, or the Revolver, and a $50.0 million delayed-draw term loan facility, or the Term Loan. We refer to the Revolver and the Term Loan together as the Senior Credit Facility, which has a maximum aggregate principal amount of $250.0 million and, subject to lender approval, an accordion feature of $250.0 million. The Senior Credit Facility is scheduled to mature on August 26, 2018, and may be extended by us for two 12-month periods.

The Senior Credit Facility provides for an annual interest rate of either (i) the Eurocurrency Rate or (ii) the Base Rate, in each case plus the Applicable Rate (each as defined in the Credit Agreement). With respect to the Revolver, the Applicable Rate on Eurocurrency loans and letters of credit ranges from 1.50% to 2.25% (based on London Interbank Offered Rate, or LIBOR) and the Applicable Rate on Base Rate loans ranges from 0.50% to 1.25% (as defined in the Credit Agreement), depending on our leverage ratio. With respect to the Term Loan, the Applicable Rate on Eurocurrency loans and letters of credit ranges from 1.45% to 2.20% (based on LIBOR) and the Applicable Rate on Base Rate loans ranges from 0.45% to 1.20% (as defined in the Credit Agreement), depending on our leverage ratio. In addition, we pay a fee of either 0.15% or 0.30% on the unused portion of the Senior Credit Facility. If usage of the Senior Credit Facility is equal to or greater than 50% of the Aggregate Commitments, the Unused Fee Rate will be 0.15%, and if usage of the Senior Credit Facility is less than 50% of the Aggregate Commitments, the Unused Fee Rate will be 0.30%. In connection with the transaction, we incurred costs of $1.9 million, which are being amortized to interest expense over the remaining term of the Senior Credit Facility.

The following table presents a summary of our Senior Credit Facility (dollars in thousands):
 
 
Interest Rate at September 30, 2017
 
Outstanding Balance at
Senior Credit Facility, net
 
 
September 30, 2017
 
December 31, 2016
Term Loan (a)
 
LIBOR + 1.45%
 
$
49,863

 
$
49,751

 
 
 
 
$
49,863

 
$
49,751

__________
(a)
Includes unamortized deferred financing costs and discounts.

On September 30, 2016, we exercised the delayed draw option on our Term Loan and borrowed $50.0 million. The Term Loan bears interest at LIBOR + 1.45% and is scheduled to mature on August 26, 2018, unless extended pursuant to its terms. The Revolver and Term Loan are used for our working capital needs and for new investments, as well as for general corporate purposes. During the nine months ended September 30, 2017, we drew down $67.3 million from our Senior Credit Facility (amount is based on the exchange rate of the euro on the date of each draw), all of which has since been repaid.

We are required to ensure that the total Restricted Payments (as defined in the amended Credit Agreement) in an aggregate amount in any fiscal year does not exceed the greater of 95% of Modified funds from operations, or MFFO, and the amount of Restricted Payments required in order for us to (i) maintain our REIT status and (ii) avoid the payment of federal or state income or excise tax. Restricted Payments include quarterly dividends and the total amount of shares repurchased by us, if any, in excess of $100.0 million per year. In addition to placing limitations on dividend distributions and share repurchases, the Credit Agreement also stipulates certain customary financial covenants. We were in compliance with all such covenants at September 30, 2017.



CPA®:17 – Global 9/30/2017 10-Q28


Notes to Consolidated Financial Statements (Unaudited)

Scheduled Debt Principal Payments

Scheduled debt principal payments for the remainder of 2017, each of the next four calendar years following December 31, 2017 and thereafter through 2039 are as follows (in thousands):
Years Ending December 31,
 
Total
2017 (remainder)
 
$
99,422

2018 (a)
 
128,895

2019
 
74,152

2020
 
425,751

2021
 
449,464

Thereafter through 2039
 
833,210

Total principal payments
 
2,010,894

Deferred financing costs
 
(8,635
)
Unamortized discount, net
 
(5,670
)
Total
 
$
1,996,589

__________
(a)
Includes the $50.0 million Term Loan outstanding at September 30, 2017 under our Senior Credit Facility, which is scheduled to mature on August 26, 2018, unless extended pursuant to its terms.

Certain amounts in the table above are based on the applicable foreign currency exchange rate at September 30, 2017. The carrying value of our Debt, net increased by $69.1 million from December 31, 2016 to September 30, 2017 due the weakening of the U.S. dollar relative to foreign currencies, particularly the euro, during the same period.

Note 11. Commitments and Contingencies

At September 30, 2017, 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. At September 30, 2017, we had $6.5 million in unfunded construction and tenant improvement commitments (Note 4).



CPA®:17 – Global 9/30/2017 10-Q29


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, 2017
 
Gains and Losses
on Derivative Instruments
 
Gains and Losses on Marketable Securities
 
Foreign Currency Translation Adjustments
 
Total
Beginning balance
$
16,857

 
$
(17
)
 
$
(128,640
)
 
$
(111,800
)
Other comprehensive income before reclassifications
(5,413
)
 
1

 
28,980

 
23,568

Amounts reclassified from accumulated other comprehensive loss to:
 
 
 
 
 
 
 
Interest expense
569

 

 

 
569

Other income and (expenses)
(1,949
)
 

 

 
(1,949
)
Total
(1,380
)
 

 

 
(1,380
)
Net current-period Other comprehensive income
(6,793
)
 
1

 
28,980

 
22,188

Net current-period Other comprehensive income attributable to noncontrolling interests

 

 
(608
)
 
(608
)
Ending balance
$
10,064

 
$
(16
)
 
$
(100,268
)
 
$
(90,220
)

 
Three Months Ended September 30, 2016
 
Gains and Losses
on Derivative Instruments
 
Gains and Losses on Marketable Securities
 
Foreign Currency Translation Adjustments
 
Total
Beginning balance
$
20,595

 
$
(63
)
 
$
(156,633
)
 
$
(136,101
)
Other comprehensive income before reclassifications
(2,089
)
 
8

 
3,707

 
1,626

Amounts reclassified from accumulated other comprehensive loss to:
 
 
 
 
 
 
 
Interest expense
1,869

 

 

 
1,869

Other income and (expenses)
(2,172
)
 

 

 
(2,172
)
Total
(303
)
 

 

 
(303
)
Net current-period Other comprehensive income
(2,392
)
 
8

 
3,707

 
1,323

Net current-period Other comprehensive income attributable to noncontrolling interests

 

 
(108
)
 
(108
)
Ending balance
$
18,203

 
$
(55
)
 
$
(153,034
)
 
$
(134,886
)



CPA®:17 – Global 9/30/2017 10-Q30


Notes to Consolidated Financial Statements (Unaudited)

 
Nine Months Ended September 30, 2017
 
Gains and Losses
on Derivative Instruments
 
Gains and Losses on Marketable Securities
 
Foreign Currency Translation Adjustments
 
Total
Beginning balance
$
29,549

 
$
(48
)
 
$
(186,177
)
 
$
(156,676
)
Other comprehensive income before reclassifications
(15,395
)
 
32

 
87,898

 
72,535

Amounts reclassified from accumulated other comprehensive loss to:
 
 
 
 
 
 
 
Interest expense
1,878

 

 

 
1,878

Other income and (expenses)
(5,968
)
 

 

 
(5,968
)
Total
(4,090
)
 

 

 
(4,090
)
Net current-period Other comprehensive income
(19,485
)
 
32

 
87,898

 
68,445

Net current-period Other comprehensive income attributable to noncontrolling interests

 

 
(1,989
)
 
(1,989
)
Ending balance
$
10,064

 
$
(16
)
 
$
(100,268
)
 
$
(90,220
)

 
Nine Months Ended September 30, 2016
 
Gains and Losses
on Derivative Instruments
 
Gains and Losses on Marketable Securities
 
Foreign Currency Translation Adjustments
 
Total
Beginning balance
$
28,200

 
$
(77
)
 
$
(167,928
)
 
$
(139,805
)
Other comprehensive income before reclassifications
(9,639
)
 
22

 
15,442

 
5,825

Amounts reclassified from accumulated other comprehensive loss to:
 
 
 
 
 
 
 
Interest expense
5,492

 

 

 
5,492

Other income and (expenses)
(5,850
)
 

 

 
(5,850
)
Total
(358
)
 

 

 
(358
)
Net current-period Other comprehensive income
(9,997
)
 
22

 
15,442

 
5,467

Net current-period Other comprehensive income attributable to noncontrolling interests

 

 
(548
)
 
(548
)
Ending balance
$
18,203

 
$
(55
)
 
$
(153,034
)
 
$
(134,886
)

Distributions

During the third quarter of 2017, our board of directors declared a quarterly distribution of $0.1625 per share, which was paid on October 16, 2017 to stockholders of record on September 30, 2017, in the amount of $56.6 million. Distributions are declared at the discretion of our board of directors and are not guaranteed.

During the nine months ended September 30, 2017, our board of directors declared distributions in the aggregate amount of $169.1 million, which equates to $0.4875 per share.

Note 13. Property Dispositions
 
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 decide to dispose of a property due to vacancy, 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.



CPA®:17 – Global 9/30/2017 10-Q31


Notes to Consolidated Financial Statements (Unaudited)

Property Dispositions

The results of operations for properties that have been sold or classified as held for sale are included in the consolidated financial statements and are summarized as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues
$

 
$
10,680

 
$
7,245

 
$
32,611

Expenses

 
(7,243
)
 
(4,258
)
 
(23,041
)
Gain on sale of real estate, net of tax

 
82,287

 
2,805

 
132,703

Impairment charges

 
(29,183
)
 

 
(29,183
)
Loss on extinguishment of debt

 
(8,218
)
 
(1,364
)
 
(15,807
)
Provision for income taxes

 
(1
)
 
(2
)
 
(24
)
Equity in earnings (losses) of equity method investments in real estate

 
1,154

 
(688
)
 
(2,336
)
Income from properties sold or classified as held for sale, net of income taxes
$

 
$
49,476

 
$
3,738

 
$
94,923


2017 Dispositions

During the second quarter of 2017, we sold three properties for total proceeds of $14.6 million, net of selling costs, and recorded an aggregate gain on sale of $1.2 million (amounts are based on the euro exchange rate on the applicable date of disposition), which was recorded under the full accrual method.

In March 2017, we sold one of our net-lease properties to the developer that constructed the I-drive Property for net proceeds of $23.5 million, inclusive of $34.0 million of financing provided by us to the developer in the form of a mezzanine loan. This sale was accounted for under the cost recovery method. As a result, we recorded a deferred gain on sale of $2.1 million, which will be recognized into income upon recovery of the cost of the property (Note 4, Note 5). The developer repaid the $60.0 million non-recourse mortgage loan encumbering the I-drive Property at closing (Note 10). In addition, in connection with the I-drive Wheel restructuring, we also recorded a deferred gain of $16.4 million, which will be recognized into income upon recovery of the cost of the Wheel Loan (Note 5).

In August 2016, we simultaneously entered into two agreements with one of our tenants, KBR, Inc., to amend the lease at one property and terminate the lease at another property, both located in Houston, Texas. The lease modification and lease termination were contingent upon one another and became effective upon disposing of one net-lease property on March 13, 2017, which was previously classified as held for sale as of December 31, 2016 prior to its sale in the first quarter of 2017. Upon disposition, we received proceeds of $14.1 million, net of closing costs, and recognized a gain on sale of $1.6 million, which was recorded under the full accrual method. In addition, as a result of the aforementioned lease modification, contractual rents were renegotiated to be at market and the existing below-market rent lease liability of $15.7 million was written off and recognized in Rental income during the nine months ended September 30, 2017 (Note 7). In addition, as a result of the termination of the lease noted above, we accelerated the below-market lease intangible liabilities of $3.3 million that were also recognized in Rental income during the nine months ended September 30, 2017. At September 30, 2016, the land and building for this property were classified as held for sale and we recognized an impairment charge of $29.2 million during the three and nine months ended September 30, 2016 to reduce the carrying value of the property to its estimated fair value (Note 8).



CPA®:17 – Global 9/30/2017 10-Q32


Notes to Consolidated Financial Statements (Unaudited)

2016 Dispositions

During the three months ended September 30, 2016, we sold 22 self-storage properties for total proceeds of $151.3 million, net of closing costs, and recognized a gain on sale of $82.3 million. Proceeds from the sale were used to repay a non-recourse mortgage loan encumbering the properties with an outstanding principal balance of $41.8 million, and as a result, we recorded a loss on extinguishment of debt of $8.2 million.

