Corporate Property Associates 18-Global Inc.
05/09/2022 | Press release | Distributed by Public on 05/09/2022 14:20
Quarterly Report (Form 10-Q)
cpa18-20220331
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from__________ to __________
Commission File Number: 000-54970
CORPORATE PROPERTY ASSOCIATES 18 - GLOBAL INCORPORATED
(Exact name of registrant as specified in its charter)
| Maryland | 90-0885534 | |
| (State of incorporation) | (I.R.S. Employer Identification No.) | |
| One Manhattan West, 395 9th Avenue, 58th Floor | ||
| New York, | New York | 10001 |
| (Address of principal executive offices) | (Zip Code) |
Investor Relations (212) 492-8920
(212) 492-1100
(Registrant's telephone numbers, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
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☑No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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☑No ☐
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 |
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Accelerated filer
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Non-accelerated filer |
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Smaller reporting company
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Emerging growth company
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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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No ☑
Registrant has 119,037,943 shares of Class A common stock, $0.001 par value, and 30,650,918 shares of Class C common stock, $0.001 par value, outstanding at May 4, 2022.
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INDEX
| Page No. | |
| PART I - FINANCIAL INFORMATION | |
| Item 1. Financial Statements (Unaudited) | |
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Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021
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2
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Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2022 and 2021
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3
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Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2022 and 2021
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4
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Condensed Consolidated Statements of Equity for the Three Months Ended March 31, 2022 and 2021
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5
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Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021
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6
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Notes to Condensed Consolidated Financial Statements
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7
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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25
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
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45
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Item 4. Controls and Procedures
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47
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| PART II - OTHER INFORMATION | |
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Item 1A. Risk Factors
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48
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Item 2. Unregistered Sales of Equity Securities
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49
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Item 6. Exhibits
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50
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Signatures
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51
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Forward-Looking Statements
This Quarterly Report on Form 10-Q (this "Report"), including Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of Part I of this Report, contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions. These forward-looking statements include, but are not limited to, statements regarding: the Proposed Merger (as defined herein), including the impact thereof; our corporate strategy and estimated or future economic performance and results, including our expectations surrounding the impact of the novel coronavirus ("COVID-19") pandemic on our business, financial condition, liquidity, results of operations, and prospects; the amount and timing of any future distributions; our capital structure, future capital expenditure levels (including any plans to fund our future liquidity needs), and future leverage and debt service obligations; statements that we make regarding our ability to remain qualified for taxation as a real estate investment trust ("REIT"); the impact of recently issued accounting pronouncements and other regulatory activity; and the general economic outlook, including the continued impact of the COVID-19 pandemic.
These statements are based on the current expectations of our management. It is important to note that our actual results could be materially different from those projected in such forward-looking statements. There are a number of risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. Other unknown or unpredictable risks or uncertainties, like the risks related to the effects of pandemics and global outbreaks of contagious diseases (such as the current COVID-19 pandemic) or the fear of such outbreaks, could also have material adverse effects on our business, financial condition, liquidity, results of operations, and prospects. You should exercise caution in relying on forward-looking statements as they involve known and unknown risks, uncertainties, and other factors that may materially affect our future results, performance, achievements, or transactions. Information on factors that could impact actual results and cause them to differ from what is anticipated in the forward-looking statements contained herein is included in this Report, as well as in our other filings with the Securities and Exchange Commission ("SEC"), including but not limited to those described in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 25, 2022 (the "2021 Annual Report"), in Part II, Item 1A. Risk Factors herein, and in Risk Factors in our definitive proxy statement/prospectus filed on April 27, 2022 in connection with the Proposed Merger. Moreover, because we operate in a very competitive and rapidly changing environment, new risks are likely to emerge from time to time. Given these risks and uncertainties, shareholders are cautioned not to place undue reliance on these forward-looking statements as a prediction of future results, which speak only as of the date of this Report, unless noted otherwise. Except as required by federal securities laws and the rules and regulations of the SEC, we do not undertake to revise or update any forward-looking statements.
All references to "Notes" throughout the document refer to the footnotes to the condensed consolidated financial statements of the registrant in Part I, Item 1. Financial Statements (Unaudited).
CPA:18 - Global 3/31/2022 10-Q - 1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
CORPORATE PROPERTY ASSOCIATES 18 - GLOBAL INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
| March 31, 2022 | December 31, 2021 | |||
| Assets | ||||
| Investments in real estate: | ||||
| Real estate - Land, buildings and improvements | $ | 1,127,596 | $ | 1,513,254 |
| Operating real estate - Land, buildings and improvements | 477,909 | 477,588 | ||
| Net investments in sales-type leases | 430,515 | - | ||
| Real estate under construction | 83,178 | 103,309 | ||
| Net investments in direct financing leases | 11,453 | 11,449 | ||
| In-place lease and other intangible assets | 276,148 | 285,222 | ||
| Investments in real estate | 2,406,799 | 2,390,822 | ||
| Accumulated depreciation and amortization | (440,146) | (448,277) | ||
| Net investments in real estate | 1,966,653 | 1,942,545 | ||
| Cash and cash equivalents | 37,579 | 52,133 | ||
| Other assets, net | 141,215 | 148,191 | ||
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Total assets (a)
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$ | 2,145,447 | $ | 2,142,869 |
| Liabilities and Equity | ||||
| Non-recourse secured debt, net | $ | 1,179,301 | $ | 1,253,045 |
| Accounts payable, accrued expenses and other liabilities | 136,776 | 127,173 | ||
| Due to affiliates | 18,845 | 7,696 | ||
| Distributions payable | 9,355 | 9,330 | ||
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Total liabilities (a)
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1,344,277 | 1,397,244 | ||
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Commitments and contingencies (Note 10)
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||||
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Preferred stock, $0.001 par value; 50,000,000 shares authorized; none issued
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- | - | ||
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Class A common stock, $0.001 par value; 320,000,000 shares authorized; 119,037,943 and 118,684,766 shares, respectively, issued and outstanding
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119 | 119 | ||
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Class C common stock, $0.001 par value; 80,000,000 shares authorized; 30,650,918 and 30,600,539 shares, respectively, issued and outstanding
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31 | 31 | ||
| Additional paid-in capital | 1,319,086 | 1,315,260 | ||
| Distributions and accumulated losses | (495,644) | (555,256) | ||
| Accumulated other comprehensive loss | (57,317) | (51,794) | ||
| Total stockholders' equity | 766,275 | 708,360 | ||
| Noncontrolling interests | 34,895 | 37,265 | ||
| Total equity | 801,170 | 745,625 | ||
| Total liabilities and equity | $ | 2,145,447 | $ | 2,142,869 |
__________
(a)See Note 2for details related to variable interest entities ("VIEs").
See Notes to Condensed Consolidated Financial Statements.
CPA:18 - Global 3/31/2022 10-Q - 2
CORPORATE PROPERTY ASSOCIATES 18 - GLOBAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except share and per share amounts)
| Three Months Ended March 31, | ||||
| 2022 | 2021 | |||
| Revenues | ||||
| Lease revenues - net-leased | $ | 31,070 | $ | 28,723 |
| Lease revenues - operating real estate | 21,190 | 19,347 | ||
| Other operating and interest income | 438 | 299 | ||
| 52,698 | 48,369 | |||
| Operating Expenses | ||||
| Depreciation and amortization | 16,016 | 16,996 | ||
| Impairment charges | 9,221 | - | ||
| Operating real estate expenses | 7,205 | 7,147 | ||
| Property expenses, excluding reimbursable tenant costs | 5,062 | 4,695 | ||
| Reimbursable tenant costs | 3,619 | 3,543 | ||
| Merger and other expenses | 2,015 | - | ||
| General and administrative | 1,922 | 1,895 | ||
| 45,060 | 34,276 | |||
| Other Income and Expenses | ||||
| Gain on sale of real estate, net | 77,271 | - | ||
| Interest expense | (11,708) | (11,747) | ||
| Other gains and (losses) | (910) | (969) | ||
| 64,653 | (12,716) | |||
| Income before income taxes | 72,291 | 1,377 | ||
| (Provision for) benefit from income taxes | (1,289) | 1,101 | ||
| Net Income | 71,002 | 2,478 | ||
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Net income attributable to noncontrolling interests (inclusive of Available Cash Distributions to a related party of $2,587 and $1,539, respectively)
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(2,034) | (1,967) | ||
| Net Income Attributable to CPA:18 - Global | $ | 68,968 | $ | 511 |
| Class A Common Stock | ||||
| Net income attributable to CPA:18 - Global | $ | 54,830 | $ | 403 |
| Basic and diluted weighted-average shares outstanding | 119,067,927 | 119,516,815 | ||
| Basic and diluted earnings per share | $ | 0.46 | $ | - |
| Class C Common Stock | ||||
| Net income attributable to CPA:18 - Global | $ | 14,138 | $ | 108 |
| Basic and diluted weighted-average shares outstanding | 30,695,542 | 32,187,435 | ||
| Basic and diluted earnings per share | $ | 0.46 | $ | - |
See Notes to Condensed Consolidated Financial Statements.
CPA:18 - Global 3/31/2022 10-Q - 3
CORPORATE PROPERTY ASSOCIATES 18 - GLOBAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in thousands)
| Three Months Ended March 31, | ||||
| 2022 | 2021 | |||
| Net Income | $ | 71,002 | $ | 2,478 |
| Other Comprehensive Loss | ||||
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Foreign currency translation adjustments
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(7,606) | (20,158) | ||
| Unrealized gain on derivative instruments | 1,849 | 1,377 | ||
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(5,757) | (18,781) | ||
| Comprehensive Income (Loss) | 65,245 | (16,303) | ||
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Amounts Attributable to Noncontrolling Interests
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| Net income | (2,034) | (1,967) | ||
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Foreign currency translation adjustments
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248 | 1,314 | ||
| Unrealized gain on derivative instruments | (14) | (2) | ||
| Comprehensive income attributable to noncontrolling interests | (1,800) | (655) | ||
| Comprehensive Income (Loss) Attributable to CPA:18 - Global | $ | 63,445 | $ | (16,958) |
See Notes to Condensed Consolidated Financial Statements.
CPA:18 - Global 3/31/2022 10-Q - 4
CORPORATE PROPERTY ASSOCIATES 18 - GLOBAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
(in thousands, except share and per share amounts)
| CPA:18 - Global Stockholders | ||||||||||||||||||
| Additional Paid-In Capital |
Distributions and Accumulated Losses |
Accumulated Other Comprehensive Loss |
Total CPA:18 - Global Stockholders | Noncontrolling Interests | ||||||||||||||
| Common Stock | ||||||||||||||||||
| Class A | Class C | |||||||||||||||||
| Shares | Amount | Shares | Amount | Total | ||||||||||||||
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Balance at January 1, 2022
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118,684,766 | $ | 119 | 30,600,539 | $ | 31 | $ | 1,315,260 | $ | (555,256) | $ | (51,794) | $ | 708,360 | $ | 37,265 | $ | 745,625 |
| Shares issued | 351,685 | - | 123,134 | - | 4,384 | 4,384 | 4,384 | |||||||||||
| Shares issued to affiliate | 230,000 | - | 2,086 | 2,086 | 2,086 | |||||||||||||
| Distributions to noncontrolling interests | - | (4,170) | (4,170) | |||||||||||||||
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Distributions declared ($0.0625 per share to Class A and Class C)
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(9,356) | (9,356) | (9,356) | |||||||||||||||
| Net income | 68,968 | 68,968 | 2,034 | 71,002 | ||||||||||||||
| Other comprehensive loss: | ||||||||||||||||||
| Foreign currency translation adjustments | (7,358) | (7,358) | (248) | (7,606) | ||||||||||||||
| Unrealized gain on derivative instruments | 1,835 | 1,835 | 14 | 1,849 | ||||||||||||||
| Repurchase of shares | (228,508) | - | (72,755) | - | (2,644) | (2,644) | (2,644) | |||||||||||
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Balance at March 31, 2022
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119,037,943 | $ | 119 | 30,650,918 | $ | 31 | $ | 1,319,086 | $ | (495,644) | $ | (57,317) | $ | 766,275 | $ | 34,895 | $ | 801,170 |
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Balance at January 1, 2021
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119,059,188 | $ | 119 | 32,096,796 | $ | 32 | $ | 1,331,278 | $ | (514,859) | $ | (19,930) | $ | 796,640 | $ | 55,911 | $ | 852,551 |
| Shares issued | 384,998 | - | 132,641 | - | 4,425 | 4,425 | 4,425 | |||||||||||
| Shares issued to affiliate | 361,448 | - | 3,092 | 3,092 | 3,092 | |||||||||||||
| Distributions to noncontrolling interests | - | (3,672) | (3,672) | |||||||||||||||
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Distributions declared ($0.0625 per share to Class A and Class C)
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(9,470) | (9,470) | (9,470) | |||||||||||||||
| Net income | 511 | 511 | 1,967 | 2,478 | ||||||||||||||
| Other comprehensive loss: | ||||||||||||||||||
| Foreign currency translation adjustments | (18,844) | (18,844) | (1,314) | (20,158) | ||||||||||||||
| Unrealized gain on derivative instruments | 1,375 | 1,375 | 2 | 1,377 | ||||||||||||||
| Repurchase of shares | (299,204) | - | (213,687) | - | (4,425) | (4,425) | (4,425) | |||||||||||
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Balance at March 31, 2021
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119,506,430 | $ | 119 | 32,015,750 | $ | 32 | $ | 1,334,370 | $ | (523,818) | $ | (37,399) | $ | 773,304 | $ | 52,894 | $ | 826,198 |
See Notes to Condensed Consolidated Financial Statements.
CPA:18 - Global 3/31/2022 10-Q - 5
CORPORATE PROPERTY ASSOCIATES 18 - GLOBAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
| Three Months Ended March 31, | ||||
| 2022 | 2021 | |||
| Cash Flows - Operating Activities | ||||
| Net Cash Provided by Operating Activities | $ | 30,047 | $ | 16,652 |
| Cash Flows - Investing Activities | ||||
| Proceeds from sale of real estate | 32,364 | - | ||
| Funding for development projects | (7,893) | (46,225) | ||
| Capital expenditures on real estate | (2,160) | (814) | ||
| Value added taxes refunded in connection with construction funding | 1,908 | 747 | ||
| Value added taxes paid in connection with construction funding | (533) | (947) | ||
| Payment of deferred acquisition fees to an affiliate | - | (1,658) | ||
| Other investing activities, net | - | (1,538) | ||
| Net Cash Provided by (Used in) Investing Activities | 23,686 | (50,435) | ||
| Cash Flows - Financing Activities | ||||
| Scheduled payments and prepayments of mortgage principal | (70,598) | (3,194) | ||
| Proceeds from notes payable to affiliate | 18,000 | - | ||
| Distributions paid | (9,331) | (9,447) | ||
| Repayment of notes payable to affiliate | (7,000) | (21,050) | ||
| Proceeds from issuance of shares | 4,307 | 4,427 | ||
| Distributions to noncontrolling interests | (4,170) | (3,672) | ||
| Proceeds from mortgage financing | 3,374 | 40,214 | ||
| Repurchase of shares | (2,644) | (4,425) | ||
| Other financing activities, net | (129) | (1,322) | ||
| Net Cash (Used in) Provided by Financing Activities | (68,191) | 1,531 | ||
| Change in Cash and Cash Equivalents and Restricted Cash During the Period | ||||
| Effect of exchange rate changes on cash and cash equivalents and restricted cash | (796) | (849) | ||
| Net decrease in cash and cash equivalents and restricted cash | (15,254) | (33,101) | ||
| Cash and cash equivalents and restricted cash, beginning of period | 81,728 | 119,713 | ||
| Cash and cash equivalents and restricted cash, end of period | $ | 66,474 | $ | 86,612 |
See Notes to Condensed Consolidated Financial Statements.
CPA:18 - Global 3/31/2022 10-Q - 6
CORPORATE PROPERTY ASSOCIATES 18 - GLOBAL INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Organization
Corporate Property Associates 18 - Global Incorporated ("CPA:18 - Global"), is a publicly owned, non-traded REIT, that invests primarily in a diversified portfolio of income-producing commercial real estate properties net leased to companies, both domestically and internationally. In addition, our portfolio includes self-storage and student housing investments. We were formed in 2012 and are managed by W. P. Carey Inc. ("WPC") through one of its subsidiaries (collectively our "Advisor"). As a REIT, we are not subject to U.S. federal income taxes on income and gains that we distribute to our stockholders as long as we satisfy certain requirements, principally relating to the nature of our income and the level of our distributions, among other factors. We earn revenue primarily by leasing the properties we own to single corporate tenants, predominantly on a triple-net lease basis, which requires the tenant to pay substantially all of the costs associated with operating and maintaining the property. We derive self-storage revenue from rents received from customers who rent storage space primarily under month-to-month leases for personal or business use. We earn student housing operating revenue primarily from leases of one year or less with individual students. Revenue is subject to fluctuation due to the timing of new lease transactions, lease terminations, lease expirations, contractual rent adjustments, tenant defaults, sales of properties, and changes in foreign currency exchange rates.
Substantially all of our assets and liabilities are held by CPA:18 Limited Partnership (the "Operating Partnership"), and as of March 31, 2022 we owned 99.97% of general and limited partnership interests in the Operating Partnership. The remaining interest in the Operating Partnership is held by a subsidiary of WPC.
On February 27, 2022, we entered into a merger agreement with WPC and certain of its subsidiaries (the "Merger Agreement"), pursuant to which we will merge with and into one of WPC's indirect subsidiaries in exchange for shares of WPC's common stock and cash (the "Proposed Merger"). On April 4, 2022, WPC filed a registration statement on Form S-4 with the SEC to register the shares of its common stock to be issued in the Proposed Merger. On April 25, 2022, WPC filed a Form S-4/A, which was declared effective by the SEC on April 27, 2022. We filed the definitive proxy statement/prospectus with the SEC on April 27, 2022 and commenced mailing the proxy statement/prospectus to our stockholders in early May 2022. The Proposed Merger and related transactions are subject to a number of closing conditions, including approval by our stockholders at a special meeting scheduled for July 26, 2022. If this approval is obtained and the other closing conditions are met, we currently expect the transaction to close in early August 2022, although there can be no assurance that the Proposed Merger will be completed at such time or at all.
Subject to the terms and conditions contained in the Merger Agreement, at the effective time of the Proposed Merger, each share of our common stock issued and outstanding immediately prior to the effective time of the Proposed Merger will be canceled and, in exchange for cancellation of such share, the rights attaching to such share will be converted automatically into the right to receive (i) 0.0978 shares of WPC common stock and (ii) $3.00 in cash, which we refer to herein as the Merger Consideration. Each share of our common stock owned by WPC immediately prior to the effective time of the Proposed Merger will automatically be canceled and retired, and will cease to exist, for no Merger Consideration. In light of the Proposed Merger, effective February 27, 2022, our board of directors suspended our Distribution Reinvestment Plan ("DRIP"), as well as repurchases of shares of our common stock from our stockholders under our quarterly redemption program (except for special circumstance redemptions). During the three months ended March 31, 2022, we incurred expenses related to the Proposed Merger totaling approximately $2.0 million, which is included in Merger and other expenses in our condensed consolidated statements of income.
As of March 31, 2022, our net lease portfolio was comprised of full or partial ownership interests in 52 properties, substantially all of which were fully occupied and triple-net leased to 47 tenants totaling 10.4 million square feet. The remainder of our portfolio was comprised of our full or partial ownership interests in 65 self-storage properties, three student housing development projects (two of which will become subject to net lease agreements upon their completion) and one student housing operating property, totaling approximately 5.1 million square feet.
We operate in three reportable business segments: Net Lease, Self Storage, and Other Operating Properties. Our Net Lease segment includes our investments in net-leased properties, whether they are accounted for as operating leases or direct financing leases. Our Self Storage segment is comprised of our investments in self-storage properties. Our Other Operating Properties segment is comprised of our investments in student housing properties. In addition, we have an All Other category that is comprised of our notes receivable investment. Our reportable business segments and All Other category are the same as our reporting units (Note 13).
CPA:18 - Global 3/31/2022 10-Q - 7
We raised aggregate gross proceeds in our initial public offering of approximately $1.2 billion through April 2, 2015, which is the date we closed our offering. We have fully invested the proceeds from our offering. In addition, from inception through March 31, 2022, $223.6 million and $64.9 million of distributions to our shareholders were reinvested in our Class A and Class C common stock, respectively, through our DRIP.
Note 2. Basis of Presentation
Basis of Presentation
Our interim condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a complete statement of our condensed consolidated financial position, results of operations, and cash flows in accordance with generally accepted accounting principles in the United States ("GAAP"). The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. In the opinion of management, the unaudited financial information for the interim periods presented in this Report reflects all normal and recurring adjustments necessary for a fair presentation of financial position, results of operations, and cash flows. Our interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 2021, which are included in the 2021 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 condensed consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.
Basis of Consolidation
Our condensed consolidated financial statements reflect all of our accounts, including those of our controlled subsidiaries. The portions of equity in consolidated subsidiaries that are not attributable, directly or indirectly, to us are presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated.
When we obtain an economic interest in an entity, we evaluate the entity to determine if it should be deemed a VIE and, if so, whether we are the primary beneficiary and are therefore required to consolidate the entity. There have been no significant changes in our VIE policies from what was disclosed in the 2021 Annual Report.
As of both March 31, 2022 and December 31, 2021, we considered ten entities to be VIEs, all of which we consolidated as we are considered the primary beneficiary. The following table presents a summary of selected financial data of the consolidated VIEs included in the condensed consolidated balance sheets (in thousands):
| March 31, 2022 | December 31, 2021 | |||
| Real estate - Land, buildings and improvements | $ | 314,301 | $ | 324,908 |
| Operating real estate - Land, buildings and improvements | 79,444 | 79,427 | ||
| Net investments in sales-type leases | 32,742 | - | ||
| Real estate under construction | 81,894 | 102,009 | ||
| In-place lease intangible assets | 100,094 | 101,450 | ||
| Accumulated depreciation and amortization | (110,570) | (107,765) | ||
| Total assets | 527,833 | 532,686 | ||
| Non-recourse secured debt, net | $ | 301,030 | $ | 321,747 |
| Total liabilities | 343,926 | 361,867 |
CPA:18 - Global 3/31/2022 10-Q - 8
Notes to Condensed Consolidated Financial Statements (Unaudited)
Foreign Currencies
We are subject to fluctuations in exchange rates between foreign currencies and the U.S. dollar (primarily the euro, the Norwegian krone, and, to a lesser extent, the British pound sterling). The following table reflects the end-of-period rate of the U.S. dollar in relation to foreign currencies:
| March 31, 2022 | December 31, 2021 | Percent Change | ||||
| British Pound Sterling | $ | 1.3123 | $ | 1.3479 | (2.6) | % |
| Euro | 1.1101 | 1.1326 | (2.0) | % | ||
| Norwegian Krone | 0.1143 | 0.1134 | 0.8 | % |
Revenue Recognition
Lease revenue (including straight-line lease revenue) is only recognized when deemed probable of collection. Collectibility is assessed for each tenant receivable using various criteria including credit ratings, guarantees, past collection issues, and the current economic and business environment affecting the tenant. If collectibility of the contractual rent stream is not deemed probable, revenue will only be recognized upon receipt of cash from the tenant. Due to the adverse impact of the COVID-19 pandemic, we did not recognize uncollected rent within lease revenues of $2.1 million and $3.5 million during the three months ended March 31, 2022 and 2021, respectively.
Our straight-line rent receivables totaled $18.0 million and $20.8 million at March 31, 2022 and December 31, 2021, respectively.
Restricted Cash
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the condensed consolidated statements of cash flows (in thousands):
| March 31, 2022 | December 31, 2021 | |||
|
Cash and cash equivalents
|
$ | 37,579 | $ | 52,133 |
| Restricted cash | 28,895 | 29,595 | ||
|
Total cash and cash equivalents and restricted cash
|
$ | 66,474 | $ | 81,728 |
Deferred Income Taxes
Our deferred tax liabilities were $45.7 million and $45.0 million at March 31, 2022 and December 31, 2021, respectively, and are included in Accounts payable, accrued expenses and other liabilities in the condensed consolidated financial statements. Our deferred tax assets, net of valuation allowances, were $2.3 million and $2.1 million at March 31, 2022 and December 31, 2021, respectively, and are included in Other assets, net in the condensed consolidated financial statements.