During the nine months ended September 30, 2016, we sold 34 self-storage properties for total proceeds of $259.1 million, net of closing costs, and recognized a gain on sale of $132.7 million in the aggregate. Proceeds from the sales were used to repay non-recourse mortgage loans encumbering the properties with outstanding principal balances aggregating $84.7 million, and as a result, we recorded a loss on extinguishment of debt of $15.8 million.



CPA®:17 – Global 9/30/2017 10-Q33


Notes to Consolidated Financial Statements (Unaudited)

Note 14. Segment Reporting
 
We operate in two reportable business segments: Net Lease and Self Storage. Our Net Lease segment includes our domestic and foreign investments in net-leased properties, whether they are accounted for as operating or direct financing leases. Our Self Storage segment is comprised of our investments in self-storage properties. In addition, we have investments in loans receivable, CMBS, one hotel, and other properties, which are included in our All Other category. The following tables present a summary of comparative results and assets for these business segments (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net Lease
 
 
 
 
 
 
 
Revenues (a) (b)
$
95,024

 
$
98,243

 
$
301,878

 
$
286,214

Operating expenses (c) (d)
(35,085
)
 
(68,453
)
 
(114,260
)
 
(139,970
)
Interest expense
(19,126
)
 
(22,302
)
 
(58,475
)
 
(66,583
)
Other income and (expenses), excluding interest expense (e)
(1,361
)
 
3,592

 
3,834

 
9,324

Provision for income taxes
(366
)
 
(590
)
 
(68
)
 
(2,570
)
(Loss) gain on sale of real estate, net of tax
(39
)
 

 
2,871

 

Net income attributable to noncontrolling interests
(3,622
)
 
(3,551
)
 
(9,895
)
 
(10,601
)
Net income attributable to CPA®:17 – Global
$
35,425

 
$
6,939

 
$
125,885

 
$
75,814

Self Storage
 
 
 
 
 
 
 
Revenues
$
9,129

 
$
10,135

 
$
26,902

 
$
35,213

Operating expenses
(6,459
)
 
(7,717
)
 
(19,998
)
 
(28,632
)
Interest expense
(1,825
)
 
(2,211
)
 
(5,802
)
 
(6,746
)
Other income and (expenses), excluding interest expense (f) (g)

 
(15,991
)
 
(260
)
 
25,905

Provision for income taxes
(28
)
 
(16
)
 
(90
)
 
(133
)
Gain on sale of real estate, net of tax

 
82,287

 

 
132,702

Net income attributable to CPA®:17 – Global
$
817

 
$
66,487

 
$
752

 
$
158,309

All Other
 
 
 
 
 
 
 
Revenues
$
3,243

 
$
1,698

 
$
8,134

 
$
5,060

Operating expenses
(289
)
 
(29
)
 
(335
)
 
(81
)
Interest expense

 

 

 
(6
)
Other income and (expenses), excluding interest expense
(2,844
)
 
(603
)
 
(5,065
)
 
(2,999
)
Provision for income taxes
(1,006
)
 
(1,442
)
 
(2,030
)
 
(3,373
)
Net (loss) income attributable to CPA®:17 – Global
$
(896
)
 
$
(376
)
 
$
704

 
$
(1,399
)
Corporate
 
 
 
 
 
 
 
Unallocated Corporate Overhead (h)
$
(5,158
)
 
$
(9,556
)
 
$
(14,555
)
 
$
(29,422
)
Net income attributable to noncontrolling interests — Available Cash Distributions
$
(5,459
)
 
$
(5,276
)
 
$
(19,240
)
 
$
(17,803
)
Total Company
 
 
 
 
 
 
 
Revenues
$
107,396

 
$
110,076

 
$
336,914

 
$
326,487

Operating expenses
(53,313
)
 
(87,442
)
 
(168,509
)
 
(203,684
)
Interest expense
(21,776
)
 
(25,048
)
 
(66,619
)
 
(75,027
)
Other income and (expenses), excluding interest expense
2,536

 
(10,495
)
 
20,754

 
39,955

Provision for income taxes
(994
)
 
(2,333
)
 
(2,730
)
 
(6,530
)
(Loss) gain on sale of real estate, net of tax
(39
)
 
82,287

 
2,871

 
132,702

Net income attributable to noncontrolling interests
(9,081
)
 
(8,827
)
 
(29,135
)
 
(28,404
)
Net income attributable to CPA®:17 – Global
$
24,729

 
$
58,218

 
$
93,546

 
$
185,499



CPA®:17 – Global 9/30/2017 10-Q34


Notes to Consolidated Financial Statements (Unaudited)

 
Total Assets at
 
September 30, 2017
 
December 31, 2016
Net Lease (i)
$
3,988,468

 
$
3,905,402

All Other (j)
277,969

 
266,231

Self-Storage
243,531

 
252,195

Corporate
136,148

 
275,095

Total Company
$
4,646,116

 
$
4,698,923

___________
(a)
Includes a $15.7 million write off and a $3.3 million acceleration of a below-market rent lease liabilities, pertaining to our KBR Inc., properties that were recognized in Rental income during the nine months ended September 30, 2017 (Note 13).
(b)
We recognized straight-line rent adjustments of $3.4 million during both the three months ended September 30, 2017 and 2016, and $10.6 million and $12.3 million during the nine months ended September 30, 2017 and 2016, respectively, which increased Rental income within our consolidated financial statements for each period.
(c)
Includes an impairment charge of $4.5 million related to a net-leased property (Note 8) incurred during the nine months ended September 30, 2017. During both the three and nine months ended September 30, 2016, we recorded an impairment charge on a net-leased property totaling $29.2 million (Note 8).
(d)
In April 2016, the Croatian government passed a special law assisting the restructuring of companies considered of systematic significance in Croatia. This law directly impacts our Agrokor tenant, which is currently experiencing financial distress and recently received a credit downgrade from both Standard & Poor’s and Moody’s. As a result of the financial difficulties and the uncertainty regarding future rent collections from the tenant, we recorded bad debt expense of $4.8 million during the nine months ended September 30, 2017.
(e)
During the three and nine months ended September 30, 2017 we recorded impairment charges on our equity method investments totaling $6.3 million and $8.8 million, respectively (Note 8).
(f)
Includes a loss on extinguishment of debt of $16.0 million and $23.6 million during the three and nine months ended September 30, 2016, respectively.
(g)
We recognized a Gain on change in control of interests of $49.9 million during the nine months ended September 30, 2016. This gain was recorded in conjunction with the change in control resulting from the acquisition of a controlling interest in a self-storage investment portfolio that we previously accounted for under the equity investment method. We recorded a non-cash gain on change in control of interests, which was the difference between the carrying value of $15.1 million and the fair value of $64.9 million from our previously held equity interest in April 2016.
(h)
Included in unallocated corporate overhead are asset management fees and general and administrative expenses, as well as interest expense and other charges related to our Senior Credit Facility. These expenses are calculated and reported at the portfolio level and not evaluated as part of any segment’s operating performance.
(i)
Includes the impact of the I-drive Property disposition (Note 4 and Note 13), the sale of a property classified as Assets held for sale as of December 31, 2016, and the sale of three other net-leased properties (Note 13).
(j)
Includes the impact of the I-drive Wheel restructuring (Note 5, Note 6, Note 13).



CPA®:17 – Global 9/30/2017 10-Q35


Notes to Consolidated Financial Statements (Unaudited)

Note 15. Subsequent Events

On October 3, 2017, we restructured our Shelborne hotel investment (Note 6) by converting the underlying loan to equity and, in addition, each of the partners transferred their equity interest in the investment to us. We subsequently sold 4.6% of the equity interest to one our joint venture partners for $4.0 million.

On October 27, 2017, we acquired a parcel of land in Dillon, South Carolina, which is adjacent to a distribution facility that we own. The land will be used to construct an expansion to the existing facility, which is currently expected to cost $47.3 million (including transaction related costs).







CPA®:17 – Global 9/30/2017 10-Q36


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management’s Discussion and Analysis of Financial Condition and Results of Operations 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. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the 2016 Annual Report and subsequent reports filed under the Securities Exchange Act of 1934.

We operate in two reportable business segments: Net Lease and Self Storage. Our Net Lease segment includes our domestic and foreign investments in net-leased properties, whether they are accounted for as operating or direct financing leases. Our Self Storage segment is comprised of our investments in self-storage properties. In addition, we have investments in loans receivable, CMBS, one hotel, and other properties, which are included in our All Other category (Note 14).

Business Overview

We are a publicly owned, non-traded 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 our 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. We have previously stated our intention to consider liquidity events for investors generally commencing eight to twelve years following the investment of substantially all of the net proceeds from our initial public offering, which occurred in April 2011. During the quarter ended September 30, 2017, our board of directors formed a special committee of independent directors to begin the process of evaluating possible liquidity alternatives for our shareholders. There can be no assurance as to the form or timing of any liquidity alternative or that any alternative will be pursued at all. We do not intend to discuss the evaluation process unless and until a particular alternative is selected.

Significant Developments

Acquisitions

During the nine months ended September 30, 2017, we acquired one domestic and two international investments at a total cost of approximately $11.5 million and $147.3 million, respectively, inclusive of acquisition-related costs and fees. One of our international investments is a joint venture investment that we account for as an equity method investment, and the total cost excludes our portion of mortgage financing, as described below (Note 6).

Dispositions

During the nine months ended September 30, 2017, we sold four net-lease properties for total proceeds of $28.6 million, net of closing costs, and recognized an aggregate gain on the sale of $2.9 million. In addition, during the nine months ended September 30, 2017, we sold one of our net-lease properties to the developer that constructed the I-drive Property for net proceeds of $23.5 million, inclusive of $34.0 million of financing provided by us to the developer in the form of a mezzanine loan, and recorded a deferred gain on sale of $2.1 million, which will be recognized upon recovery of the cost of the property (Note 4, Note 5). In connection with the I-drive Wheel restructuring, we also recorded a deferred gain of $16.4 million, which will be recognized into income upon recovery of the cost of the Wheel Loan (Note 5).
 
Financing Activity

During the nine months ended September 30, 2017, we refinanced two non-recourse mortgage loans totaling $157.7 million with two non-recourse mortgage loans totaling $180.0 million that have a weighted-average interest rate of 2.8% and term of three years. In addition, we obtained mortgage financing related to the foreign joint venture investment described above, of


CPA®:17 – Global 9/30/2017 10-Q37


which our portion totaled $88.0 million (Note 6). During the nine months ended September 30, 2017, we drew down on two non-recourse mortgage loans totaling $25.1 million, that have a weighted-average interest rate of 3.1% and term of seven years.

In addition, during the nine months ended September 30, 2017, we repaid eight non-recourse mortgage loans totaling $160.5 million, seven of which were scheduled to mature in 2017 and one of which was scheduled to mature in 2018 (amount is based on the exchange rate of the euro as of the date of repayment). Of the $160.5 million, $60.0 million pertained to the non-recourse mortgage loan that was paid down in conjunction with the sale of the I-drive Property (Note 4) on which we recognized a loss on extinguishment of debt of $1.3 million (Note 10). In addition, in connection with our disposition of a property located in Pordenone, Italy, which was part of a larger portfolio of properties located throughout Italy leased to a single tenant, we paid down a portion of the principal balance of the mortgage loan on that portfolio for a total of $9.3 million (amount is based on the exchange rate of the euro as of the date of repayment).

Hurricane Harvey and Hurricane Irma

During the third quarter of 2017, certain of our properties were damaged by Hurricane Harvey and Hurricane Irma. We evaluated such properties to determine if any losses should be recognized and, as a result, recognized a loss of $1.7 million on our Shelborne hotel in Miami, Florida, which represents the estimated insurance deductible to be paid. We recognized this charge within Equity in (losses) earnings of equity method investments in real estate on our consolidated financial statements.
After the payment of the deductible, we currently expect that all other costs will be covered by insurance.



CPA®:17 – Global 9/30/2017 10-Q38


Portfolio Overview

We hold a diversified portfolio of income-producing commercial real estate properties and other real estate-related assets. We make investments both domestically and internationally. Portfolio information is provided on a pro rata basis, unless otherwise noted below, to better illustrate the economic impact of our various net-leased, jointly owned investments. See Terms and Definitions below for a description of pro rata amounts.

Portfolio Summary
 
September 30, 2017
 
December 31, 2016
Number of net-leased properties
410

 
395

Number of operating properties (a)
38

 
38

Number of tenants (b)
116

 
121

Total square footage (in thousands)
47,129

 
46,119

Occupancy (b)
99.72
%
 
99.72
%
Weighted-average lease term (in years) (b)
11.9

 
12.9

Number of countries
16

 
14

Total assets (consolidated basis in thousands)
$
4,646,116

 
$
4,698,923

Net investments in real estate (consolidated basis in thousands) (c)
3,665,730

 
3,745,466

Debt, net — pro rata (in thousands)
2,259,345

 
2,314,937


 
Nine Months Ended September 30,
(dollars in millions, except exchange rates)
2017
 
2016
Acquisition volume — consolidated (d) (e)
$
17.3

 
$
105.5

Acquisition volume — pro rata (e) (f)
158.8

 
105.5

Financing obtained — consolidated (g)
205.1

 
122.2

Financing obtained — pro rata (g) (h)
293.1

 
139.2

Average U.S. dollar/euro exchange rate
1.1130

 
1.1161

Average U.S. dollar/British pound sterling exchange rate
1.2751

 
1.3939

Average U.S. dollar/Japanese yen exchange rate
0.0089

 
0.0092

Change in the U.S. CPI (i)
2.2
%
 
2.1
%
Change in the Harmonized Index of Consumer Prices (i)
0.8
%
 
0.4
%
__________
(a)
Operating properties are comprised of full ownership interests in 37 self-storage properties with an average occupancy of 92.6% at September 30, 2017, full ownership interests in 37 self-storage properties with an average occupancy of 93.0% at December 31, 2016, and one hotel property at each date; all of these were managed by third parties.
(b)
Excludes operating properties.
(c)
In the second quarter of 2017, we reclassified certain line items in our consolidated balance sheets. As a result, prior period amounts for certain line items included within Net investments in real estate as of December 31, 2016 has been revised to the current period presentation (Note 2).
(d)
Includes build-to-suit transactions that are reflected as the total commitment for the build-to-suit funding, and excludes investments in unconsolidated joint ventures.
(e)
Includes acquisition-related costs and fees for business combinations, which are expensed in the consolidated financial statements.
(f)
Includes investments in unconsolidated joint ventures, which include our equity investments in real estate (Note 6).
(g)
Includes refinancings of $180.0 million during the nine months ended September 30, 2017.
(h)
Financing on a pro rata basis during the nine months ended September 30, 2017 includes our share of the non-recourse mortgage financing related to certain of our joint venture investments.
(i)
Many of our lease agreements include contractual increases indexed to changes in the U.S. Consumer Price Index, or CPI, or similar indices in the jurisdictions in which the properties are located.



CPA®:17 – Global 9/30/2017 10-Q39


Net-Leased Portfolio

The tables below represent information about our net-leased portfolio on a pro rata basis and, accordingly, exclude all operating properties at September 30, 2017. See Terms and Definitions below for a description of pro rata amounts and ABR.

Top Ten Tenants by ABR
(dollars in thousands)
Tenant/Lease Guarantor
 
Property Type
 
Tenant Industry
 
Location
 
ABR
 
Percent
Metro Cash & Carry Italia S.p.A. (a)
 
Retail
 
Retail Stores
 
Germany; Italy
 
$
28,174

 
7
%
Agrokor (a) (b)
 
Retail; Warehouse
 
Grocery
 
Croatia
 
24,653

 
7
%
Advance Stores Company, Inc.
 
Office; Warehouse
 
Retail Stores
 
Various U.S.
 
18,345

 
5
%
Kesko Senukai (a)
 
Retail; Warehouse
 
Retail Stores
 
Estonia, Latvia, Lithuania
 
16,431

 
4
%
The New York Times Company
 
Office
 
Media: Advertising, Printing and Publishing
 
New York, NY
 
14,986

 
4
%
Lineage Logistics Holdings, LLC
 
Warehouse
 
Business Services
 
Various U.S.
 
14,375

 
4
%
KBR, Inc.
 
Office
 
Business Services
 
Houston, TX
 
12,567

 
3
%
Blue Cross and Blue Shield of Minnesota, Inc.
 
Education Facility; Office
 
Insurance
 
Various, MN
 
12,450

 
3
%
Hellweg 2 (a)
 
Retail
 
Retail Stores
 
Germany
 
12,268

 
3
%
Jumbo Logistiek Vastgoed B.V. (a)
 
Warehouse
 
Grocery
 
Netherlands
 
10,869

 
3
%
Total
 
 
 
 
 
 
 
$
165,118

 
43
%
__________
(a)
ABR amounts are subject to fluctuations in foreign currency exchange rates.
(b)
In April 2016, the Croatian government passed a special law assisting the restructuring of companies considered of systematic significance in Croatia. This law directly impacts our Agrokor tenant, which is currently experiencing financial distress and received a credit downgrade from both Standard & Poor’s and Moody’s. As a result of the financial difficulties and the uncertainty regarding future rent collections from the tenant, we recorded bad debt expense of $4.8 million during the nine months ended September 30, 2017. In addition, we recorded an impairment on our equity method investment related to this tenant of $2.5 million during the nine months ended September 30, 2017.



CPA®:17 – Global 9/30/2017 10-Q40


Portfolio Diversification by Geography
(dollars in thousands)
Region
 
ABR
 
Percent
United States
 
 
 
 
Midwest
 
$
70,723

 
19
%
South
 
60,938

 
16
%
East
 
45,638

 
12
%
West
 
31,027

 
8
%
United States Total
 
208,326

 
55
%
International
 
 
 
 
Poland
 
29,327

 
8
%
Italy
 
26,486

 
7
%
Croatia
 
24,653

 
6
%
Germany
 
21,215

 
6
%
Spain
 
19,223

 
5
%
The Netherlands
 
16,353

 
4
%
Lithuania
 
10,902

 
3
%
United Kingdom
 
5,203

 
1
%
Other (a)
 
18,989

 
5
%
International Total
 
172,351

 
45
%
Total
 
$
380,677

 
100
%
__________
(a)
Includes ABR from tenants in Latvia, Hungary, the Czech Republic, Slovakia, Japan, Estonia, and Norway.

Portfolio Diversification by Property Type
(dollars in thousands)
Property Type
 
ABR
 
Percent
Warehouse
 
$
106,758

 
28
%
Office
 
102,498

 
27
%
Retail
 
95,075

 
25
%
Industrial
 
54,354

 
14
%
Other (a)
 
21,992

 
6
%
Total
 
$
380,677

 
100
%
__________
(a)
Includes ABR from tenants with the following property types: education facility, fitness facility, self-storage, land, and net-leased student housing.



CPA®:17 – Global 9/30/2017 10-Q41


Portfolio Diversification by Tenant Industry
(dollars in thousands)
Industry Type
 
ABR
 
Percent
Retail Stores
 
$
109,546

 
29
%
Grocery
 
51,193

 
13
%
Business Services
 
38,776

 
10
%
Media: Advertising, Printing, and Publishing
 
18,526

 
5
%
Insurance
 
16,215

 
4
%
Cargo Transportation
 
15,848

 
4
%
Capital Equipment
 
14,664

 
4
%
Consumer Services
 
13,431

 
4
%
Telecommunications
 
11,440

 
3
%
Automotive
 
10,153

 
3
%
Media: Broadcasting and Subscription
 
10,112

 
3
%
Healthcare and Pharmaceuticals
 
9,513

 
3
%
Banking
 
9,146

 
2
%
Hotel, Gaming, and Leisure
 
8,978

 
2
%
Beverage, Food, and Tobacco
 
8,821

 
2
%
Containers, Packing, and Glass
 
7,671

 
2
%
Non-Durable Consumer Goods
 
7,503

 
2
%
High Tech Industries
 
6,420

 
2
%
Other (a)
 
12,721

 
3
%
Total
 
$
380,677

 
100
%
__________
(a)
Includes ABR from tenants in the following industries: wholesale; construction and building; aerospace and defense; consumer transportation; chemicals, plastics, and rubber; durable consumer goods; real estate; metals and mining; finance; and environmental industries.



CPA®:17 – Global 9/30/2017 10-Q42


Lease Expirations
(dollars in thousands)
Year of Lease Expiration (a)

Number of Leases Expiring

ABR

Percent
2017 remaining (b)

8

 
$
994

 
%
2018

6

 
373

 
%
2019

4

 
2,469

 
1
%
2020

5

 
274

 
%
2021

7

 
1,768

 
1
%
2022

4

 
4,264

 
1
%
2023

7

 
4,703

 
1
%
2024

11

 
33,599

 
9
%
2025

16

 
24,014

 
6
%
2026

17

 
26,967

 
7
%
2027

22

 
31,130

 
8
%
2028

26

 
40,925

 
11
%
2029

4

 
6,501

 
2
%
2030
 
22

 
68,267

 
18
%
Thereafter

65

 
134,429

 
35
%
Total

224


$
380,677


100
%
__________
(a)
Assumes tenant does not exercise any renewal option.
(b)
Month-to-month leases with ABR totaling $0.2 million are included in 2017 ABR.

Self-Storage Summary

Our self-storage properties had an average occupancy rate of 92.6% at September 30, 2017 and were comprised as follows (square footage in thousands):
State
 
Number of Properties
 
Square Footage
Illinois
 
13

 
900

California
 
7

 
476

New York
 
5

 
335

Florida
 
4

 
261

Hawaii
 
4

 
259

Georgia
 
2

 
79

North Carolina
 
1

 
80

Texas
 
1

 
75

Total
 
37

 
2,465




CPA®:17 – Global 9/30/2017 10-Q43


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, which we do not control, we report our net investment and our net income or loss from that investment. Under the pro rata consolidation method, we present our proportionate share, based on our economic ownership of these jointly owned investments, of the portfolio metrics of those investments. Multiplying each of the jointly owned investments’ financial statement line items by our percentage ownership and adding those amounts to or subtracting those amounts from our totals, as applicable, may not accurately depict the legal and economic implications of holding an ownership interest of less than 100% in such jointly owned investments.

ABR ABR represents contractual minimum annualized base rent for our net-leased properties and reflects exchange rates as of September 30, 2017. If there is a rent abatement, we annualize the first monthly contractual base rent following the free rent period. ABR is not applicable to operating properties.

Financial Highlights

(in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Total revenues
$
107,396

 
$
110,076

 
$
336,914

 
$
326,487

Net income attributable to CPA®:17 – Global
24,729

 
58,218

 
93,546

 
185,499

 
 
 
 
 
 
 
 
Cash distributions paid
56,385

 
55,408

 
168,358

 
165,296

 
 
 
 
 
 
 
 
Net cash provided by operating activities
 
 
 
 
195,822

 
151,716

Net cash provided by investing activities
 
 
 
 
1,300

 
169,050

Net cash used in financing activities
 
 
 
 
(316,917
)
 
(163,417
)
 
 
 
 
 
 
 
 
Supplemental financial measures:
 
 
 
 
 
 
 
FFO attributable to CPA®:17 – Global (a)
68,431

 
43,710

 
213,964

 
194,586

MFFO attributable to CPA®:17 – Global (a)
64,663

 
47,886

 
179,279

 
152,211

Adjusted MFFO attributable to CPA®:17 – Global (a)
66,634

 
51,795

 
184,855

 
161,708

__________
(a)
We consider the performance metrics listed above, including Funds from operations, or FFO, MFFO, and Adjusted modified funds from operations, or Adjusted MFFO, which are supplemental measures that are not defined by GAAP, both referred to herein as non-GAAP measures, to be important measures in the evaluation of our operating performance. See Supplemental Financial Measures below for our definitions of these non-GAAP measures and reconciliations to their most directly comparable GAAP measures.

Consolidated Results

Revenues and Net Income Attributable to CPA®:17 – Global

For the three months ended September 30, 2017 as compared to the same period in 2016, total revenues decreased by $2.7 million primarily due to our 2016 and 2017 dispositions, partially offset by the revenue generated from our recently acquired net-leased properties.