Note 3. Agreements and Transactions with Related Parties
Proposed Merger
The Proposed Merger with WPC is described in Note 1.
Transactions with Our Advisor
We have an advisory agreement with our Advisor whereby our Advisor performs certain services for us under a fee arrangement, as discussed in detail in the 2021 Annual Report.
We have an unsecured revolving line of credit with WPC with a borrowing capacity of $50.0 million and a scheduled maturity date of March 31, 2023. The line of credit bears an interest rate equal to the rate that WPC can borrow funds under its senior credit facility(including an annual facility fee of 0.20%). The principal outstanding balance on the line of credit was $11.0 million as of March 31, 2022. No amounts were outstanding as of December 31, 2021. Subsequent to March 31, 2022 and through the date of this Report, we borrowed a net amount of $5.0 million under the line of credit (Note 14).
CPA:18 - Global 3/31/2022 10-Q - 9
Notes to Condensed Consolidated Financial Statements (Unaudited)
Jointly Owned Investments
As of both March 31, 2022 and December 31, 2021, we owned interests ranging from 50% to 99% in 16 jointly owned investments, with the remaining interests held by third parties or by WPC (four investments). Since no other parties hold any rights that supersede our control, we consolidate all of these joint ventures.
Other Transactions with our Affiliates
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 terms of the relevant agreements, as discussed in the 2021 Annual Report (in thousands):
| Three Months Ended March 31, | ||||
| 2022 | 2021 | |||
| Amounts Included in the Condensed Consolidated Statements of Income | ||||
| Asset management fees | $ | 3,058 | $ | 3,138 |
| Available Cash Distributions | 2,587 | 1,539 | ||
|
Personnel and overhead reimbursements
|
1,046 | 630 | ||
| Interest expense | 127 | 257 | ||
| $ | 6,818 | $ | 5,564 | |
| Acquisition Fees Capitalized | ||||
| Capitalized personnel and overhead reimbursements | $ | - | $ | 20 |
| $ | - | $ | 20 |
The following table presents a summary of amounts included in Due to affiliates in the condensed consolidated financial statements (in thousands):
| March 31, 2022 | December 31, 2021 | |||
| Due to Affiliates | ||||
| Loan from WPC, including accrued interest | $ | 11,033 | $ | - |
|
External joint-venture loans, accounts payable, and other (a)
|
6,785 | 6,624 | ||
| Asset management fees payable | 1,017 | 1,062 | ||
| Acquisition fees, including accrued interest | 10 | 10 | ||
| $ | 18,845 | $ | 7,696 |
___________
(a)Includes loans from our joint-venture partners to the jointly owned investments that we consolidate. As of both March 31, 2022 and December 31, 2021, amounts outstanding to our joint-venture partners, including accrued interest, were $5.5 million.
Asset Management Fees
For any portion of asset management fees our Advisor receives 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 ("NAV") per Class A share, which was $9.07 as of September 30, 2021. From January 1, 2021 through February 28, 2022, at our option our Advisor received all of its asset management fees in shares of our Class A common stock. In light of the Proposed Merger, in February 2022 our board of directors approved the payment of all asset management fees in cash instead of shares of our common stock, effective as of March 1, 2022. As of March 31, 2022, our Advisor owned 8,556,732 shares of our Class A common stock, or 5.7% of our total Class A and Class C shares outstanding. Asset management fees are included in Property expenses, excluding reimbursable tenant costs in the condensed consolidated financial statements.
CPA:18 - Global 3/31/2022 10-Q - 10
Notes to Condensed Consolidated Financial Statements (Unaudited)
Acquisition and Disposition Fees
Our Advisor receives acquisition fees, a portion of which is payable upon acquisition, while the remaining portion is subordinated to a preferred return of a non-compounded cumulative distribution of 5.0% per annum (based initially on our invested capital). The preferred return was achieved as of the periods ended March 31, 2022 and December 31, 2021. Unpaid installments of deferred acquisition fees are included in Due to affiliates in the condensed consolidated financial statements and bear interest at an annual rate of 2.0%.
The Advisor has waived its right to disposition fees with respect to sales and dispositions of single investments and portfolios of investments. In addition, as a condition of the Proposed Merger, WPC agreed to waive certain back-end fees that it would have been entitled to receive from us upon our liquidation pursuant to the terms of our advisory agreement and Operating Partnership agreement with WPC.
Personnel and Overhead Reimbursements
Under the advisory agreement, the amount of applicable personnel costs allocated to us is capped at 1.0% of our pro rata total revenues for each of 2022 and 2021. Our Advisor allocates overhead expenses to us based upon the percentage of the Advisor's full-time employee equivalents that are attributable to us, to be reviewed annually by us and the Advisor. In general, personnel and overhead reimbursements are included in General and administrative expenses in the condensed consolidated financial statements.
Available Cash Distributions
WPC's interest in the Operating Partnership entitles it to receive distributions of up to 10.0% of the available cash generated by the Operating Partnership (the "Available Cash Distribution"), which is defined as cash generated from operations, excluding capital proceeds, as reduced by operating expenses and debt service, excluding prepayments and balloon payments. Available Cash Distributions are included in Net income attributable to noncontrolling interests in the condensed consolidated financial statements.
Note 4. Real Estate, Operating Real Estate, and Real Estate Under Construction
Real Estate -Land, Buildings and Improvements
Real estate, which consists of land and buildings leased to others, which are subject to operating leases, is summarized as follows (in thousands):
| March 31, 2022 | December 31, 2021 | |||
| Land | $ | 186,806 | $ | 264,590 |
| Buildings and improvements | 940,790 | 1,248,664 | ||
| Less: Accumulated depreciation | (192,036) | (199,664) | ||
| $ | 935,560 | $ | 1,313,590 |
The carrying value of our Real Estate - Land, buildings and improvements decreased by $13.0 million from December 31, 2021 to March 31, 2022, reflecting the impact of exchange rate fluctuations during the same period (Note 2).
Depreciation expense, including the effect of foreign currency translation, on our real estate was $8.9 million for both the three months ended March 31, 2022 and 2021.
During the three months ended March 31, 2022, we reclassified nine properties classified as Real estate - Land, buildings and improvements to Net investments in sales-type leases. As a result, the carrying value of our Real estate - Land, buildings and improvements decreased by $321.4 million from December 31, 2021 to March 31, 2022 (Note 5). In addition, during the three months ended March 31, 2022, we sold two properties classified as Real estate - Land, buildings and improvements. As a result, the carrying value of our Real estate - Land, buildings and improvements decreased by $28.2 million from December 31, 2021 to March 31, 2022 (Note 12).
CPA:18 - Global 3/31/2022 10-Q - 11
Notes to Condensed Consolidated Financial Statements (Unaudited)
Operating Real Estate -Land, Buildings and Improvements
Operating real estate, which consists of our self-storage and student housing properties (not subject to net lease agreements), is summarized as follows (in thousands):
| March 31, 2022 | December 31, 2021 | |||
| Land | $ | 80,481 | $ | 80,481 |
| Buildings and improvements | 397,428 | 397,107 | ||
| Less: Accumulated depreciation | (83,575) | (80,035) | ||
| $ | 394,334 | $ | 397,553 |
Depreciation expense, including the effect of foreign currency translation, on our operating real estate was $3.5 million and $4.3 million for the three months ended March 31, 2022 and 2021, respectively.
Leases
Lease Income
Lease income recognized and included within Lease revenues - net-leased and Lease revenues - operating real estate in the condensed consolidated statements of income are as follows (in thousands):
| Three Months Ended March 31, | ||||
| 2022 | 2021 | |||
| Lease revenues - net-leased | ||||
| Lease income - fixed | $ | 26,186 | $ | 23,972 |
|
Lease income - variable (a)
|
4,670 | 4,381 | ||
|
Total operating lease income (b)
|
$ | 30,856 | $ | 28,353 |
| Lease revenues - operating real estate | ||||
| Lease income - fixed | $ | 20,497 | $ | 18,808 |
|
Lease income - variable (c)
|
693 | 539 | ||
| Total operating real estate income | $ | 21,190 | $ | 19,347 |
___________
(a)Includes (i) rent increases based on changes in the Consumer Price Index ("CPI") and other comparable indices and (ii) reimbursements for property taxes, insurance, and common area maintenance services.
(b)Excludes interest income from direct financing leases of $0.2 million and $0.4 million for the three months ended March 31, 2022 and 2021, respectively (Note 5). Interest income from direct financing leases is included in Lease revenues - net-leased in the condensed consolidated statements of income.
(c)Primarily comprised of late fees and administrative fees.
Real Estate Under Construction
The following table provides the activity of our Real estate under construction (in thousands):
| Three Months Ended March 31, 2022 | ||
| Beginning balance | $ | 103,309 |
|
Reclassification to Net investments in sales-type leases (Note 5)
|
(29,757) | |
| Capitalized funds | 9,550 | |
| Capitalized interest | 2,525 | |
| Foreign currency translation adjustments | (2,449) | |
| Ending balance | $ | 83,178 |
CPA:18 - Global 3/31/2022 10-Q - 12
Notes to Condensed Consolidated Financial Statements (Unaudited)
Capitalized Funds
During the three months ended March 31, 2022, total capitalized funds primarily related to construction draws for our student housing development projects, and includes $2.8 million of accrued costs, which is a non-cash investing activity.
Capitalized Interest
Capitalized interest includes interest incurred during construction as well as amortization of the mortgage discount and deferred financing costs, which totaled $2.5 million during the three months ended March 31, 2022, and is a non-cash investing activity.
Ending Balance
As of March 31, 2022, we had three ongoing student housing development projects, and aggregate unfunded commitments of approximately $48.0 million, excluding capitalized interest, accrued costs, and capitalized acquisition fees.
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 sales-type leases, notes receivable (which are included in Other assets, net in the condensed consolidated financial statements) and our Net investments in direct financing leases (net of allowance for credit losses). Operating leases are not included in finance receivables.
Net Investments in Sales-Type Leases
On March 30, 2022, the tenant at 11 net-lease student housing properties in Spain and Portugal exercised its option to purchase the properties, following the announcement of the Proposed Merger, which triggered a change in control event. The tenant also elected to assume the existing non-recourse mortgages encumbering the properties. The purchase is expected to occur on or around June 30, 2022.
In accordance with Accounting Standards Codification ("ASC") 842, Leases, we reclassified these net-lease assets (as described below) to Net investments in sales-type leases totaling $430.5 million on our condensed consolidated balance sheets as of March 31, 2022 (representing the aggregate sales price based on the exchange rate of the euro at period end), since the tenant exercised its purchase option. In connection with this transaction, we reclassified the following amounts to Net investments in sales-type leases: (i) $332.2 million from Real estate - Land, buildings and improvements, (ii) $29.8 million from Real estate under construction, and (iii) $10.7 million from Accumulated depreciation and amortization. In addition, we (i) reclassified $2.6 million of straight-line rent receivables on these properties within Other assets, net on our condensed consolidated balance sheets to Gain on sale of real estate, net (as a reduction to Gain on sale of real estate, net) on our condensed consolidated statements of income, and (ii) accrued $2.6 million of closing costs and taxes within Accounts payable, accrued expenses and other liabilities on our condensed consolidated balance sheets. We recognized an aggregate Gain on sale of real estate, net, of $73.5 million (inclusive of amounts attributable to noncontrolling interests totaling $3.8 million) during the three months ended March 31, 2022 related to this transaction.
Notes Receivable
As of both March 31, 2022 and December 31, 2021, our notes receivable was comprised of a $28.0 million mezzanine tranche of 10-year commercial mortgage-backed securities on the Cipriani banquet halls in New York, New York, with a maturity date of July 2024. The mezzanine tranche is subordinated to a $60.0 million senior loan on the properties. Interest-only payments at a rate of 10% per annum are due through its maturity date. On July 28, 2020, we were notified that the borrower had defaulted on the mortgage loan senior to our mezzanine tranche, and since that date through March 31, 2022 we have received $4.8 million from the borrower, which is recognized as a liability within Accounts payable, accrued expenses and other liabilities in our condensed consolidated balance sheets. The senior loan lender has the right to call such amounts paid by the borrower but has not as of the date of this Report. We are currently evaluating our rights and options in connection with the senior loan default and therefore have not recognized these amounts within interest income for the three months ended March 31, 2022 or 2021.