CPA®:17 – Global 9/30/2017 10-Q44


Net income attributable to CPA®:17 – Global decreased by $33.5 million during the three months ended September 30, 2017 as compared to the same period in 2016, primarily due to properties sold in 2016 whereby we recognized a gain on sale of real estate, net of tax of $82.3 million in the prior year period, partially offset by $16.0 million of losses on extinguishment of debt related to the sold properties as well as impairment charges of $29.2 million relating to a property deemed held for sale as of September 30, 2016. These factors were partially offset by income recognized on our acquisitions and loans originated during 2016 and 2017 as well as a decrease in interest expense as a result of loans paid off or refinanced during 2016 and 2017.

Total revenues increased by $10.4 million during the nine months ended September 30, 2017 as compared to the same period in 2016, primarily due to the write-off and acceleration of below-market lease intangible liabilities of $15.7 million and $3.3 million, respectively, related to the KBR Inc., lease modification/termination, which was recognized in Rental income in the current year period (Note 13). In addition, we had an increase in revenues attributable to our recently acquired net-lease properties, all of which was partially offset by our 2016 and 2017 dispositions.

Net income attributable to CPA®:17 – Global decreased by $92.0 million during the nine months ended September 30, 2017 as compared to the same period in 2016, primarily due to properties sold in 2016 whereby we recognized a gain on sale of real estate, net of tax of $132.7 million in the prior year period, partially offset by $23.6 million of losses on extinguishment of debt related to the sold properties, a decrease of $49.9 million pertaining to a gain on change in control of interests recognized during the nine months ended September 30, 2016 and impairment charges of $29.2 million relating to a property deemed held for sale as of September 30, 2016. These factors were partially offset by decreases in interest expense as a result of loans paid off or refinanced during 2016 and 2017 as well as an increase in other income as a result of the U.S. dollar weakening against other currencies, primarily the euro between the periods.

FFO attributable to CPA®:17 – Global

FFO attributable to CPA®:17 – Global increased during the three months ended September 30, 2017 as compared to the same period in 2016, primarily due to a decrease in loss on extinguishment of debt, an increase in foreign currency gains, and a decrease in interest expense as a result of loan payoffs and refinancing.

FFO attributable to CPA®:17 – Global increased during the nine months ended September 30, 2017 as compared to the same periods in 2016, primarily due to the write-off and acceleration of below-market lease intangible liabilities noted above, an increase in unrealized foreign currency gains, a decrease in interest expense, a decrease in acquisition expenses, and a decrease in loss on extinguishment of debt, all of which were partially offset by the $49.9 million gain on change in control of interests that we recognized during the nine months ended September 30, 2016, as described above.

MFFO and Adjusted MFFO Attributable to CPA®:17 – Global

MFFO and Adjusted MFFO attributable to CPA®:17 – Global increased during the three months ended September 30, 2017 as compared to the same period in 2016, primarily due to the accretive impact of our investments acquired between the periods, the improved operating performance of existing net-leased properties and one of our equity method investments, and a reduction in interest expense. These factors were partially offset by the impact of dispositions subsequent to September 30, 2016.

MFFO and Adjusted MFFO attributable to CPA®:17 – Global increased during the nine months ended September 30, 2017 as compared to the same period in 2016, primarily due to the accretive impact of our investments acquired between the periods, a reduction in interest expense and the improved operating performance of one of our equity method investments. These increases were partially offset by the impact of dispositions subsequent to September 30, 2016 and the bad debt expense recognized in connection with our Agrokor investment (Note 14).



CPA®:17 – Global 9/30/2017 10-Q45


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 the value in our real estate investments. 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,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Revenues
 
 
 
 
 
 
 
 
 
 
 
Lease revenues
$
87,467

 
$
89,982

 
$
(2,515
)
 
$
279,752

 
$
261,970

 
$
17,782

Other real estate income — operating property revenues
9,631

 
10,792

 
(1,161
)
 
28,543

 
37,281

 
(8,738
)
Reimbursable tenant costs
6,697

 
7,061

 
(364
)
 
19,469

 
20,768

 
(1,299
)
Interest income and other
3,601

 
2,241

 
1,360

 
9,150

 
6,468

 
2,682

 
107,396

 
110,076

 
(2,680
)
 
336,914

 
326,487

 
10,427

Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
 
 
 
 
Net-leased properties
25,401

 
27,732

 
(2,331
)
 
77,785

 
77,202

 
583

Operating properties
3,236

 
3,512

 
(276
)
 
9,734

 
10,357

 
(623
)
 
28,637

 
31,244

 
(2,607
)
 
87,519

 
87,559

 
(40
)
Property expenses:
 
 
 
 
 
 
 
 
 
 
 
Asset management fees
7,362

 
7,489

 
(127
)
 
22,026

 
22,456

 
(430
)
Reimbursable tenant costs
6,697

 
7,061

 
(364
)
 
19,469

 
20,768

 
(1,299
)
Net-leased properties
2,873

 
2,925

 
(52
)
 
12,522

 
10,142

 
2,380

Operating properties
3,213

 
4,199

 
(986
)
 
10,237

 
14,567

 
(4,330
)
 
20,145

 
21,674

 
(1,529
)
 
64,254

 
67,933

 
(3,679
)
General and administrative
3,849

 
3,895

 
(46
)
 
11,225

 
12,223

 
(998
)
Acquisition and other expenses
406

 
1,446

 
(1,040
)
 
716

 
6,786

 
(6,070
)
Impairment charges
276

 
29,183

 
(28,907
)
 
4,795

 
29,183

 
(24,388
)
 
53,313

 
87,442

 
(34,129
)
 
168,509

 
203,684

 
(35,175
)
Other Income and Expenses
 
 
 
 
 
 
 
 
 
 
 
Interest expense
(21,776
)
 
(25,048
)
 
3,272

 
(66,619
)
 
(75,027
)
 
8,408

Other income and (expenses)
6,455

 
2,715

 
3,740

 
22,385

 
7,081

 
15,304

Equity in (losses) earnings of equity method investments in real estate
(3,906
)
 
2,780

 
(6,686
)
 
349

 
6,532

 
(6,183
)
Loss on extinguishment of debt
(13
)
 
(15,990
)
 
15,977

 
(1,980
)
 
(23,580
)
 
21,600

Gain on change in control of interests

 

 

 

 
49,922

 
(49,922
)
 
(19,240
)
 
(35,543
)
 
16,303

 
(45,865
)
 
(35,072
)
 
(10,793
)
Income (loss) before income taxes and (loss) gain on sale of real estate
34,843

 
(12,909
)
 
47,752

 
122,540

 
87,731

 
34,809

Provision for income taxes
(994
)
 
(2,333
)
 
1,339

 
(2,730
)
 
(6,530
)
 
3,800

Income (loss) before gain on sale of real estate
33,849

 
(15,242
)
 
49,091

 
119,810

 
81,201

 
38,609

(Loss) gain on sale of real estate, net of tax
(39
)
 
82,287

 
(82,326
)
 
2,871

 
132,702

 
(129,831
)
Net Income
33,810

 
67,045

 
(33,235
)
 
122,681

 
213,903

 
(91,222
)
Net income attributable to noncontrolling interests
(9,081
)
 
(8,827
)
 
(254
)
 
(29,135
)
 
(28,404
)
 
(731
)
Net Income Attributable to CPA®:17 – Global
$
24,729

 
$
58,218

 
$
(33,489
)
 
$
93,546

 
$
185,499

 
$
(91,953
)



CPA®:17 – Global 9/30/2017 10-Q46


Lease Composition and Leasing Activities

As of September 30, 2017, approximately 62.3% of our net leases, based on ABR, provide for adjustments based on formulas indexed to changes in the CPI, or similar indices for the jurisdiction in which the property is located, some of which have caps and/or floors. In addition, 35.8% of our net leases on that same basis have fixed rent adjustments, for which ABR is scheduled to increase by an average of 1.7% in the next 12 months. We own international investments and, therefore, lease revenues from these investments are subject to exchange rate fluctuations in various foreign currencies, primarily the euro.

The following discussion presents a summary of rents on existing properties arising from leases with new tenants, or second generation leases, and renewed leases with existing tenants for the periods presented and, therefore, does not include new acquisitions for our portfolio during the periods presented.

During the nine months ended September 30, 2017, we signed five such leases totaling approximately 0.9 million square feet of leased space, which were all extensions with existing tenants. The weighted-average new rent for these leases is $13.91 per square foot, compared to the average former rent of $12.41 per square foot.



CPA®:17 – Global 9/30/2017 10-Q47


Property Level Contribution

The following table presents the property level contribution for our consolidated net-leased and operating properties, as well as a reconciliation to net income attributable to CPA®:17 – Global (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Existing Net-Leased Properties
 
 
 
 
 
 
 
 
 
 
 
Lease revenues
$
83,170

 
$
80,925

 
$
2,245

 
$
260,334

 
$
242,395

 
$
17,939

Depreciation and amortization
(23,586
)
 
(23,273
)
 
(313
)
 
(69,378
)
 
(69,970
)
 
592

Property expenses
(2,839
)
 
(3,266
)
 
427

 
(12,292
)
 
(10,077
)
 
(2,215
)
Property level contribution
56,745

 
54,386

 
2,359

 
178,664

 
162,348

 
16,316

Recently Acquired Net-Leased Properties
 
 
 
 
 
 
 
 
 
 
 
Lease revenues
4,297

 
812

 
3,485

 
12,485

 
1,982

 
10,503

Depreciation and amortization
(1,815
)
 
(183
)
 
(1,632
)
 
(5,266
)
 
(425
)
 
(4,841
)
Property expenses
(48
)
 
(3
)
 
(45
)
 
(525
)
 
(5
)
 
(520
)
Property level contribution
2,434

 
626

 
1,808

 
6,694

 
1,552

 
5,142

Existing Operating Properties
 
 
 
 
 
 
 
 
 
 
 
Operating property revenues
7,179

 
6,858

 
321

 
21,127

 
20,028

 
1,099

Operating property expenses
(2,543
)
 
(2,781
)
 
238

 
(7,908
)
 
(8,031
)
 
123

Depreciation and amortization
(964
)
 
(1,203
)
 
239

 
(2,892
)
 
(3,727
)
 
835

Property level contribution
3,672

 
2,874

 
798

 
10,327

 
8,270

 
2,057

Recently Acquired Operating Properties
 
 
 
 
 
 
 
 
 
 
 
Operating property revenues
2,452

 
2,573

 
(121
)
 
7,388

 
5,159

 
2,229

Depreciation and amortization
(2,272
)
 
(2,309
)
 
37

 
(6,842
)
 
(4,342
)
 
(2,500
)
Operating property expenses
(656
)
 
(753
)
 
97

 
(2,251
)
 
(1,542
)
 
(709
)
Property level contribution
(476
)
 
(489
)
 
13

 
(1,705
)
 
(725
)
 
(980
)
Properties Sold or Held for Sale
 
 
 
 
 
 
 
 
 
 
 
Lease revenues

 
8,245

 
(8,245
)
 
6,933

 
17,593

 
(10,660
)
Operating property revenues

 
1,361

 
(1,361
)
 
28

 
12,094

 
(12,066
)
Operating property expenses

 
(620
)
 
620

 
45

 
(4,656
)
 
4,701

Property expenses

 
299

 
(299
)
 
172

 
(398
)
 
570

Depreciation and amortization

 
(4,276
)
 
4,276

 
(3,141
)
 
(9,095
)
 
5,954

Property level contribution

 
5,009

 
(5,009
)
 
4,037

 
15,538

 
(11,501
)
Property Level Contribution
62,375

 
62,406

 
(31
)
 
198,017

 
186,983

 
11,034

Add other income:
 
 
 
 
 
 
 
 
 
 
 
Interest income and other
3,601

 
2,241

 
1,360

 
9,150

 
6,468

 
2,682

Less other expenses:
 
 
 
 
 
 
 
 
 
 
 
Asset management fees
(7,362
)
 
(7,489
)
 
127

 
(22,026
)
 
(22,456
)
 
430

General and administrative
(3,849
)
 
(3,895
)
 
46

 
(11,225
)
 
(12,223
)
 
998

Acquisition and other expenses
(406
)
 
(1,446
)
 
1,040

 
(716
)
 
(6,786
)
 
6,070

Impairment charges
(276
)
 
(29,183
)
 
28,907

 
(4,795
)
 
(29,183
)
 
24,388

Other Income and Expenses
 
 
 
 
 
 
 
 
 
 
 
Interest expense
(21,776
)
 
(25,048
)
 
3,272

 
(66,619
)
 
(75,027
)
 
8,408

Other income and (expenses)
6,455

 
2,715

 
3,740

 
22,385

 
7,081

 
15,304

Equity in (losses) earnings of equity method investments in real estate
(3,906
)
 
2,780

 
(6,686
)
 
349

 
6,532

 
(6,183
)
Loss on extinguishment of debt
(13
)
 
(15,990
)
 
15,977

 
(1,980
)
 
(23,580
)
 
21,600

Gain on change in control of interests

 

 

 

 
49,922

 
(49,922
)
 
(19,240
)
 
(35,543
)
 
16,303

 
(45,865
)
 
(35,072
)
 
(10,793
)
Income (loss) before income taxes and (loss) gain on sale of real estate
34,843

 
(12,909
)
 
47,752

 
122,540

 
87,731

 
34,809

Provision for income taxes
(994
)
 
(2,333
)
 
1,339

 
(2,730
)
 
(6,530
)
 
3,800

Income (loss) before (loss) gain on sale of real estate
33,849

 
(15,242
)
 
49,091

 
119,810

 
81,201

 
38,609

(Loss) gain on sale of real estate, net of tax
(39
)
 
82,287

 
(82,326
)
 
2,871

 
132,702

 
(129,831
)
Net Income
33,810

 
67,045

 
(33,235
)
 
122,681

 
213,903

 
(91,222
)
Net income attributable to noncontrolling interests
(9,081
)
 
(8,827
)
 
(254
)
 
(29,135
)
 
(28,404
)
 
(731
)
Net Income Attributable to CPA®:17 – Global
$
24,729

 
$
58,218

 
$
(33,489
)
 
$
93,546

 
$
185,499

 
$
(91,953
)



CPA®:17 – Global 9/30/2017 10-Q48


Property level contribution is a non-GAAP measure that we believe to be a useful supplemental measure for management and investors in evaluating and analyzing the financial results of our net-leased and operating properties over time. Property level contribution presents the lease and operating property revenues, less property expenses and depreciation and amortization. We believe that Property level contribution allows for meaningful comparison between periods of the direct costs of owning and operating our net-leased assets and operating properties. 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. While we believe that Property level contribution is a useful supplemental measure, it should not be considered as an alternative to Net income attributable to CPA®:17 – Global as an indication of our operating performance.

Existing Net-Leased Properties

Existing net-leased properties are those we acquired or placed into service prior to January 1, 2016 and were not sold during the periods presented. At September 30, 2017, we had 237 existing net-leased properties.

For the three months ended September 30, 2017 as compared to the same period in 2016, Property level contribution for existing net-leased properties increased by $2.4 million, primarily due to an increase in lease revenues of $2.2 million and a decrease in property expenses of $0.4 million, partially offset by an increase in depreciation and amortization expenses of $0.3 million. Lease revenues increased by $1.3 million as a result of an increase in the average exchange rate of the U.S. dollar in relation to foreign currencies (primarily the euro) between the periods and by $0.7 million due to an increase in Rental income that resulted from a lease modification of one of our net-leased properties that occurred in the third quarter of 2016.

For the nine months ended September 30, 2017 as compared to the same period in 2016, Property level contribution for existing net-leased properties increased by $16.3 million, primarily due to an increase in lease revenues of $17.9 million, as well a decrease in depreciation and amortization expenses of $0.6 million, partially offset by an increase in property expenses of $2.2 million. Lease revenues increased primarily due to the $15.7 million write-off of a below-market lease intangible liability that was recognized in Rental income and by $1.9 million due to an increase in Rental income that resulted from a lease modification of one of our net-leased properties that occurred in third quarter of 2016. Property expenses increased primarily due to bad debt expense of $4.8 million related to our Agrokor investment, partially offset by a refund of real estate taxes totaling $1.9 million received during the nine months ended September 30, 2017.

Recently Acquired Net-Leased Properties

Recently acquired net-leased properties are those that we acquired or placed into service subsequent to December 31, 2015. Since January 1, 2016, we have acquired nine investments, comprised of 17 properties.

For the three months ended September 30, 2017 as compared to the same period in 2016, Property level contribution from recently acquired net-leased properties increased by $1.8 million, primarily due to an increase in lease revenues of $3.5 million as a result of the new investments that we acquired or placed into service during 2017 and 2016, partially offset by increases in depreciation and amortization expenses of $1.6 million as a result of those new investments.

For the nine months ended September 30, 2017 as compared to the same period in 2016, Property level contribution from recently acquired net-leased properties increased by $5.1 million, primarily due to an increase in lease revenues of $10.5 million as a result of the new investments that we acquired or placed into service during 2017 and 2016, partially offset by increases in depreciation and amortization expenses of $4.8 million and property expenses of $0.5 million as a result of those new investments.

Existing Operating Properties

Existing operating properties are those we acquired prior to January 1, 2016 and were not sold during the periods presented. At September 30, 2017, we had 32 wholly owned existing self-storage properties. Additionally, other real estate operations includes the results of operations of a parking garage attached to one of our existing net-leased properties.

For the three months ended September 30, 2017, as compared to the same period in 2016, Property level contribution from existing operating properties increased by $0.8 million, primarily due to an increase in operating revenues of $0.3 million and decreases in both depreciation and amortization expenses and property expenses of $0.2 million. Operating revenues increased primarily due to an increase in the average unit rate in 2017 compared to 2016. Depreciation and amortization decreased because certain of our in-place lease intangible assets were fully amortized prior to January 1, 2017, and property expenses decreased primarily due to a decrease in repairs and maintenance compared to the prior period.


CPA®:17 – Global 9/30/2017 10-Q49



For the nine months ended September 30, 2017, as compared to the same period in 2016, Property level contribution from existing operating properties increased by $2.1 million, primarily due to an increase in operating revenues of $1.1 million and a decrease in depreciation and amortization expenses of $0.8 million. Operating revenues increased primarily due to an increase in the average unit rate in 2017 compared to 2016. Depreciation and amortization decreased because certain of our in-place lease intangible assets were fully amortized prior to January 1, 2017.

Recently Acquired Operating Properties

Recently acquired operating properties includes five self-storage properties, in which we acquired the remaining 15% controlling interest in April 2016 and that were previously accounted for as an equity investment in real estate. As a result of the acquisition of the controlling interest, we have consolidated this investment since April 2016 and reflect 100% of the Property level contribution from these assets.

Properties Sold or Held for Sale

Properties sold or held for sale during the three and nine months ended September 30, 2017 and 2016, are those that were sold or held for sale subsequent to December 31, 2015.

We did not have any dispositions during the three months ended September 30, 2017. During the nine months ended September 30, 2017, we disposed of five net-lease properties, one of which was classified as held for sale at December 31, 2016 (Note 13). As a result, property level contribution for the nine months ended September 30, 2017 includes $3.3 million of acceleration of amortization of certain lease intangibles, which is included in lease revenues.

For the three and nine months ended September 30, 2016, we sold 22 and 34 self-storage properties, respectively.

Other Revenues and Expenses

Interest Income and Other

Interest income and other primarily consists of interest earned on our loans receivable and CMBS investments, as well as other income received related to our properties.

For the three months ended September 30, 2017 as compared to the same period in 2016, interest income and other increased by $1.4 million, primarily as a result of the four loans originated in March 2017 in connection with the I-drive Property disposition and I-drive Wheel restructuring (Note 4, Note 5) that generated $1.5 million of interest income, partially offset by a $0.2 million reduction of interest income as a result of the repayment of one of our loans receivable in November 2016.

For the nine months ended September 30, 2017 as compared to the same period in 2016, interest income and other increased by $2.7 million, primarily as a result of the four loans originated in March 2017 in connection with the I-drive Property disposition and I-drive Wheel restructuring (Note 4, Note 5) that generated $3.3 million of interest income, partially offset by a $0.8 million reduction of interest income as a result of the repayment of one of our loans receivable in November 2016.

Property Expenses — Asset Management Fees

For the three months ended September 30, 2017 as compared to the same period in 2016, asset management fees decreased by $0.1 million as a result of dispositions since September 30, 2016, slightly offset by an increase in the estimated fair market value of our real estate portfolio, both of which impact the asset base from which our Advisor earns a fee.

For the nine months ended September 30, 2017 as compared to the same period in 2016, asset management fees decreased by $0.4 million as a result of dispositions since September 30, 2016, slightly offset by an increase in the estimated fair market value of our real estate portfolio, both of which impact the asset base from which our Advisor earns a fee.



CPA®:17 – Global 9/30/2017 10-Q50


General and Administrative

For the three months ended September 30, 2017 as compared to the same period in 2016, general and administrative expenses remained flat.

For the nine months ended September 30, 2017 as compared to the same period in 2016, general and administrative expenses decreased by $1.0 million, primarily due to decreases in investor relations expenses of $0.4 million and in personnel and overhead reimbursement costs of $0.3 million. The decrease in investor relation expenses was primarily driven by a decrease in transfer agent costs that were directly impacted by a decrease in our share transaction volume and by a decrease in proxy expenses during the nine months ended September 30, 2017. The decrease in personnel and overhead reimbursement costs was primarily driven by an increase in revenue at other entities managed by WPC and its affiliates as compared to our revenues, which directly impacts the allocation of our Advisor’s expenses to us (Note 3).

Acquisition and Other Expenses

Acquisition expenses represent direct costs incurred to acquire properties in transactions that are accounted for as business combinations, whereby such costs are required to be expensed as incurred (Note 4). On January 1, 2017, we adopted ASU 2017-01 (Note 2), and as a result, future transaction costs are more likely to be capitalized since we expect most of our future acquisitions to be classified as asset acquisitions under this new standard. In addition, goodwill will no longer be allocated and written off upon sale if future sales were deemed to be sales of assets and not businesses.

For the three months ended September 30, 2017 as compared to the same period in 2016, acquisition and other expenses decreased by $1.0 million, primarily because none of our 2017 acquisitions were deemed to be business combinations. During the three months ended September 30, 2017, we incurred $0.4 million of acquisition and other expenses, which relates to deal costs for transactions that have not yet been consummated.

For the nine months ended September 30, 2017 as compared to the same period in 2016, acquisition and other expenses decreased by $6.1 million, primarily because none of our 2017 acquisitions were deemed to be business combinations. During the nine months ended September 30, 2017, we incurred $0.7 million of acquisition and other expenses, which relates to deal costs for transactions that have not yet been consummated.

Impairment Charges

Where the undiscounted cash flows for an asset are less than the asset’s carrying value when considering and evaluating the various alternative courses of action that may occur, we recognize an impairment charge to reduce the carrying value of the asset to its estimated fair value. Further, when we classify an asset as held for sale, we carry the asset at the lower of its current carrying value or its fair value, less estimated costs to sell. Our impairment charges are more fully described in Note 8.

During the three and nine months ended September 30, 2017, we incurred other-than-temporary impairment charges of $0.3 million on two of our CMBS tranches to reduce their carrying values to their estimated fair values as a result of non-performance (Note 8). During the nine months ended September 30, 2017, we incurred an impairment charge of $4.5 million on a property in order to reduce the carrying value of the property to its estimated fair value (Note 8). The fair value measurement approximated its estimated selling price.

During the three and nine months ended September 30, 2016, we incurred other-than-temporary impairment charges of $29.2 million on one property classified as Assets held for sale as of September 30, 2016 in order to reduce the carrying value of the property to its estimated fair value. The fair value measurement approximated its estimated selling price.

Interest Expense

For the three months ended September 30, 2017 as compared to the same period in 2016, interest expense decreased by $3.3 million, primarily due to a decrease in our average outstanding debt balance and lower weighted-average interest rate on our average outstanding debt during the periods presented. Our average outstanding debt balance decreased by $56.3 million during the three months ended September 30, 2017 as compared to the same period in 2016, respectively. Our weighted-average interest rate was 4.0% and 4.4% during the three months ended September 30, 2017 and 2016, respectively.

For the nine months ended September 30, 2017 as compared to the same period in 2016, interest expense decreased by $8.4 million, primarily due to a lower weighted-average interest rate on our average outstanding debt during the periods presented.


CPA®:17 – Global 9/30/2017 10-Q51


Our weighted-average interest rate was 4.0% and 4.5% during the nine months ended September 30, 2017 and 2016, respectively.