CPA:18 - Global 3/31/2022 10-Q - 13
Notes to Condensed Consolidated Financial Statements (Unaudited)
Net Investments in Direct Financing Leases
Net investments in our direct financing lease investments is summarized as follows (in thousands):
| March 31, 2022 | December 31, 2021 | |||
| Lease payments receivable | $ | 4,984 | $ | 5,192 |
| Unguaranteed residual value | 10,550 | 10,550 | ||
| 15,534 | 15,742 | |||
| Less: unearned income | (4,081) | (4,293) | ||
| $ | 11,453 | $ | 11,449 |
Interest income from direct financing leases was $0.2 million and $0.4 million for the three months ended March 31, 2022 and 2021, respectively, and is included in Lease revenues - net-leased in our condensed consolidated statements of income.
We did not record an allowance for credit losses during the three months ended March 31, 2022 and 2021, and did not have an allowance for credit losses as of March 31, 2022 and December 31, 2021.
Credit Quality of Finance Receivables
We generally invest in facilities that we believe are critical to a tenant's business and therefore have a lower risk of tenant default. During the three months ended March 31, 2022, we reclassified certain assets to Net investments in sales-type leases (which are considered finance receivables), as described above under Net Investments in Sales-Type Leases.As of both March 31, 2022 and December 31, 2021, we had no significant finance receivable balances that were past due. Additionally, there were no material modifications of finance receivables during the three months ended March 31, 2022.
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. A credit quality of one through three indicates a range of investment grade to stable. A credit quality of four through five indicates inclusion on the watch list to risk of default. The credit quality evaluation of our finance receivables is updated quarterly.
A summary of our finance receivables by internal credit quality rating is as follows (dollars in thousands):
| Number of Tenants/Obligors at | Carrying Value at | |||||
| Internal Credit Quality Indicator | March 31, 2022 | December 31, 2021 | March 31, 2022 | December 31, 2021 | ||
| 1 - 3 | 2 | 1 | $ | 441,968 | $ | 11,449 |
| 4 | 1 | 1 | 28,000 | 28,000 | ||
| 5 | - | - | - | - | ||
| 0 | $ | 469,968 | $ | 39,449 |
Note 6. Intangible Assets and Liabilities
In-place lease and above-market rent intangibles are included in In-place lease and other intangible assets in the condensed consolidated financial statements. Below-market rent intangibles are included in Accounts payable, accrued expenses and other liabilities in the condensed consolidated financial statements. Goodwill is included in our Net Lease segment and included in Other assets, net in the condensed consolidated financial statements.
CPA:18 - Global 3/31/2022 10-Q - 14
Notes to Condensed Consolidated Financial Statements (Unaudited)
Intangible assets and liabilities are summarized as follows (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||||
| 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 |
9 - 23
|
$ | 232,975 | $ | (159,030) | $ | 73,945 | $ | 240,432 | $ | (162,497) | $ | 77,935 |
| Above-market rent |
9 - 30
|
9,516 | (5,505) | 4,011 | 10,294 | (6,081) | 4,213 | ||||||
| 242,491 | (164,535) | 77,956 | 250,726 | (168,578) | 82,148 | ||||||||
| Goodwill | |||||||||||||
| Goodwill | 25,985 | - | 25,985 | 26,021 | - | 26,021 | |||||||
| Total intangible assets | $ | 268,476 | $ | (164,535) | $ | 103,941 | $ | 276,747 | $ | (168,578) | $ | 108,169 | |
|
Finite-Lived Intangible Liabilities
|
|||||||||||||
| Below-market rent |
9 - 30
|
$ | (14,613) | $ | 8,990 | $ | (5,623) | $ | (14,654) | $ | 8,755 | $ | (5,899) |
| Total intangible liabilities | $ | (14,613) | $ | 8,990 | $ | (5,623) | $ | (14,654) | $ | 8,755 | $ | (5,899) |
Net amortization of intangibles, including the effect of foreign currency translation, was $3.5 million and $3.6 million for the three months ended March 31, 2022 and 2021, respectively. Amortization of below-market rent and above-market rent intangibles is recorded as an adjustment to rental income; and amortization of in-place lease intangibles is included in Depreciation and amortization on our condensed consolidated statements of income.
Note 7. Fair Value Measurements
The fair value of an asset is defined as the exit price, which is the amount that would either be received when an asset is sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a three-tier fair value hierarchy based on the inputs used in measuring fair value. These tiers are: Level 1, for which quoted market prices for identical instruments are available in active markets, such as money market funds, equity securities, and U.S. Treasury securities; Level 2, for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument, such as certain derivative instruments including interest rate caps, interest rate swaps, foreign currency forward contracts and foreign currency collars; and Level 3, for securities that do not fall into Level 1 or Level 2 and for which little or no market data exists, therefore requiring us to develop our own assumptions.
Items Measured at Fair Value on a Recurring Basis
The methods and assumptions described below were used to estimate the fair value of each class of financial instrument. For significant Level 3 items, we have also provided the unobservable inputs.
Derivative Assets and Liabilities- Our derivative assets and liabilities, which are included in Other assets, net and Accounts payable, accrued expenses and other liabilities, respectively, in the condensed consolidated financial statements, are comprised of interest rate swaps, interest rate caps, and foreign currency collars (Note 8).
The valuation of our derivative instruments is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves, spot and forward rates, and implied volatilities. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative instruments for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. These derivative instruments were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market.
CPA:18 - Global 3/31/2022 10-Q - 15
Notes to Condensed Consolidated Financial Statements (Unaudited)
We did not have any transfers into or out of Level 1, Level 2, and Level 3 measurements during the three months ended March 31, 2022 and 2021. Gains and losses (realized and unrealized) recognized on items measured at fair value on a recurring basis included in earnings are reported within Other gains and (losses) on our condensed consolidated financial statements.
Our other financial instruments had the following carrying values and fair values as of the dates shown (dollars in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||
| Level | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||
|
Non-recourse secured debt, net (a) (b)
|
3 | $ | 1,179,301 | $ | 1,171,205 | $ | 1,253,045 | $ | 1,266,234 |
|
Notes receivable (c)
|
3 | 28,000 | 28,000 | 28,000 | 28,000 |
___________
(a)As of March 31, 2022 and December 31, 2021, the carrying value of Non-recourse secured debt, net includes unamortized deferred financing costs of $5.9 million and $6.7 million, respectively, and unamortized premium, net of $5.1 million and $4.3 million, respectively (Note 9).
(b)We determined the estimated fair value of our Non-recourse secured debt, net using a discounted cash flow model that estimates the present value of the future loan payments by discounting such payments at current estimated market interest rates. The estimated market interest rates take into account interest rate risk and the value of the underlying collateral, which includes quality of the collateral, the credit quality of the tenant/obligor, and the time until maturity.
(c)We determined the estimated fair value of our Notes receivable using a discounted cash flow model with rates that take into account the credit of the tenant/obligor, order of payment tranches, and interest rate risk. We also considered the value of the underlying collateral, taking into account the quality of the collateral, the credit quality of the tenant/obligor, the time until maturity, and the current market interest rate.
We estimated that our other financial assets and liabilities (excluding net investments in direct financing leases) had fair values that approximated their carrying values as of both March 31, 2022 and December 31, 2021.
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. There have been no significant changes in our impairment policies from what was disclosed in the 2021 Annual Report.
During the three months ended March 31, 2022, we recognized an impairment charge of $9.2 million (inclusive of $4.6 million attributable to a noncontrolling interest) on an international office facility in order to reduce its carrying value to its estimated fair value ($49.9 million). The estimated fair value is based on the estimated selling price of property and the fair value of the non-recourse mortgage encumbering the property also approximates the fair value of the property. This impairment charge is included within Impairment charges and Net income attributable to noncontrolling interests on our consolidated statements of income, and reduced Real estate - Land, buildings and improvements and Noncontrolling interests on our consolidated balance sheets.
Note 8. Risk Management and Use of Derivative Financial Instruments
Risk Management
In the normal course of our ongoing business operations, we encounter economic risk. There are four main components of economic risk that impact us: interest rate risk, credit risk, market risk, and foreign currency risk. We are primarily subject to interest rate risk on our interest-bearing liabilities. Credit risk is the risk of default on our operations and our tenants' inability or unwillingness to make contractually required payments. Market risk includes changes in the value of our properties and related loans, as well as changes in the value of our other investments due to changes in interest rates or other market factors. We own international investments, primarily in Europe, and are subject to risks associated with fluctuating foreign currency exchange rates.
CPA:18 - Global 3/31/2022 10-Q - 16
Notes to Condensed Consolidated Financial Statements (Unaudited)
Derivative Financial Instruments
There have been no significant changes in our derivative financial instrument policies from what was disclosed in the 2021 Annual Report. At both March 31, 2022 and December 31, 2021, no cash collateral had been posted or received for any of our derivative positions.
The following table sets forth certain information regarding our derivative instruments (in thousands):
|
Derivatives Designated as Hedging Instruments
|
Balance Sheet Location | Derivative Assets Fair Value at | Derivative Liabilities Fair Value at | ||||||
| March 31, 2022 | December 31, 2021 | March 31, 2022 | December 31, 2021 | ||||||
| Interest rate caps | Other assets, net | $ | 601 | $ | 133 | $ | - | $ | - |
| Foreign currency collars | Other assets, net | 527 | 594 | - | - | ||||
| Interest rate swaps | Other assets, net | 207 | - | - | - | ||||
| Interest rate swaps | Accounts payable, accrued expenses and other liabilities | - | - | (105) | (1,304) | ||||
| 1,335 | 727 | (105) | (1,304) | ||||||
| Derivatives Not Designated as Hedging Instruments | |||||||||
| Interest rate swap | Accounts payable, accrued expenses and other liabilities | - | - | - | (3) | ||||
| - | - | - | (3) | ||||||
| Total derivatives | $ | 1,335 | $ | 727 | $ | (105) | $ | (1,307) |
The following tables present the impact of our derivative instruments in the condensed consolidated financial statements (in thousands):
| Amount of Gain (Loss) Recognized on Derivatives in Other Comprehensive Income (Loss) | ||||
| Three Months Ended March 31, | ||||
| Derivatives in Cash Flow Hedging Relationships | 2022 | 2021 | ||
| Interest rate swaps | $ | 1,406 | $ | 956 |
| Interest rate caps | 509 | (24) | ||
| Foreign currency collars | (66) | 445 | ||
| Total | $ | 1,849 | $ | 1,377 |
| Amount of Gain (Loss) on Derivatives Reclassified from Other Comprehensive Loss into Income | |||||
|
Derivatives in Cash Flow Hedging Relationships
|
Location of Gain (Loss) Recognized in Income | Three Months Ended March 31, | |||
| 2022 | 2021 | ||||
| Interest rate swaps | Interest expense | $ | (200) | $ | (499) |
| Foreign currency collars | Other gains and (losses) | 142 | 1 | ||
| Interest rate caps | Interest expense | (36) | (28) | ||
| Total | $ | (94) | $ | (526) |
Amounts reported in Other comprehensive loss related to our interest derivative contracts will be reclassified to Interest expense as interest is incurred on our variable-rate debt. Amounts reported in Other comprehensive loss related to foreign currency derivative contracts will be reclassified to Other gains and (losses) when the hedged foreign currency contracts are settled. As of March 31, 2022, we estimated that an additional $0.4 million and $0.5 million will be reclassified as Interest expense and Other gains and (losses), respectively, during the next 12 months.
CPA:18 - Global 3/31/2022 10-Q - 17
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table presents the impact of our derivative instruments in the condensed consolidated financial statements (in thousands):
| Amount of Gain on Derivatives Recognized in Income | |||||
| Derivatives Not in Cash Flow Hedging Relationships | Location of Gain (Loss) Recognized in Income | Three Months Ended March 31, | |||
| 2022 | 2021 | ||||
| Foreign currency collars | Other gains and (losses) | $ | 54 | $ | 45 |
| Interest rate swap | Interest expense | 4 | 6 | ||
| Derivatives in Cash Flow Hedging Relationships | |||||
| Interest rate swaps | Interest expense | 200 | 499 | ||
| Interest rate caps | Interest expense | (1) | - | ||
| Total | $ | 257 | $ | 550 |
Interest Rate Swaps and Caps
We are exposed to the impact of interest rate changes primarily through our borrowing activities. To limit this exposure, we attempt to obtain mortgage financing on a long-term, fixed-rate basis. However, from time to time, we or our joint investment partners have obtained, and may in the future obtain, variable-rate non-recourse secured debt and, as a result, we have entered into, and may continue to enter into interest rate swap agreements or interest rate cap agreements with counterparties. Interest rate swaps, which effectively convert the variable-rate debt service obligations of a loan to a fixed rate, are agreements in which one party exchanges a stream of interest payments for a counterparty's stream of cash flow over a specific period. The notional, or face, amount on which the swaps are based is not exchanged. Interest rate caps limit the effective borrowing rate of variable-rate debt obligations while allowing participants to share in downward shifts in interest rates. Our objective in using these derivatives is to limit our exposure to interest rate movements.
The interest rate swaps and caps that our consolidated subsidiaries had outstanding as of March 31, 2022 are summarized as follows (currency in thousands):
| Interest Rate Derivatives | Number of Instruments |
Notional Amount |
Fair Value at
March 31, 2022 (a)
|
||
| Interest rate caps | 6 | 95,663 | EUR | $ | 601 |
| Interest rate swaps | 5 | 35,692 | USD | 102 | |
| $ | 703 |
___________
(a)Fair value amount is based on the exchange rate of the euro as of March 31, 2022, as applicable.
Foreign Currency Collars
We are exposed to foreign currency exchange rate movements, primarily in the euro, the Norwegian krone, and, to a lesser extent, the British pound sterling. We manage foreign currency exchange rate movements by generally placing our debt service obligation on an investment in the same currency as the tenant's rental obligation to us. This reduces our overall exposure to the net cash flow from that investment. However, we are subject to foreign currency exchange rate movements to the extent that there is a difference in the timing and amount of the rental obligation and the debt service. Realized and unrealized gains and losses recognized in earnings related to foreign currency transactions are included in Other gains and (losses) in the condensed consolidated financial statements.
In order to hedge certain of our foreign currency cash flow exposures, we enter into foreign currency collars. 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 collars have maturities of 61 months or less.
CPA:18 - Global 3/31/2022 10-Q - 18
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table presents the foreign currency derivative contracts we had outstanding and their designations as of March 31, 2022 (currency in thousands):
| Foreign Currency Derivatives | Number of Instruments |
Notional Amount |
Fair Value at
March 31, 2022
|
||
| Designated as Cash Flow Hedging Instruments | |||||
| Foreign currency collars | 4 | 2,600 | EUR | $ | 477 |
| Foreign currency collars | 3 | 3,750 | NOK | 50 | |
| $ | 527 |
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 March 31, 2022. At March 31, 2022, our total credit exposure was $1.3 million and the maximum exposure to any single counterparty was $0.6 million.
Some of the agreements we have with our derivative counterparties contain cross-default provisions that could trigger a declaration of default on our derivative obligations if we default, or are capable of being declared in default, on certain of our indebtedness. As of March 31, 2022, we had not been declared in default on any of our derivative obligations. The estimated fair value of our derivatives in a net liability position was $0.1 million and $1.4 million as of March 31, 2022 and December 31, 2021, respectively, which included accrued interest and any nonperformance risk adjustments. If we had breached any of these provisions as of March 31, 2022 or December 31, 2021, we could have been required to settle our obligations under these agreements at their aggregate termination value of $0.1 million and $1.4 million, respectively.
Note 9. Non-Recourse Secured Debt, Net
As of March 31, 2022, the weighted-average interest rate for our total non-recourse secured debt was 3.8% (fixed-rate and variable-rate non-recourse secured debt were 3.9% and 3.6%, respectively), with maturity dates ranging from April 2022 to April 2039.
Repayments
On January 21, 2022, we prepaid a non-recourse mortgage loan of $36.3 million with an interest rate of 2.2%, in connection with the disposition of a portion of an office facility encumbered by the loan (Note 12).
On February 1, 2022, we prepaid $22.3 million outstanding on a non-recourse mortgage loan with an interest rate of 4.6%. The remaining principal balance on this non-recourse mortgage loan was $29.1 million as of March 31, 2022.
On February 28, 2022, we repaid a non-recourse mortgage loan at maturity with a principal balance of approximately $9.3 million and interest rate of 1.6%.
CPA:18 - Global 3/31/2022 10-Q - 19
Notes to Condensed Consolidated Financial Statements (Unaudited)
Scheduled Debt Principal Payments
Scheduled debt principal payments during the remainder of 2022, each of the next four calendar years following December 31, 2022, and thereafter are as follows (in thousands):
| Years Ending December 31, | Total | |
|
2022 (remainder) (a)
|
$ | 170,371 |
| 2023 | 370,777 | |
| 2024 | 195,200 | |
| 2025 | 341,890 | |
| 2026 | 90,840 | |
| Thereafter through 2039 | 11,062 | |
| Total principal payments | 1,180,140 | |
| Unamortized deferred financing costs | (5,933) | |
| Unamortized premium, net | 5,094 | |
| Total | $ | 1,179,301 |
___________
(a)Includes a non-recourse mortgage loan (with a principal balance of $51.4 million as of March 31, 2022), for which, in April 2022, we extended the maturity date by approximately one year, from April 30, 2022 to April 28, 2023.
Certain amounts in the table above are based on the applicable foreign currency exchange rate at March 31, 2022.
The carrying value of our Non-recourse secured debt, net decreased by $7.8 million in the aggregate from December 31, 2021 to March 31, 2022, reflecting the impact of exchange rate fluctuations during the same period (Note 2).
Covenants
Our non-recourse mortgage loan agreements include customary financial maintenance covenants that require us to maintain certain ratios and benchmarks at the end of each quarter. Our compliance with such covenants depends on many factors that could be impacted by current or future economic conditions, including the adverse impact of the COVID-19 pandemic. Other than the covenant breach discussed below, we were in compliance with our covenants at March 31, 2022.
As of March 31, 2022, we were in breach of a tenant payment covenant on two of our non-recourse mortgage loans (aggregate principal balance of $61.4 million as of that date) encumbering properties leased to a tenant in the hotel industry. As a result of the breach, as of March 31, 2022, the lender declared a "cash trap" in which any surplus cash in our rent account will be transferred to a reserve account with the lender.
Note 10. Commitments and Contingencies
As of March 31, 2022, 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 condensed consolidated financial statements of income or results of operations.
See Note 4for unfunded construction commitments.
CPA:18 - Global 3/31/2022 10-Q - 20
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 11. Earnings Per Share and Equity
Basic and Diluted Earnings Per Share
The following table presents earnings per share (in thousands, except share and per share amounts):
| Three Months Ended March 31, | ||||||||||
| 2022 | 2021 | |||||||||
|
Basic and Diluted Weighted-Average Shares Outstanding |
Allocation of Net Income | Basic and Diluted Earnings Per Share |
Basic and Diluted Weighted-Average Shares Outstanding |
Allocation of Net Income | Basic and Diluted Earnings Per Share | |||||
| Class A common stock | 119,067,927 | $ | 54,830 | $ | 0.46 | 119,516,815 | $ | 403 | $ | - |
| Class C common stock | 30,695,542 | 14,138 | 0.46 | 32,187,435 | 108 | - | ||||
| Net income attributable to CPA:18 - Global | $ | 68,968 | $ | 511 |
The allocation of Net income attributable to CPA:18 - Global is calculated based on the basic and diluted weighted-average shares outstanding for Class A and Class C common stock for each respective period.
Distributions
For the three months ended March 31, 2022, our board of directors declared quarterly distributions of $0.0625 per share for both our Class A and Class C common stock, which were paid on April 14, 2022 to stockholders of record on March 31, 2022, in the amount of $9.4 million.
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 March 31, 2022 | ||||||
| Gains and (Losses) on Derivative Instruments | Foreign Currency Translation Adjustments | Total | ||||
| Beginning balance | $ | (862) | $ | (50,932) | $ | (51,794) |
| Other comprehensive loss before reclassifications | 1,755 | (7,606) | (5,851) | |||
| Amounts reclassified from accumulated other comprehensive loss to: | ||||||
| Interest expense | 236 | - | 236 | |||
| Other gains and (losses) | (142) | - | (142) | |||
| Net current-period other comprehensive loss | 1,849 | (7,606) | (5,757) | |||
| Net current-period other comprehensive loss attributable to noncontrolling interests | (14) | 248 | 234 | |||
| Ending balance | $ | 973 | $ | (58,290) | $ | (57,317) |
CPA:18 - Global 3/31/2022 10-Q - 21
Notes to Condensed Consolidated Financial Statements (Unaudited)
| Three Months Ended March 31, 2021 | ||||||
| Gains and (Losses) on Derivative Instruments | Foreign Currency Translation Adjustments | Total | ||||
| Beginning balance | $ | (3,363) | $ | (16,567) | $ | (19,930) |
| Other comprehensive loss before reclassifications | 851 | (20,158) | (19,307) | |||
| Amounts reclassified from accumulated other comprehensive loss to: | ||||||
| Interest expense | 527 | - | 527 | |||
| Other gains and (losses) | (1) | - | (1) | |||
| Net current-period other comprehensive loss | 1,377 | (20,158) | (18,781) | |||
| Net current-period other comprehensive loss attributable to noncontrolling interests | (2) | 1,314 | 1,312 | |||
| Ending balance | $ | (1,988) | $ | (35,411) | $ | (37,399) |
See Note 8for additional information on our derivative activity recognized within Other comprehensive loss for the periods presented.
Note 12. Property Dispositions
We may decide to dispose of a property due to a variety of circumstances, including but not limited 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 condensed consolidated balance sheet. Our property dispositions are also discussed in Note 4.
2022 - Real Estate - Land, Buildings and Improvements
On January 21, 2022, we sold a portion of an office facility in Rotterdam, the Netherlands, for total proceeds, net of selling costs of $22.4 million and recognized a loss on sale of less than $0.1 million (inclusive of income taxes of $0.1 million recognized upon sale). In connection with this disposition, and using additional sources of cash, we prepaid the $36.3 million non-recourse mortgage loan encumbering the full property. Amounts are based on the exchange rate of the euro on the date of the transaction.
On March 24, 2022, we sold a vacant warehouse facility in Houston, Texas, for total proceeds, net of selling costs of $7.3 million and recognized a gain on sale of $3.8 million.