Other Income and (Expenses)
 
Other income and (expenses) primarily consists of gains and losses on foreign currency transactions, and derivative instruments. We make intercompany loans to a number of our foreign subsidiaries, most of which do not have the U.S. dollar as their functional currency. Remeasurement of foreign currency intercompany transactions that are scheduled for settlement, consisting primarily of accrued interest and short-term loans, are included in the determination of net income. We also recognize gains or losses on foreign currency transactions when we repatriate cash from our foreign investments or hold foreign currencies in entities designated as U.S. dollar functional currency. In addition, we have certain derivative instruments, including common stock warrants, foreign currency contracts, and a swap, 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, 2017, as compared to the same period in 2016, net other income increased by $3.7 million, primarily comprised of an increase in foreign currency transaction gains related to our international investments of $4.2 million, partially offset by a decrease in the gains on derivatives of $0.4 million.

For the nine months ended September 30, 2017, as compared to the same period in 2016, net other income increased by $15.3 million, primarily comprised of an increase in foreign currency transaction gains related to our international investments of $15.0 million.



CPA®:17 – Global 9/30/2017 10-Q52


Equity in (Losses) Earnings of Equity Method Investments in Real Estate

Equity in (losses) earnings of equity method investments in real estate is recognized in accordance with the investment agreement for each of our equity method investments 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. Further details about our equity method investments are discussed in Note 6. The following table presents the details of our Equity in (losses) earnings of equity method investments in real estate (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Lessee
 
2017
 
2016
 
2017
 
2016
Net Lease:
 
 
 
 
 
 
 
 
Apply (a) (b)
 
$
(6,731
)
 
$
125

 
$
(6,969
)
 
$
176

Hellweg 2 (a) (c)
 
1,923

 
163

 
4,611

 
586

Jumbo Logistiek Vastgoed B.V. (a)
 
1,036

 
888

 
3,092

 
2,928

U-Haul Moving Partners, Inc. and Mercury Partners, LP
 
614

 
615

 
1,837

 
1,839

Kesko Senukai (a) (d)
 
474

 

 
625

 

Berry Global Inc.
 
440

 
417

 
1,316

 
1,251

BPS Nevada, LLC
 
305

 
461

 
914

 
721

Bank Pekao S.A. (a)
 
198

 
171

 
603

 
516

State Farm
 
187

 
186

 
574

 
559

Eroski Sociedad Cooperativa — Mallorca (a)
 
180

 
161

 
480

 
500

Tesco Global Aruhazak Zrt. (a)
 
164

 
87

 
649

 
665

Agrokor (a) (e)
 
96

 
83

 
(2,630
)
 
227

Dick’s Sporting Goods, Inc.
 
50

 
32

 
139

 
94

 
 
(1,064
)
 
3,389

 
5,241

 
10,062

Self-Storage:
 
 
 
 
 
 
 
 
Madison Storage NYC, LLC and Veritas Group IX‑NYC, LLC (f)
 

 

 

 
(433
)
 
 

 

 

 
(433
)
All Other:
 
 
 
 
 
 
 
 
Shelborne (g)
 
(3,526
)
 
(2,657
)
 
(6,230
)
 
(2,373
)
BG LLH, LLC (h)
 
684

 
91

 
814

 
(779
)
BPS Nevada, LLC — Preferred Equity (i)
 

 
803

 
1,211

 
2,391

IDL Wheel Tenant, LLC (j)
 

 
1,154

 
(687
)
 
(2,336
)
 
 
(2,842
)
 
(609
)
 
(4,892
)
 
(3,097
)
Total equity in (losses) earnings of equity method investments in real estate
 
$
(3,906
)
 
$
2,780

 
$
349

 
$
6,532

__________
(a)
Amounts include impact of fluctuations in the exchange rate of the applicable foreign currency.
(b)
During the three and nine months ended September 30, 2017, we recognized an other-than-temporary impairment charge of $6.3 million related to our Apply equity method investment (Note 8).
(c)
The increase in equity earnings was due to a reduction in interest expense for the three and nine months ended September 30, 2017 as compared to the same periods in 2016, which was the result of a related mortgage loan that was repaid in January 2017 (Note 6).
(d)
On May 23, 2017, we entered into a joint venture investment to acquire a 70% interest in a real estate investment portfolio for a total cost of $141.5 million (dollar amount is based on the exchange rate of the euro on the date of acquisition), which excludes our portion of mortgage financing totaling $88.0 million (Note 6).
(e)
During the nine months ended September 30, 2017, we recognized an other-than-temporary impairment charge of $2.5 million on our Agrokor equity method investment to reduce the carrying value of our investment in the joint venture to its estimated fair value due to tenant financial difficulties (Note 8).


CPA®:17 – Global 9/30/2017 10-Q53


(f)
In April 2016, we purchased the remaining 15% controlling interest in this equity investment and therefore consolidated this investment since the date of purchase of that controlling interest.
(g)
The decrease in equity earnings occurred because we were required to absorb the majority of the losses on this investment during the three and nine months ended September 30, 2017, since the other partners’ capital balances had been reduced to zero. We were only partially responsible for absorbing losses during the same period in 2016. During the three and nine months ended September 30, 2017, as a result of Hurricane Irma, we incurred damages at the hotel, which we currently expect to be covered by insurance after the estimated deductible of $1.7 million is paid (Note 6). We recognized this charge within Equity in (losses) earnings of equity method investments in real estate on our consolidated financial statements.
(h)
The increase in equity earnings for the three and nine months ended September 30, 2017 as compared to the same period in 2016 was primarily due to the write off of deferred financing costs in the three and nine months ended September 30, 2016 as a result of debt restructuring on this investment.
(i)
This investment represents a preferred equity interest, with a preferred rate of return of 12%. On May 19, 2017, we received the full repayment of our preferred equity interest totaling $27.0 million; therefore, the preferred equity interest is now retired (Note 6).
(j)
The Wheel Loan was restructured on March 17, 2017 and, as a result, we have reclassified the equity investment to a loan receivable, included in Other assets, net (Note 6).

Loss on Extinguishment of Debt

For the three and nine months ended September 30, 2017 as compared to the same periods in 2016, loss on extinguishment of debt decreased by $16.0 million and $21.6 million, respectively, primarily due to the early terminations of certain mortgage debt associated with our 2016 dispositions (Note 13).

Gain on Change in Control of Interests

In connection with our acquisition of the remaining 15% controlling interest in a jointly owned investment in five self-storage properties that was previously accounted for as an equity method investment, we recorded a $49.9 million gain on change in control of interests during the nine months ended September 30, 2016. As a result of this acquisition, we have consolidated this investment since April 2016. The gain on change in control represents the difference between our carrying values and the fair values of our previously held equity interests in these properties.

Provision for Income Taxes

Our provision for income taxes is primarily related to our international properties.

During the three and nine months ended September 30, 2017, we recorded a provision for income taxes of $1.0 million and $2.7 million, respectively, comprised of current income taxes of $0.6 million and $1.9 million, respectively, and deferred income taxes of $0.4 million and $0.8 million, respectively.

During the three and
nine months ended September 30, 2016, we recorded a provision for income taxes of $2.3 million and $6.5 million, respectively, comprised of deferred income taxes of $1.9 million and $4.4 million, respectively, and current income taxes of $0.4 million and $2.1 million, respectively.

(Loss) Gain on Sale of Real Estate, Net of Tax

During the nine months ended September 30, 2017, we recognized a gain on sale of real estate, net of tax of $2.9 million, as a result of the four net-lease properties and a parcel of land that were sold during the period (Note 13).

During the three and nine months ended September 30, 2016, we recognized a gain on sale of real estate, net of tax, of $82.3 million and $132.7 million, respectively, as a result of the sale of 22 and 34 self-storage properties during the periods, respectively.

Net Income Attributable to Noncontrolling Interests

For the three months ended September 30, 2017 as compared to the same period in 2016, net income attributable to noncontrolling interests increased by $0.3 million, primarily due to an increase of $0.2 million in the Available Cash Distribution paid to our Advisor (Note 3).



CPA®:17 – Global 9/30/2017 10-Q54


For the nine months ended September 30, 2017 as compared to the same period in 2016, net income attributable to noncontrolling interests increased by $0.7 million, primarily due to an increase of $1.4 million in the Available Cash Distribution paid to our Advisor (Note 3), partially offset by a decrease related to one of our jointly owned investments that had an impairment charge in the first quarter of 2017.

Liquidity and Capital Resources

We use the cash flow generated from our investments primarily to meet our operating expenses, service debt, and fund distributions to stockholders. We currently expect that, for the short term, the aforementioned cash requirements will be funded by our cash on hand, financings, or unused capacity under our Senior Credit Facility. We may also use proceeds from financings and asset sales for the acquisition of real estate and real estate related investments.

Our liquidity would be affected adversely by unanticipated costs and greater-than-anticipated operating expenses. To the extent that our working capital reserve is insufficient to satisfy our cash requirements, additional funds may be provided from cash generated from operations or through short-term borrowings. In addition, we may incur indebtedness in connection with the acquisition of real estate, refinance the debt thereon, arrange for the leveraging of any previously unfinanced property, or reinvest the proceeds of financings or refinancings in additional properties.

Sources and Uses of Cash During the Period

We expect to continue to invest in a diversified portfolio of income-producing commercial properties and other real estate-related assets. Our cash flows will fluctuate periodically 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 the receipt of lease revenues; whether our Advisor receives fees in shares of our common stock or cash, which our board of directors must elect, after consultation with our Advisor; the timing and characterization of distributions received from equity investments in real estate; the timing of payments of the Available Cash Distribution to our Advisor; and changes in foreign currency exchange rates. Despite these fluctuations, we believe our investments 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. We may also use existing cash resources, the proceeds of non-recourse mortgage loans, sales of assets, unused capacity under our Senior Credit Facility, distributions reinvested in our common stock through our DRIP, and the issuance of additional equity securities to meet these needs. 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 $44.1 million during the nine months ended September 30, 2017 as compared to the same period in 2016, primarily due to a reduction in the loss on extinguishment of debt that pertained to the prepayment penalties on certain of the loans encumbering the self-storage properties that were disposed of in 2016, a reduction in interest expense as noted above, a reduction in acquisition expenses as a result of there being no acquisitions deemed business combinations in 2017, an increase in the cash flows generated from our 2016 and 2017 acquisitions, and past due receivables collected on our I-drive Property Disposition in the first quarter of 2017, all of which were partially offset by a decrease in the rent collected on our Agrokor investments.

Investing Activities Our investing activities are generally comprised of real estate-related transactions (purchases and sales), payment of deferred acquisition fees to our Advisor related to asset acquisitions, and capitalized property-related costs. During the nine months ended September 30, 2017, we completed the sale of five net-lease properties for total proceeds of $111.2 million, net of selling costs (Note 13). We used $151.6 million to fund capital contributions to our equity investments in real estate, primarily due to the $90.3 million contribution for Hellweg 2 mortgage loan payoffs and $51.3 million for the Kesko Senukai investment (Note 6), and received $32.4 million as a return of capital from our equity method investments. We also received proceeds from the repayment of a preferred equity interest of $27.0 million (Note 6) and we funded $11.3 million and $10.2 million for a real estate acquisition and a build-to-suit expansion project, respectively.



CPA®:17 – Global 9/30/2017 10-Q55


Financing Activities — During the nine months ended September 30, 2017, we made scheduled and unscheduled mortgage principal payments totaling $350.0 million and received $203.5 million in proceeds from non-recourse mortgage financings related to new and existing investments (Note 10). We paid distributions to our stockholders for the fourth quarter of 2016 and first quarter of 2017 totaling $168.4 million, which consisted of $91.5 million of cash distributions and $76.9 million of distributions that were reinvested by stockholders in shares of our common stock through our DRIP. We received $67.3 million of proceeds related to the Revolver under our Senior Credit Facility, which was fully repaid. We also paid $46.3 million for the repurchase of shares pursuant to our redemption plan as described below, and paid distributions of $29.2 million to affiliates that hold noncontrolling interests in various investments jointly owned with us.

Distributions

Our objectives are to generate sufficient cash flow over time to provide stockholders with distributions and to continue to seek investments with potential for capital appreciation throughout varying economic cycles. During the nine months ended September 30, 2017, we declared distributions to our stockholders totaling $169.1 million, which consisted of $92.8 million of cash distributions and $76.3 million of distributions reinvested by stockholders in our shares through our DRIP. We funded all of these distributions from Net cash provided by operating activities. Since inception, we have funded all of our cumulative distributions from Net cash provided by operating activities. Cash flow from operations is first applied to current period distributions, then to any deficit from prior period cumulative negative cash flow, and finally to future period distributions. As we have fully invested the proceeds of our offerings, we expect that in the future, if distributions cannot be fully sourced from net cash provided by operating activities, they may be sourced from the proceeds of financings or sales of assets.

Redemptions

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, 2017, we redeemed 4,875,166 shares of our common stock pursuant to our redemption plan, comprised of 1,447 redemption requests at a weighted-average price per share of $9.48. As of the date of this Report, we have fulfilled all of the valid redemptions requests that have been received during the nine months ended September 30, 2017.

Summary of Financing
 
The table below summarizes our debt and Senior Credit Facility (dollars in thousands):
 
September 30, 2017
 
December 31, 2016
Carrying Value (a)
 
 
 
Fixed rate
$
1,108,182

 
$
1,236,058

Variable rate:
 
 
 
Senior Credit Facility  Term Loan
49,863

 
49,751

Non-recourse debt:
 
 
 
Amount subject to interest rate swaps and caps
457,969

 
292,291

Floating interest rate mortgage loans
380,575

 
493,901

 
888,407

 
835,943

 
$
1,996,589

 
$
2,072,001

Percent of Total Debt
 
 
 
Fixed rate
56
%
 
60
%
Variable rate
44
%
 
40
%
 
100
%
 
100
%
Weighted-Average Interest Rate at End of Period
 
 
 
Fixed rate
4.9
%
 
4.9
%
Variable rate (b)
2.9
%
 
2.9
%
__________


CPA®:17 – Global 9/30/2017 10-Q56


(a)
Aggregate debt balance includes unamortized deferred financing costs totaling $8.6 million and $9.5 million as of September 30, 2017 and December 31, 2016, respectively, and unamortized discount totaling $5.7 million and $6.3 million as of September 30, 2017 and December 31, 2016, respectively.
(b)
The impact of our derivative instruments is reflected in the weighted-average interest rates.

Cash Resources
 
At September 30, 2017, our cash resources consisted primarily of cash and cash equivalents totaling $161.2 million. Of this amount, $42.4 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 funds. As of the date of this Report, we also had unused capacity of $200.0 million on our Senior Credit Facility. Our cash resources may be used for future investments and can be used for working capital needs, other commitments, and distributions to our stockholders. In addition, our unleveraged properties had an aggregate carrying value of $459.7 million at September 30, 2017, although there can be no assurance that we would be able to obtain financing for these properties.
 
Cash Requirements
 
During the next 12 months, we expect that our cash requirements will include payments to acquire 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; making share repurchases pursuant to our redemption plan; making scheduled debt service payments and repayments of borrowings under our Revolver (Note 10); as well as other normal recurring operating expenses. Balloon payments totaling $185.1 million on our consolidated non-recourse mortgage loan obligations and Term Loan are also 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, or at all. Capital and other lease commitments totaling $8.5 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, scheduled and unscheduled debt payments on our mortgage loans, and repayments of borrowings under our Revolver through the use of our cash reserves; cash generated from operations; and proceeds from repayments of loans receivable, financings, and asset sales.

Off-Balance Sheet Arrangements and Contractual Obligations
 
The table below summarizes our debt, off-balance sheet arrangements, and other contractual obligations (primarily our capital commitments and lease obligations) at September 30, 2017 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
Mortgage debt, net — principal (a)
$
1,960,894

 
$
162,586

 
$
399,299

 
$
639,294

 
$
759,715

Senior Credit Facility – Term Loan — principal (b)
50,000

 
50,000

 

 

 

Deferred acquisition fees — principal
5,610

 
3,386

 
2,224

 

 

Interest on borrowings and deferred acquisition fees
318,846

 
77,186

 
132,060

 
78,689

 
30,911

Operating and other lease commitments (c)
72,393

 
2,871

 
5,996

 
2,607

 
60,919

Asset retirement obligations, net (d)
16,657

 

 

 

 
16,657

Capital commitments (e)
6,529

 
5,663

 
866

 

 

 
$
2,430,929

 
$
301,692

 
$
540,445

 
$
720,590

 
$
868,202

__________
(a)
Excludes deferred financing costs totaling $8.5 million and unamortized discount, net of $5.6 million, which were included in Mortgage debt, net at September 30, 2017.
(b)
Excludes deferred financing costs of $0.1 million and unamortized discount of less than $0.1 million on our Senior Credit Facility, which is scheduled to mature on August 26, 2018, unless extended pursuant to its terms.
(c)
Operating commitments consist of rental obligations under ground leases. Other lease commitments consist of our estimated share of future rents payable for the purpose of leasing office space pursuant to the advisory agreement. Amounts are estimated based on current allocation percentages among WPC and the other Managed Programs as of September 30, 2017 (Note 3).


CPA®:17 – Global 9/30/2017 10-Q57


(d)
Represents the estimated amount of future obligations for the removal of asbestos and environmental waste in connection with several of our investments, payable upon the retirement or sale of the assets.
(e)
Capital commitments include $5.6 million and $0.9 million related to unfunded construction commitments and tenant improvements allowances, respectively.
 
Amounts in the table above that relate to our foreign operations are based on the exchange rate of the local currencies at September 30, 2017, which consisted primarily of the euro. At September 30, 2017, we had no material capital lease obligations for which we were the lessee, either individually or in the aggregate.

Equity Method 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 (Note 6). At September 30, 2017, on a combined basis, these investments had total assets of approximately $4.4 billion and third-party non-recourse mortgage debt of $2.7 billion. At that date, our pro rata share of the aggregate debt for these investments was $459.7 million. Cash requirements with respect to our share of these debt obligations are discussed above under Cash Requirements.

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, MFFO, and Adjusted MFFO, which are non-GAAP measures. We believe that these measures are useful to investors to consider because they may assist them to better understand and measure the performance of our business over time and against similar companies. A description of FFO, MFFO, and Adjusted MFFO and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are provided below.
 
FFO, MFFO, and Adjusted 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 non-GAAP measure known as FFO, which we believe to be an appropriate supplemental measure, when used in addition to and in conjunction with results presented in accordance with GAAP, to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental non-GAAP 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. 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 from real estate assets; and after adjustments for unconsolidated partnerships and jointly owned investments. Adjustments for unconsolidated partnerships and jointly owned investments are calculated to reflect FFO. Our FFO calculation complies with NAREIT’s policy described above. However, NAREIT’s definition of FFO does not distinguish between the conventional method of equity accounting and the hypothetical liquidation at book value method of accounting for unconsolidated partnerships and jointly owned investments.
 
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


CPA®:17 – Global 9/30/2017 10-Q58


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. It should be noted, 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 due to the fact that impairments are based on estimated future undiscounted cash flows, it could be difficult to recover any impairment charges. However, FFO, MFFO, and Adjusted 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 measures FFO, MFFO, and Adjusted MFFO and the adjustments to GAAP in calculating FFO, MFFO, and Adjusted 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 changes to GAAP accounting for real estate subsequent to the establishment of NAREIT’s definition of FFO have prompted an increase in cash-settled 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-traded 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-traded REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after acquisition activity ceases. Due to the above factors and other unique features of publicly registered, non-traded REITs, the Investment Program Association, an industry trade group, has standardized a measure known as MFFO, which the Investment Program Association has recommended as a supplemental measure for publicly registered non-traded REITs and which we believe to be another appropriate non-GAAP measure to reflect the operating performance of a non-traded 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 essentially all of our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-traded REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance, with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. 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 Investment Program Association’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations, or the Practice Guideline, issued by the Investment Program Association in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, included in the determination of GAAP net income, as applicable: 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


CPA®:17 – Global 9/30/2017 10-Q59


to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, 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 that are unrealized and may not ultimately be realized.
 
Our MFFO calculation complies with the Investment Program Association’s Practice Guideline described above. In calculating MFFO, we exclude acquisition-related 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 income in determining cash flow from operating activities.

Our management uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other non-traded 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 MFFO and the adjustments used to calculate it allow us to present our performance in a manner that takes into account certain characteristics unique to non-traded REITs, such as their limited life, defined acquisition period, and targeted exit strategy, and is therefore a useful measure for 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. 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.

In addition, our management uses Adjusted MFFO as another measure of sustainable operating performance. Adjusted MFFO adjusts MFFO for deferred income tax expenses and benefits, which are non-cash items that may cause short-term fluctuations in net income but have no impact on current period cash flows. Additionally, we adjust MFFO to reflect the realized gains/losses on the settlement of foreign currency derivatives to arrive at Adjusted MFFO. Foreign currency derivatives are a fundamental part of our operations in that they help us manage the foreign currency exposure we have associated with cash flows from our international investments

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, MFFO, and Adjusted MFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO, MFFO, and Adjusted MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income 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, MFFO, and Adjusted 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, MFFO, and Adjusted MFFO. In the future, the SEC, NAREIT, or another regulatory body may decide to standardize the allowable adjustments across the non-traded REIT industry and we would have to adjust our calculation and characterization of FFO, MFFO, or Adjusted MFFO accordingly.



CPA®:17 – Global 9/30/2017 10-Q60


FFO, MFFO, and Adjusted MFFO were as follows (in thousands): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net income attributable to CPA®:17 – Global
$
24,729

 
$
58,218

 
$
93,546

 
$
185,499

Adjustments:
 
 
 
 
 
 
 
Depreciation and amortization of real property
28,674

 
31,279

 
87,622

 
87,657

Loss (gain) on sale of real estate
39

 
(82,287
)
 
(2,871
)
 
(132,702
)
Impairment charges on real estate

 
29,183

 
4,489

 
29,183

Proportionate share of adjustments to equity in net income of partially owned entities to arrive at FFO
15,116

 
7,461

 
33,057

 
25,380

Proportionate share of adjustments for noncontrolling interests to arrive at FFO (a)
(127
)
 
(144
)
 
(1,879
)
 
(431
)
Total adjustments
43,702

 
(14,508
)
 
120,418

 
9,087

FFO attributable to CPA®:17 – Global (as defined by NAREIT)
68,431

 
43,710

 
213,964

 
194,586

Adjustments:
 
 
 
 
 
 
 
Unrealized gains on foreign currency, derivatives, and other
(1,697
)
 
(722
)
 
(13,269
)
 
(676
)
Straight-line and other rent adjustments (b)
(3,875
)
 
(4,384
)
 
(12,538
)
 
(14,833
)
Realized gains on foreign currency, derivatives and other
(4,666
)
 
(2,006
)
 
(8,507
)
 
(6,445
)
Acquisition and other expenses (c)
406

 
1,446

 
716

 
6,786

Amortization of premiums/discounts on debt investments, net
286

 
613

 
1,468

 
1,516

Loss on extinguishment of debt
13

 
15,990

 
1,980

 
23,580

Impairment charges, held to maturity securities
276

 

 
306

 

Above- and below-market rent intangible lease amortization, net (d) (e)
334

 
(4,092
)
 
(18,177
)
 
(4,324
)
Gain on change in control of interests (f)

 

 

 
(49,922
)
Proportionate share of adjustments to equity in net income of partially owned entities to arrive at MFFO
5,148

 
(2,753
)
 
13,263

 
1,650

Proportionate share of adjustments for noncontrolling interests to arrive at MFFO
7

 
84

 
73

 
293

Total adjustments
(3,768
)
 
4,176

 
(34,685
)
 
(42,375
)
MFFO attributable to CPA®:17 – Global
64,663

 
47,886

 
179,279

 
152,211

Adjustments:
 
 
 
 
 
 
 
Hedging gains
1,777

 
2,172

 
5,357

 
5,850

Deferred taxes and other tax adjustments
194

 
1,737

 
219

 
3,647

Total adjustments
1,971

 
3,909

 
5,576

 
9,497

Adjusted MFFO attributable to CPA®:17 – Global
$
66,634

 
$
51,795

 
$
184,855

 
$
161,708

__________
(a)
Includes $1.5 million related to an impairment charge on one of our consolidated joint-venture investments during the nine months ended September 30, 2017 (Note 8).
(b)
Under GAAP, rental receipts are allocated to periods using an accrual basis. This may result in timing of 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 and Adjusted 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.