CPA:18 - Global 3/31/2022 10-Q - 22
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 13. Segment Reporting
We operate in three reportable business segments: Net Lease, Self Storage, and Other Operating Properties. Our Net Lease segment includes our investments in net-leased properties, whether they are accounted for as operating leases or direct financing leases. Our Self Storage segment is comprised of our investments in self-storage properties. Our Other Operating Properties segment is comprised of our investments in student housing operating properties. In addition, we have an All Other category that is comprised of our notes receivable investment. The following tables present a summary of comparative results and assets for these business segments (in thousands):
| Three Months Ended March 31, | ||||
| 2022 | 2021 | |||
| Net Lease | ||||
|
Revenues (a)
|
$ | 31,233 | $ | 28,802 |
| Operating expenses | (27,066) | (17,793) | ||
| Gain on sale of real estate, net | 77,286 | - | ||
| Interest expense | (8,928) | (7,877) | ||
| Other gains and (losses) | 42 | 243 | ||
| (Provision for) benefit from income taxes | (143) | 1,210 | ||
| Net loss (income) attributable to noncontrolling interests | 600 | (473) | ||
| Net income attributable to CPA:18 - Global | $ | 73,024 | $ | 4,112 |
| Self Storage | ||||
| Revenues | $ | 19,972 | $ | 16,268 |
| Operating expenses | (9,566) | (9,092) | ||
| Interest expense | (2,605) | (3,266) | ||
| Other gains and (losses) | (10) | (56) | ||
| Provision for income taxes | (32) | (66) | ||
|
Net income attributable to CPA:18 - Global
|
$ | 7,759 | $ | 3,788 |
| Other Operating Properties | ||||
| Revenues | $ | 1,493 | $ | 3,299 |
| Operating expenses | (1,271) | (2,510) | ||
| Interest expense | (143) | (570) | ||
| Other gains and (losses) | - | (3) | ||
| (Provision for) benefit from income taxes | (802) | 35 | ||
| Net (income) loss attributable to noncontrolling interests | (47) | 45 | ||
| Net (loss) income attributable to CPA:18 - Global | $ | (770) | $ | 296 |
|
All Other
|
||||
|
Revenues (b)
|
$ | - | $ | - |
| Net income attributable to CPA:18 - Global | $ | - | $ | - |
| Corporate | ||||
|
Unallocated Corporate Overhead (c)
|
$ | (8,458) | $ | (6,146) |
| Net income attributable to noncontrolling interests - Available Cash Distributions | $ | (2,587) | $ | (1,539) |
| Total Company | ||||
|
Revenues (a) (b)
|
$ | 52,698 | $ | 48,369 |
| Operating expenses | (45,060) | (34,276) | ||
| Gain on sale of real estate, net | 77,271 | - | ||
|
Interest expense
|
(11,708) | (11,747) | ||
|
Other gains and (losses) (c)
|
(910) | (969) | ||
| (Provision for) benefit from income taxes | (1,289) | 1,101 | ||
| Net income attributable to noncontrolling interests | (2,034) | (1,967) | ||
| Net income attributable to CPA:18 - Global | $ | 68,968 | $ | 511 |
CPA:18 - Global 3/31/2022 10-Q - 23
Notes to Condensed Consolidated Financial Statements (Unaudited)
| Total Assets | ||||
| March 31, 2022 | December 31, 2021 | |||
| Net Lease | $ | 1,602,214 | $ | 1,586,662 |
| Self Storage | 337,246 | 337,052 | ||
| Other Operating Properties | 163,284 | 160,746 | ||
| All Other | 28,000 | 28,000 | ||
| Corporate | 14,703 | 30,409 | ||
| Total Company | $ | 2,145,447 | $ | 2,142,869 |
__________
(a)The three months ended March 31, 2022 and 2021 include straight-line rent adjustments of less than $0.1 million and $1.1 million, respectively. Straight-line lease revenue is included within Lease revenues - net-leased within our condensed consolidated financial statements.
(b)On July 28, 2020, we were notified that the borrower had defaulted on the mortgage loan senior to our mezzanine tranche, and since that date we have not recognized interest income (Note 5).
(c)Included in unallocated corporate overhead are expenses and other gains and (losses) that are calculated and reported at the portfolio level and not evaluated as part of any segment's operating performance. Such items include asset management fees, general and administrative expenses, and gains and losses on foreign currency transactions and derivative instruments. Asset management fees totaled $3.1 million for both the three months ended March 31, 2022 and 2021 (Note 3).
Note 14. Subsequent Events
Borrowing Under Line of Credit with WPC
Subsequent to March 31, 2022 and through the date of this Report, we borrowed a net amount of $5.0 million under the unsecured revolving line of credit with WPC (Note 3).
CPA:18 - Global 3/31/2022 10-Q - 24
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 2021 Annual Report and subsequent reports filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Refer to Item 1 of the 2021 Annual Report for a description of our business.
Significant Developments
Proposed Merger
On February 27, 2022, we entered into the Merger Agreement with WPC and certain of its subsidiaries pursuant to which we will merge with and into one of WPC's indirect subsidiaries in exchange for shares of WPC's common stock and cash (Note 1). Under the terms of the Merger Agreement, a special committee of our board of directors, consisting of all our independent directors, was allowed to solicit, receive, evaluate, and enter into negotiations with respect to alternative proposals from third parties for a 30-day period following the execution of the Merger Agreement. This "go-shop" period expired on March 30, 2022, with no qualifying proposals or offers being received. On April 4, 2022, WPC filed a registration statement on Form S-4 with the SEC to register the shares of its common stock to be issued in the Proposed Merger. On April 25, 2022, WPC filed a Form S-4/A, which was declared effective by the SEC on April 27, 2022. We filed the definitive proxy statement/prospectus with the SEC on April 27, 2022 and commenced mailing the proxy statement/prospectus to our stockholders in early May 2022. The Proposed Merger and related transactions are subject to a number of closing conditions, including approval by our stockholders at a special meeting scheduled for July 26, 2022. If this approval is obtained and the other closing conditions are met, we currently expect the transaction to close in early August 2022, although there can be no assurance that the Proposed Merger will be completed at such time or at all.
In light of the Proposed Merger, effective February 27, 2022, our board of directors suspended our DRIP, as well as repurchases of shares of our common stock from our stockholders under our quarterly discretionary redemption plan (except for special circumstance redemptions).
See Part II, Item 1A. Risk Factors herein, which incorporates by reference the Risk Factors in the definitive proxy statement/prospectus that we filed with the SEC in connection with the Proposed Merger.
Student Housing Purchase Option Exercise
On March 30, 2022, the tenant at 11 net-lease student housing properties in Spain and Portugal exercised its option to purchase the properties, following the announcement of the Proposed Merger, which triggered a change in control event. The tenant also elected to assume the existing non-recourse mortgages encumbering the properties. The purchase is expected to occur on or around June 30, 2022. In accordance with ASC 842, Leases, we reclassified these net-lease assets to Net investments in sales-type leases totaling $430.5 million on our condensed consolidated balance sheets as of March 31, 2022 (representing the aggregate sales price based on the exchange rate of the euro at period end), since the tenant exercised its purchase option. We recognized an aggregate Gain on sale of real estate, net, of $73.5 million (inclusive of amounts attributable to noncontrolling interests totaling $3.8 million) during the three months ended March 31, 2022 related to this transaction.
COVID-19
Our Advisor continues to actively engage in discussions with our tenants and the third-party managers of our operating properties regarding the impact of the COVID-19 pandemic on their business operations, liquidity, and financial position. Through the date of this Report, we received from tenants approximately 94% of contractual base rent that was due in the first quarter of 2022 (based on contractual minimum annualized base rent ("ABR") as of December 31, 2021) and 96% of contractual rents due at our self-storage properties during the three months ended March 31, 2022. Given the significant uncertainty around the duration and severity of the impact of the COVID-19 pandemic, we are unable to predict the impact it will have on our tenants' continued ability to pay rent. Therefore, information provided regarding rent collections for the first quarter of 2022 should not serve as an indication of expected future rent collections.
CPA:18 - Global 3/31/2022 10-Q - 25
As of March 31, 2022, our debt and interest obligations due within one year totaled $259.2 million, and we expect to fund capital commitments of $46.0 million in the next year, primarily for our three student housing development projects. Two such projects are subject to exercised purchase options (as described above under Student Housing Purchase Option Exercise) and are expected to be sold on or around June 30, 2022, at which point our funding would cease. We believe that we have sufficient liquidity to meet our liquidity and capital resource requirements, primarily through available cash and cash equivalents, proceeds from the sale of certain properties subject to exercised purchase options (Note 5) and planned asset dispositions, cash received under net lease and operating lease agreements (which includes four student housing properties placed into service during 2021), and undrawn capacity under our construction loans. If necessary, we are able to borrow up to $50.0 million under an unsecured revolving line of credit with WPC (scheduled to mature on March 31, 2023), which had an outstanding balance of $11.0 million as of March 31, 2022 (Note 3). Subsequent to March 31, 2022 and through the date of this Report, we borrowed a net amount of $5.0 million under the line of credit (Note 14). Additional sources of liquidity, if necessary, includes leveraging our unleveraged properties (which had an aggregate carrying value of $129.5 million as of March 31, 2022), refinancing existing debt obligations, and other asset sales. In addition, in order to enable us to retain cash and preserve financial flexibility, (i) since the second quarter of 2020, our distributions declared for both Class A and Class C common stock were reduced from previous levels and (ii) since August 2020, we have generally limited the amount of cash available for our redemption program to the amount reinvested by stockholders in our DRIP.
Net Asset Values
Our NAVs as of September 30, 2021 were $9.07 for both our Class A and Class C common stock. Please see our Current Report on Form 8-K dated December 9, 2021 and the 2021 Annual Report for additional information regarding the calculation of our NAVs. During the period between the execution of the Merger Agreement and consummation of the Proposed Merger, we do not intend to make or report any updated determination of our NAVs.
Financial Highlights
During the three months ended March 31, 2022, we completed the following (as further described in the condensed consolidated financial statements).
Disposition Activity
On January 21, 2022, we sold a portion of an office facility in Rotterdam, the Netherlands, for total proceeds, net of selling costs of $22.4 million and recognized a loss on sale of less than $0.1 million (inclusive of income taxes of $0.1 million recognized upon sale). In connection with this disposition, and using additional sources of cash, we prepaid the $36.3 million non-recourse mortgage loan encumbering the full property. Amounts are based on the exchange rate of the euro on the date of the transaction (Note 12).
On March 24, 2022, we sold a vacant warehouse facility in Houston, Texas, for total proceeds, net of selling costs of $7.3 million and recognized a gain on sale of $3.8 million (Note 12).
Mortgage Loan Repayments
On February 1, 2022, we prepaid $22.3 million outstanding on a non-recourse mortgage loan with an interest rate of 4.6%. The remaining principal balance on this non-recourse mortgage loan was $29.1 million as of March 31, 2022 (Note 9).
On February 28, 2022, we repaid a non-recourse mortgage loan at maturity with a principal balance of approximately $9.3 million and interest rate of 1.6% (Note 9).
CPA:18 - Global 3/31/2022 10-Q - 26
Consolidated Results
(in thousands)
| Three Months Ended March 31, | ||||
| 2022 | 2021 | |||
| Total revenues | $ | 52,698 | $ | 48,369 |
| Net income attributable to CPA:18 - Global | 68,968 | 511 | ||
|
Distributions declared (a)
|
9,356 | 9,470 | ||
| Cash distributions paid | 9,331 | 9,447 | ||
| Net cash provided by operating activities | 30,047 | 16,652 | ||
| Net cash provided by (used in) investing activities | 23,686 | (50,435) | ||
| Net cash (used in) provided by financing activities | (68,191) | 1,531 | ||
|
Supplemental financial measures (b):
|
||||
|
FFO attributable to CPA:18 - Global
|
14,544 | 15,823 | ||
| MFFO attributable to CPA:18 - Global | 17,742 | 16,022 | ||
| Adjusted MFFO attributable to CPA:18 - Global | 17,987 | 14,262 |
__________
(a)Quarterly distributions declared are generally paid in the subsequent quarter. Since the second quarter of 2020, our distributions declared for both Class A and Class C common stock were reduced from previous levels to enable us to retain cash and preserve financial flexibility.
(b)We consider the performance metrics listed above, including Funds from operations ("FFO"), Modified funds from operations ("MFFO"), and Adjusted modified funds from operations ("Adjusted MFFO"), which are supplemental measures that are not defined by GAAP ("non-GAAP measures"), to be important measures in the evaluation of our operating performance. See Supplemental Financial Measuresbelow for our definitions of these non-GAAP measures and reconciliations to their most directly comparable GAAP measures.
Revenues
Total revenues increased for the three months ended March 31, 2022 as compared to the same period in 2021, primarily due to the positive impact of our student housing properties placed into service during 2021 and higher revenues from self-storage operating properties (driven by an increase in occupancy and unit rates).
Net Income Attributable to CPA:18 - Global
Net income attributable to CPA:18 - Global increased for the three months ended March 31, 2022 as compared to the same period in 2021, primarily due to the aggregate gain on sale of real estate recognized during the current year period (Note 4, Note 12), higher revenues from self-storage operating properties, and the positive impact of our student housing properties placed into service during 2021, partially offset by an impairment charge recognized during the current year period (Note 7) and costs incurred in connection with the Proposed Merger during the current year period (Note 1).
FFO
FFO decreased for the three months ended March 31, 2022 as compared to the same period in 2021, primarily due to costs incurred in connection with the Proposed Merger during the current year period (Note 1), partially offset by the positive impact of our student housing properties placed into service during 2021 and higher revenues from self-storage operating properties
MFFO and Adjusted MFFO Attributable to CPA:18 - Global
MFFO and Adjusted MFFO increased for the three months ended March 31, 2022 as compared to the same period in 2021, primarily due to the positive impact of our student housing properties placed into service during 2021 and higher revenues from self-storage operating properties.
CPA:18 - Global 3/31/2022 10-Q - 27
Portfolio Overview
We hold a diversified portfolio of income-producing commercial real estate properties and other real estate-related assets. In addition, our portfolio includes self-storage and student housing properties (not subject to net lease agreements) for the periods presented below. Portfolio information is provided on a pro rata basis, unless otherwise noted below, to better illustrate the economic impact of our various jointly owned net-leased and operating investments. See Terms and Definitions below for a description of pro rata amounts.
Portfolio Summary
| March 31, 2022 | December 31, 2021 | |||
|
Number of net-leased properties (a)
|
52 | 53 | ||
|
Number of operating properties (b)
|
66 | 66 | ||
|
Number of development projects (a)
|
3 | 3 | ||
| Number of tenants (net-leased properties) | 47 | 50 | ||
| Total portfolio square footage (in thousands) | 15,478 | 15,576 | ||
| Occupancy (net-leased properties) | 99.4 | % | 98.3 | % |
| Weighted-average lease term (net-leased properties in years) | 9.7 | 9.9 | ||
| Number of countries | 11 | 11 | ||
| Total assets (consolidated basis in thousands) | $ | 2,145,447 | $ | 2,142,869 |
| Net investments in real estate (consolidated basis in thousands) | 1,966,653 | 1,942,545 | ||
|
Debt, net - pro rata (in thousands)
|
1,070,485 | 1,141,462 |
| Three Months Ended March 31, | ||||
| (dollars in thousands, except exchange rates) | 2022 | 2021 | ||
| Financing obtained - consolidated | $ | 3,374 | $ | 40,194 |
|
Financing obtained - pro rata
|
3,259 | 38,813 | ||
| Average U.S. dollar/euro exchange rate | 1.1223 | 1.2051 | ||
| Average U.S. dollar/Norwegian krone exchange rate | 0.1130 | 0.1173 | ||
| Average U.S. dollar/British pound sterling exchange rate | 1.3418 | 1.3775 |
__________
(a)As of both March 31, 2022 and December 31, 2021, includes nine net-leased properties and two development projects subject to exercised purchase options, which are expected to be sold on or around June 30, 2022 (Note 5).
(b)As of both March 31, 2022 and December 31, 2021, our operating portfolio consisted of 65 self-storage properties and one student housing operating property.
CPA:18 - Global 3/31/2022 10-Q - 28
The tables below present information about our portfolio on a pro rata basis as of and for the three months ended March 31, 2022. See Terms and Definitions below for a description of Pro Rata Metrics, stabilized net operating income ("Stabilized NOI"), and ABR.
Portfolio Diversification by Property Type
(dollars in thousands)
| Property Type |
Stabilized NOI (a)
|
Percent | ||
| Net-Leased | ||||
| Office | $ | 10,311 | 29 | % |
| Warehouse | 3,324 | 10 | % | |
| Industrial | 2,473 | 7 | % | |
| Retail | 2,220 | 6 | % | |
| Hospitality | 1,517 | 4 | % | |
| Student Housing (net lease) | 1,448 | 4 | % | |
| Net-Leased Total | 21,293 | 60 | % | |
| Operating | ||||
| Self Storage | 13,403 | 38 | % | |
| Other Operating Properties | 688 | 2 | % | |
| Operating Total | 14,091 | 40 | % | |
| Total | $ | 35,384 | 100 | % |
__________
(a)For the three months ended March 31, 2022, we did not recognize approximately $2.1 million of contractual base rent that was not collected due to the adverse impact of the COVID-19 pandemic (Note 2), which reduced Stabilized NOI for certain tenants.
CPA:18 - Global 3/31/2022 10-Q - 29
Portfolio Diversification by Geography
(dollars in thousands)
| Region |
Stabilized NOI (a)
|
Percent | ||
| United States | ||||
| South | $ | 10,663 | 30 | % |
| Midwest | 6,372 | 18 | % | |
| West | 4,562 | 13 | % | |
| East | 2,683 | 8 | % | |
| U.S. Total | 24,280 | 69 | % | |
| International | ||||
| Norway | 3,103 | 9 | % | |
| The Netherlands | 2,143 | 6 | % | |
| Spain | 1,371 | 4 | % | |
| Mauritius | 1,164 | 3 | % | |
| Poland | 1,054 | 3 | % | |
| Croatia | 827 | 2 | % | |
| Germany | 707 | 2 | % | |
| Slovakia | 658 | 2 | % | |
| Portugal | 77 | - | % | |
| International Total | 11,104 | 31 | % | |
| Total | $ | 35,384 | 100 | % |
__________
(a)For the three months ended March 31, 2022, we did not recognize approximately $2.1 million of contractual base rent that was not collected due to the adverse impact of the COVID-19 pandemic (Note 2), which reduced Stabilized NOI for certain tenants.
Top Ten Tenants by Total Stabilized NOI
(dollars in thousands)
|
Tenant/Lease Guarantor (a)
|
Property Type | Tenant Industry | Location | Stabilized NOI | Percent | ||
| Sweetheart Cup Company, Inc. | Warehouse | Containers, Packaging and Glass | University Park, Illinois | $ | 1,550 | 4 | % |
|
Rabobank Groep NV(b)
|
Office | Banking | Eindhoven, Netherlands | 1,528 | 4 | % | |
|
Brookfield Strategic Real Estate Partners (b)
|
Student Housing (net lease) | Student Housing (net lease) | Various Spain and Portugal | 1,448 | 4 | % | |
|
Albion Resorts (Club Med) (b)
|
Hospitality | Hotel and Leisure | Albion, Mauritius | 1,164 | 3 | % | |
|
Siemens AS (b)
|
Office | Capital Equipment | Oslo, Norway | 1,133 | 3 | % | |
|
Bank Pekao S.A. (b)
|
Office | Banking | Warsaw, Poland | 1,054 | 3 | % | |
| State Farm Automobile Co. | Office | Insurance | Austin, Texas | 983 | 3 | % | |
|
COOP Ost AS (b)
|
Retail | Grocery | Oslo, Norway | 958 | 3 | % | |
| State of Iowa Board of Regents | Office | Sovereign and Public Finance | Coralville and Iowa City, Iowa | 933 | 3 | % | |
| Orbital ATK, Inc. | Office | Metals | Plymouth, Minnesota | 918 | 3 | % | |
| Total | $ | 11,669 | 33 | % |
__________
(a)For the three months ended March 31, 2022 we did not recognize $2.1 million of contractual base rent that was not collected from a former top ten tenant (by Stabilized NOI), which has been adversely impacted by the COVID-19 pandemic (Note 2). At March 31, 2022, ABR for this tenant was $7.9 million.
(b)Stabilized NOI amounts for these properties are subject to fluctuations in foreign currency exchange rates.
CPA:18 - Global 3/31/2022 10-Q - 30
Net-Leased Portfolio
The tables below represent information about our net-leased portfolio on a pro rata basis and, accordingly, exclude all operating properties as of March 31, 2022. See Terms and Definitions below for a description of Pro Rata Metrics, Stabilized NOI, and ABR.
Portfolio Diversification by Tenant Industry
(dollars in thousands)
| Industry Type | ABR | Percent | ||
| Hotel and Leisure | $ | 15,022 | 14 | % |
| Student Housing (net lease) | 13,547 | 13 | % | |
| Banking | 10,718 | 10 | % | |
| Grocery | 6,817 | 7 | % | |
| Containers, Packaging, and Glass | 6,213 | 6 | % | |
| Capital Equipment | 5,590 | 5 | % | |
| Oil and Gas | 5,283 | 5 | % | |
| Insurance | 4,662 | 4 | % | |
| Utilities: Electric | 4,406 | 4 | % | |
| Retail | 3,810 | 4 | % | |
| Sovereign and Public Finance | 3,761 | 4 | % | |
| Metals | 3,674 | 4 | % | |
| High Tech Industries | 3,649 | 4 | % | |
| Advertising, Printing, and Publishing | 3,416 | 3 | % | |
| Healthcare and Pharmaceuticals | 2,687 | 3 | % | |
| Automotive | 2,073 | 2 | % | |
| Construction and Building | 2,039 | 2 | % | |
| Telecommunications | 1,149 | 1 | % | |
| Electricity | 1,103 | 1 | % | |
| Wholesale | 1,091 | 1 | % | |
|
Other (a)
|
3,529 | 3 | % | |
| Total | $ | 104,239 | 100 | % |
__________
(a)Includes ABR from tenants in the cargo transportation, durable consumer goods, non-durable consumer goods, and business services industries.
CPA:18 - Global 3/31/2022 10-Q - 31
Lease Expirations
(dollars in thousands)
|
Year of Lease Expiration (a)
|
Number of Leases Expiring | ABR | Percent | ||
| Remaining 2022 | 1 | $ | 2 | - | % |
| 2023 | 9 | 14,722 | 14 | % | |
| 2024 | 3 | 4,914 | 5 | % | |
| 2025 | 3 | 5,222 | 5 | % | |
| 2026 | 6 | 8,046 | 8 | % | |
| 2027 | 3 | 2,694 | 3 | % | |
| 2028 | 4 | 6,242 | 6 | % | |
| 2029 | 4 | 9,398 | 9 | % | |
| 2030 | 3 | 4,674 | 4 | % | |
| 2031 | 4 | 5,397 | 5 | % | |
| 2032 | 6 | 9,203 | 9 | % | |
| 2033 | - | - | - | % | |
| 2034 | 5 | 4,097 | 4 | % | |
| 2035 | 4 | 5,161 | 5 | % | |
| Thereafter (>2035) | 13 | 24,467 | 23 | % | |
| Total | 68 | $ | 104,239 | 100 | % |
__________
(a)Assumes tenant does not exercise renewal option.
Lease Composition and Leasing Activities
Substantially all of our leases provide for either scheduled rent increases, periodic rent adjustments based on formulas indexed to changes in the CPI or similar indices, or percentage rents. As of March 31, 2022, approximately 43.6% of our leases (based on ABR) provided for adjustments based on formulas indexed to changes in the U.S. CPI (or similar indices for the jurisdiction in which the property is located), some of which are subject to caps and/or floors. In addition, 43.4% of our leases (based on ABR) have fixed rent adjustments, for a scheduled average ABR increase of 1.8% over the next 12 months. Lease revenues from our international investments are subject to exchange rate fluctuations, primarily from the euro. We recognize rents from percentage rents as reported by the lessees, which is after the level of sales requiring a rental payment to us is reached. Percentage rents are insignificant for the periods presented.
CPA:18 - Global 3/31/2022 10-Q - 32
Operating Properties
As of March 31, 2022, our operating portfolio consisted of 65 self-storage properties and one student housing operating property. As of March 31, 2022, our operating portfolio was comprised as follows (square footage in thousands):
| Location | Number of Properties | Square Footage |
| Florida | 21 | 1,778 |
| Texas | 13 | 1,009 |
| California | 10 | 860 |
| Nevada | 3 | 243 |
| Delaware | 3 | 241 |
| Georgia | 3 | 171 |
| Illinois | 2 | 100 |
| Hawaii | 2 | 95 |
| Kentucky | 1 | 121 |
| North Carolina | 1 | 121 |
| Washington, D.C. | 1 | 67 |
| South Carolina | 1 | 63 |
| New York | 1 | 61 |
| Louisiana | 1 | 59 |
| Massachusetts | 1 | 58 |
| Missouri | 1 | 41 |
| Oregon | 1 | 40 |
| Total | 66 | 5,128 |
Development Projects
As of March 31, 2022, we had the following three consolidated student housing development projects, including joint ventures, which remained under construction as of that date (dollars in thousands):
| Location |
Ownership Percentage (a)
|
Number of Buildings | Square Footage |
Estimated Project
Totals (b) (c)
|
Amount Funded (b) (c)
|
Estimated Completion Date | |||
|
Swansea, United Kingdom (d)
|
97.0 | % | 1 | 176,496 | $ | 89,411 | $ | 68,275 | Q3 2022 |
|
Granada, Spain (e)
|
98.5 | % | 1 | 75,557 | 21,407 | 12,794 | Q3 2022 | ||
|
Valencia, Spain (e)
|
98.7 | % | 1 | 100,423 | 25,986 | 8,663 | Q3 2023 | ||
| 3 | 352,476 | $ | 136,804 | 89,732 | |||||
|
Third-party contributions (f)
|
(1,552) | ||||||||
| Total | $ | 88,180 |
__________
(a)Represents our expected ownership percentage upon the completion of each respective development project.