CPA®:17 – Global 9/30/2017 10-Q61


(c)
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-traded REITs that have completed their acquisition activity and have other similar operating characteristics. By excluding expensed acquisition costs, management believes MFFO and Adjusted 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 our Advisor or third parties. Acquisition fees and expenses under GAAP are considered operating expenses and as expenses included in the determination of net income, a performance measure 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. On January 1, 2017, we adopted ASU 2017-01 (Note 2), and, as a result, transaction costs are more likely to be capitalized since we expect most of our future acquisitions to be classified as asset acquisitions under this new standard. In addition, goodwill will no longer be allocated and written off upon sale if future sales were deemed to be sales of assets and not businesses.
(d)
Includes $15.7 million write-off and $3.3 million acceleration of a below-market rent lease liabilities, pertaining to our KBR Inc., properties that were recognized in Rental income during the nine months ended September 30, 2017 (Note 13).
(e)
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 and Adjusted MFFO provides useful supplemental information on the performance of the real estate.
(f)
Gain on change in control of interests during the nine months ended September 30, 2016 represents a gain recognized on our acquisition of a 15% controlling interest in five self-storage properties, which we had previously accounted for as an equity method investment.



CPA®:17 – Global 9/30/2017 10-Q62


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 that we are exposed to are interest rate risk and foreign currency exchange risk. We are also exposed to further market risk as a result of tenant concentrations in certain industries and/or geographic regions, since 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, our Advisor views our collective tenant roster as a portfolio and attempts to diversify such portfolio 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 forward contracts to hedge our foreign currency cash flow exposures.

Interest Rate Risk

The values of our real estate, related fixed-rate debt obligations, our Senior Credit Facility, and our loans receivable investments are 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, which may affect our ability to refinance property-level mortgage debt when balloon payments are scheduled, if we do not choose to repay the debt when due. 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 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 have historically attempted to obtain non-recourse mortgage financing on a long-term, fixed-rate basis. However, from time to time, we or our joint investment partners have obtained, and may in the future obtain, variable-rate non-recourse mortgage loans, and, as a result, we have entered into, swaptions, and may continue to 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 a 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, and interest rate caps limit the effective borrowing rate of variable-rate debt obligations while allowing participants to share in downward shifts in interest rates. These interest rate swaps and caps are derivative instruments that, where applicable, are designated as cash flow hedges on the forecasted interest payments on the debt obligation. The face amount on which the swaps or caps are based is not exchanged. A swaption is an option that gives us the right, but not the obligation, to enter into an interest rate swap under which we would pay a fixed-rate and receive a variable-rate. At the option’s expiration, we may also elect to cash settle the option if such option is “in-the-money” or allow the option to expire at no additional cost to us. Our objective in using these derivatives is to limit our exposure to interest rate movements. At September 30, 2017, we estimated that the total fair value of our interest rate swaps, and caps, 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 $4.9 million (Note 9).

At September 30, 2017, our outstanding debt either bore interest at fixed rates, bore interest at floating rates, was swapped or capped 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, 2017 ranged from 1.9% to 7.4%. The contractual annual interest rates on our variable-rate debt at September 30, 2017 ranged from 1.3% to 6.0%. Our debt obligations are more fully described in Note 10 and Liquidity and Capital Resources — Summary of Financing in Item 7 above. The following table presents principal cash outflows based upon expected maturity dates of our debt obligations outstanding at September 30, 2017 (in thousands):
 
2017 (Remaining)
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
 
Fair value
Fixed-rate debt (a)
$
90,969

 
$
57,892

 
$
29,615

 
$
125,060

 
$
213,993

 
$
596,601

 
$
1,114,130

 
$
1,133,763

Variable-rate debt (a) (b)
$
8,453

 
$
71,003

 
$
44,537

 
$
300,691

 
$
235,471

 
$
236,609

 
$
896,764

 
$
845,161

__________
(a)
Amounts are based on the exchange rate at September 30, 2017, as applicable.


CPA®:17 – Global 9/30/2017 10-Q63


(b)
Includes the $50.0 million Term Loan outstanding at September 30, 2017 under our Senior Credit Facility, which is scheduled to mature on August 26, 2018, unless extended pursuant to its terms.

At September 30, 2017, the estimated fair value of our fixed-rate debt and 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, or that has been subject to interest rate caps, is affected by changes in interest rates. A decrease or increase in interest rates of 1% would change the estimated fair value of this debt at September 30, 2017 by an aggregate increase of $48.3 million or an aggregate decrease of $70.8 million, respectively. Annual interest expense on our unhedged variable-rate debt at September 30, 2017 would increase or decrease by $4.3 million for each respective 1% change in annual interest rates.

As more fully described under Liquidity and Capital Resources — Summary of Financing in Item 2 above, a portion of our variable-rate debt in the table above bore interest at fixed rates at September 30, 2017, 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 international investments, primarily in Europe and Asia, and as a result, are subject to risk from the effects of exchange rate movements in various foreign currencies, primarily the euro and, to a lesser extent, the British pound sterling, the Japanese yen, and the Norwegian krone, which may affect future costs and cash flows. Although all of our foreign investments through the third quarter of 2017 were conducted in these currencies, we may conduct business in other currencies in the future. 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 have obtained, and may in the future obtain, non-recourse mortgage financing in local currencies. 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, to some extent, mitigate the risk from changes in foreign currency exchange rates.

The June 23, 2016 referendum by voters in the United Kingdom to exit the European Union, a process commonly referred to as “Brexit,” adversely impacted global markets, including certain currencies, and has resulted in a decline in the value of the British pound sterling as compared to the U.S. dollar. Volatility in exchange rates is expected to continue as the United Kingdom negotiates its likely exit from the European Union. As of September 30, 2017, 1% and 43% of our total pro rata ABR was from the United Kingdom and other European Union countries, respectively.  Any impact from Brexit on us will depend, in part, on the outcome of the related tariff, trade, regulatory, and other negotiations. Although it is unknown what the result of those negotiations will be, it is possible that new terms may adversely affect our operations and financial results.

Scheduled future minimum rents, exclusive of renewals, under non-cancelable operating leases, for our consolidated foreign operations for the remainder of 2017, during each of the next four calendar years following December 31, 2017 and thereafter, are as follows (in thousands):
Lease Revenues (a)
 
2017 (Remaining)
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
Euro (b)
 
$
29,792

 
$
118,314

 
$
118,496

 
$
119,003

 
$
118,109

 
$
869,882

 
$
1,373,596

British pound sterling (c)
 
1,310

 
5,199

 
5,199

 
5,213

 
5,199

 
46,892

 
69,012

Japanese yen (d)
 
683

 
2,710

 
2,710

 
2,717

 
2,710

 
653

 
12,183

 
 
$
31,785

 
$
126,223

 
$
126,405

 
$
126,933

 
$
126,018

 
$
917,427

 
$
1,454,791




CPA®:17 – Global 9/30/2017 10-Q64


Scheduled debt service payments (principal and interest) for mortgage notes payable for our consolidated foreign operations for the remainder of 2017, during each of the next four calendar years following December 31, 2017 and thereafter, are as follows (in thousands):
Debt Service (a) (e)
 
2017 (Remaining)
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
Euro (b)
 
$
76,677

 
$
31,449

 
$
28,535

 
$
106,292

 
$
162,468

 
$
268,877

 
$
674,298

British pound sterling (c)
 
425

 
1,678

 
12,493

 
375

 
17,412

 

 
32,383

Japanese yen (d)
 
23,273

 

 

 

 

 

 
23,273

 
 
$
100,375

 
$
33,127

 
$
41,028

 
$
106,667

 
$
179,880

 
$
268,877

 
$
729,954

__________
(a)
Amounts are based on the applicable exchange rates at September 30, 2017. Contractual rents and debt obligations are denominated in the functional currency of the country of each property. Our foreign operations denominated in the Norwegian krone are related to an unconsolidated jointly owned investment and is excluded from the amounts in the tables.
(b)
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, 2017 of $7.0 million.
(c)
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, 2017 of $0.4 million.
(d)
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, 2017 of less than $0.1 million.
(e)
Interest on unhedged variable-rate debt obligations was calculated using the applicable annual interest rates and balances outstanding at September 30, 2017.

As a result of scheduled balloon payments on certain of our international non-recourse mortgage loans, projected debt service obligations exceed projected lease revenues in 2017 and 2021. In 2017, balloon payments totaling $92.4 million are due on four non-recourse mortgage loans that are collateralized by properties that we own. We currently anticipate that, by their respective due dates, we will have refinanced or repaid certain of these loans using our cash resources, including unused capacity on our credit facility and proceeds from dispositions.

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 certain areas in excess of 10%, based on the percentage of our consolidated total revenues or ABR.

For the three months ended September 30, 2017, our consolidated portfolio had the following significant characteristics in excess of 10%, based on the percentage of our consolidated total revenues:

70% related to domestic properties, which included a concentration in both Texas and New York of 11%; and
30% related to international properties.

At September 30, 2017, our consolidated net-leased portfolio, which excludes investments within our Self Storage segment as well as in our All Other category, had the following significant property and lease characteristics in excess of 10% in certain areas, based on the percentage of our pro rata ABR as of that date:

55% related to domestic properties;
45% related to international properties;
28% related to warehouse facilities, 27% related to office facilities, 25% related to retail facilities, and 14% related to industrial facilities; and
29% related to the retail stores industry, 13% related to the grocery industry, and 10% related to the business services industry.


CPA®:17 – Global 9/30/2017 10-Q65


Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Our disclosure controls and procedures include internal 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, 2017, 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, 2017 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 controls over financial reporting.



CPA®:17 – Global 9/30/2017 10-Q66


PART II — OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities.

Unregistered Sales of Equity Securities

During the three months ended September 30, 2017, we issued 728,520 shares of our common stock to our Advisor as consideration for asset management fees. These shares were issued at $10.11 per share, which represented 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 of 1933, as amended, the shares issued were deemed to be exempt from registration. In acquiring our shares, our Advisor represented that such interests were being acquired by it for investment purposes and not with a view to the distribution thereof. From inception through September 30, 2017, we have issued a total of 13,919,229 shares of our common stock to our Advisor as consideration for asset management fees.

All prior sales of unregistered securities have been reported in our previously filed quarterly and annual reports on Form 10-Q and Form 10-K, respectively.

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, 2017:
 
 
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)
2017 Period
 
 
 
 
July
 
1,500

 
$
9.40

 
N/A
 
N/A
August
 

 

 
N/A
 
N/A
September
 
1,913,870

 
9.50

 
N/A
 
N/A
Total
 
1,915,370

 
 
 
 
 
 
__________
(a)
Represents shares of our common stock requested to be 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. During the three months ended September 30, 2017, we redeemed 578 redemption requests for our common stock. As of the date of this Report, we have fulfilled all of the valid requests that we received during the three months ended September 30, 2017. The average price paid per share will vary depending on the number of redemption requests that were made during the period, the most recently published NAV, and the amount of time a stockholder has held their respective shares.



CPA®:17 – Global 9/30/2017 10-Q67


Item 6. Exhibits.

The following exhibits are filed with this Report. Documents other than those designated as being filed herewith are incorporated herein by reference.
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, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, 2017 and December 31, 2016 (ii) Consolidated Statements of Income for three and nine months ended September 30, 2017 and 2016, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016, (iv) Consolidated Statements of Equity for the nine months ended September 30, 2017 and 2016, (v) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016, and (vi) Notes to Consolidated Financial Statements.
 
Filed herewith



CPA®:17 – Global 9/30/2017 10-Q68


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 8, 2017
By:
/s/ Mallika Sinha
 
 
 
Mallika Sinha
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial Officer)
 
 
 
 
Date:
November 8, 2017
 
 
 
 
By:
/s/ Kristin Sabia
 
 
 
Kristin Sabia
 
 
 
Chief Accounting Officer
 
 
 
(Principal Accounting Officer)



CPA®:17 – Global 9/30/2017 10-Q69


EXHIBIT INDEX

The following exhibits are filed with this Report. Documents other than those designated as being filed herewith are incorporated herein by reference.
Exhibit No.

 
Description
 
Method of Filing
31.1

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

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

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

 
The following materials from Corporate Property Associates 17 – Global Incorporated’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, 2017 and December 31, 2016 (ii) Consolidated Statements of Income for three and nine months ended September 30, 2017 and 2016, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016, (iv) Consolidated Statements of Equity for the nine months ended September 30, 2017 and 2016, (v) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016, and (vi) Notes to Consolidated Financial Statements.
 
Filed herewith