(b)Amounts are based on the applicable exchange rate as of March 31, 2022.
(c)Amounts exclude capitalized interest, accrued costs, and capitalized acquisition fees paid to our Advisor, which are all included in Real estate under construction on our condensed consolidated balance sheets.
(d)Amount funded for this project includes a $7.2 million right-of-use ("ROU") land lease asset as of March 31, 2022, and is included in In-place lease and other intangible assets on our condensed consolidated balance sheets.
(e)Included as part of an agreement with a third party to become a net-leased property upon completion of construction. On March 30, 2022, the tenant exercised its option to purchase these properties, which is expected to occur on or around June 30, 2022, at which point our funding would cease (Note 5).
(f)Amount represents the funds contributed from our joint-venture partners.
CPA:18 - Global 3/31/2022 10-Q - 33
Terms and Definitions
Pro Rata Metrics - The portfolio information abovecontains certain metrics prepared on a pro rata basis ("Pro Rata Metrics"). We have a number of investments in which our economic ownership is less than 100%. On a full consolidation basis, 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 from that investment. On a pro rata basis, we generally present our proportionate share, based on our economic ownership of these jointly owned investments, of the portfolio metrics of those investments. Multiplying each of our jointly owned investments' financial statement line items by our percentage ownership and adding 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 our jointly owned investments.
ABR - ABR represents contractual minimum annualized base rent for our net-leased properties and reflects exchange rates as of March 31, 2022. 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.
NOI - Net operating income ("NOI") is a non-GAAP measure intended to reflect the performance of our entire portfolio of properties and investments. We define NOI as lease revenues and other operating and interest income less non-reimbursable property and corporate expenses as determined by GAAP. We believe that NOI is a helpful measure that both investors and management can use to evaluate the financial performance of our properties and it allows for comparison of our portfolio performance between periods and to other REITs. While we believe that NOI is a useful supplemental measure, it should not be considered as an alternative to Net income as an indication of our operating performance.
Stabilized NOI - We use Stabilized NOI, a non-GAAP measure, as a metric to evaluate the performance of our entire portfolio of properties. Stabilized NOI for development projects and newly acquired operating properties that are not yet substantially leased up are not included in our portfolio information until one year after the project has been substantially completed and placed into service, or the property has been substantially leased up (and the project or property has not been disposed of during or prior to the current period). In addition, any newly acquired stabilized operating property is included in our portfolio of Stabilized NOI information upon acquisition. Stabilized NOI for a net-leased property is included in our portfolio information upon acquisition or in the period when it is placed into service (as the property will already have a lease in place).
Stabilized NOI is adjusted for corporate expenses, such as asset management fees and the Available Cash Distributions to our Advisor (Note 3), that are calculated and reported at the corporate level and not evaluated as part of any property's operating performance. Additionally, non-cash adjustments (such as straight-line rent adjustments) and interest income related to our notes receivable (which is non-property related) are not included in Stabilized NOI. Lastly, non-core income is excluded from Stabilized NOI as this income is generally not recurring in nature.
We believe that Stabilized NOI is a helpful measure that both investors and management can use to evaluate the financial performance of our properties and it allows for comparison of our portfolio performance between periods and to other REITs. While we believe that Stabilized NOI is a useful supplemental measure, it should not be considered as an alternative to Net income as an indication of our operating performance.
CPA:18 - Global 3/31/2022 10-Q - 34
Reconciliation of Net Income (GAAP) to Net Operating Income Attributable to CPA:18 - Global (non-GAAP) (in thousands):
| Three Months Ended March 31, | ||||
| 2022 | 2021 | |||
| Net Income (GAAP) | $ | 71,002 | $ | 2,478 |
| Adjustments: | ||||
|
Depreciation and amortization
|
16,016 | 16,996 | ||
| Impairment charges | 9,221 | - | ||
| Merger and other expenses | 2,015 | - | ||
| Gain on sale of real estate, net | (77,271) | - | ||
|
Interest expense
|
11,708 | 11,747 | ||
|
Other gains and (losses)
|
910 | 969 | ||
| Benefit from (provision for) income taxes | 1,289 | (1,101) | ||
|
NOI related to noncontrolling interests (1)
|
(3,171) | (3,222) | ||
|
Net Operating Income Attributable to CPA:18 - Global (Non-GAAP)
|
$ | 31,719 | $ | 27,867 |
| (1) NOI related to noncontrolling interests: | ||||
|
Net income attributable to noncontrolling interests (GAAP)
|
$ | (2,034) | $ | (1,967) |
|
Depreciation and amortization
|
(1,535) | (1,684) | ||
| Impairment charges | (4,610) | - | ||
| Gain on sale of real estate, net | 3,882 | - | ||
|
Interest expense
|
(1,114) | (1,176) | ||
|
Other gains and (losses)
|
(30) | (121) | ||
| (Provision for) benefit from income taxes | (317) | 187 | ||
|
Available Cash Distributions to a related party (Note 3)
|
2,587 | 1,539 | ||
| NOI related to noncontrolling interests | (3,171) | (3,222) |
Reconciliation of Stabilized NOI to Net Operating Income Attributable to CPA:18 - Global (Non-GAAP) (pro rata, in thousands):
| Three Months Ended March 31, | ||||
| 2022 | 2021 | |||
| Net-leased | $ | 21,293 | $ | 19,392 |
| Self storage | 13,403 | 10,167 | ||
| Other operating properties | 688 | 1,414 | ||
| Stabilized NOI | 35,384 | 30,973 | ||
|
Other NOI:
|
||||
|
Corporate (a)
|
(5,333) | (4,959) | ||
| Straight-line rent adjustments | 210 | 1,307 | ||
| Non-core income | 75 | 69 | ||
|
Disposed properties
|
(40) | (115) | ||
| 30,296 | 27,275 | |||
|
Development projects (b)
|
1,423 | (18) | ||
| Recently-opened operating properties | - | 610 | ||
|
Net Operating Income Attributable to CPA:18 - Global (Non-GAAP)
|
$ | 31,719 | $ | 27,867 |
_________
(a)Includes expenses such as asset management fees, the Available Cash Distributions to our Advisor, and other costs that are calculated and reported at the corporate level and not evaluated as part of any property's operating performance.
(b)Includes NOI for our ongoing or recently placed into service student housing development projects.
CPA:18 - Global 3/31/2022 10-Q - 35
Results of Operations
We evaluate our results of operations with a focus on: (i) our ability to generate the cash flow necessary to meet our objectives of funding distributions to stockholders and (ii) increasing the value of 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.
Revenues
The following table presents our consolidated revenues:
| Three Months Ended March 31, | ||||||
| 2022 | 2021 | Change | ||||
| Revenues | ||||||
| Revenues from: | ||||||
| Existing net-leased properties | $ | 29,093 | $ | 27,808 | $ | 1,285 |
| Recently net-leased or acquired properties | 1,917 | - | 1,917 | |||
| Net-leased properties sold or held for sale | 60 | 915 | (855) | |||
| Total net-leased revenues (including reimbursable tenant costs) | 31,070 | 28,723 | 2,347 | |||
| Revenues from: | ||||||
| Existing operating properties | 21,465 | 17,285 | 4,180 | |||
| Operating properties sold | - | 2,282 | (2,282) | |||
| Total operating property revenues | 21,465 | 19,567 | 1,898 | |||
| Interest income and other | 163 | 79 | 84 | |||
| $ | 52,698 | $ | 48,369 | $ | 4,329 |
Lease Revenues
"Existing net-leased properties" are those we acquired or placed into service prior to January 1, 2021 and were not sold during the periods presented. For the periods presented, there were 47 existing net-leased properties.
For the three months ended March 31, 2022 as compared to the same period in 2021, lease revenues increased by $1.3 million, primarily due to (i) $1.4 million of higher rent collected during the current year period as a result of the positive impact on rent collections as businesses recovered from the initial effects of the COVID-19 pandemic (uncollected rent was $2.1 million during the current year period, as compared to $3.5 million during the prior year period) (Note 2); (ii) a $0.3 million increase due to a new lease at a multi-tenant property; and (iii) a $0.2 million increase due to scheduled rent increases, partially offset by a $1.0 million decrease as a result of the weakening of the euro and Norwegian krone in relation to the U.S. dollar.
"Recently net-leased or acquired properties" are those we placed into service or acquired subsequent to December 31, 2020 or remain under construction as a development project (and are subject to net leases upon completion of construction). For the periods presented, there were seven recently net-leased or acquired properties, comprised of four student housing properties placed into service in the third quarter of 2021, two ongoing student housing development projects, and one property acquired in the fourth quarter of 2021.
"Net-leased properties sold or held for sale" includes two net-leased properties sold during the three months ended March 31, 2022 (Note 12) and two net-leased properties sold during the year ended December 31, 2021.
Operating Property Revenues
"Existing operating properties" are those we acquired or placed into service prior to January 1, 2021 and were not sold during the periods presented. For the periods presented, there were 66 existing operating properties (consisting of 65 self-storage properties and one student housing operating property).
CPA:18 - Global 3/31/2022 10-Q - 36
For the three months ended March 31, 2022 as compared to the same period in 2021, operating property revenues from existing operating properties increased by $4.2 million, primarily due to an increase in occupancy and unit rates across our self-storage portfolio.
"Operating properties sold" includes two student housing operating properties located in the United Kingdom sold in September 2021.
Operating Expenses
Depreciation and Amortization
The following table presents our consolidated depreciation and amortization:
| Three Months Ended March 31, | ||||||
| 2022 | 2021 | Change | ||||
| Depreciation and Amortization | ||||||
| Net-leased properties | $ | 12,474 | $ | 12,670 | $ | (196) |
| Operating properties | 3,542 | 4,326 | (784) | |||
| $ | 16,016 | $ | 16,996 | $ | (980) |
For the three months ended March 31, 2022 as compared to the same period in 2021, depreciation and amortization for our operating properties decreased as a result of the sale of two student housing operating properties in September 2021.
Impairment Charges
Our impairment charges are described in Note 7.
Merger and Other Expenses
For the three months ended March 31, 2022, merger and other expenses totaling $2.0 million were comprised of costs incurred in connection with the Proposed Merger (Note 1).
Other Income and (Expenses), and (Provision for) Benefit from Income Taxes
Gain on Sale of Real Estate, Net
Gain on sale of real estate, net, consists of gain on the sale of properties that were disposed of or subject to a purchase option during the reporting period, as more fully described in Note 4and Note 12.
Interest Expense
Our interest expense is directly impacted by the non-recourse secured debt financings obtained, assumed, or extinguished in connection with our investment, construction, and disposition activity (Note 9).
For the three months ended March 31, 2022 as compared to the same period in 2021, interest expense was substantially flat.
The following table presents certain information about our outstanding debt (dollars in thousands):
| Three Months Ended March 31, | ||||
| 2022 | 2021 | |||
| Average outstanding debt balance | $ | 1,192,166 | $ | 1,319,670 |
| Weighted-average interest rate | 3.7 | % | 3.6 | % |
CPA:18 - Global 3/31/2022 10-Q - 37
Other Gains and (Losses)
Other gains and (losses) 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 amortizing loans, are included in the determination of net income. We also recognize gains or losses on foreign currencies held by entities with the U.S. dollar as their functional currency due to fluctuations in foreign exchange rates. The timing and amount of such gains or losses cannot always be estimated and are subject to fluctuation.
2022 - For the three months ended March 31, 2022, net other losses were $0.9 million, which were primarily comprised of net realized and unrealized losses of $1.0 million related to changes in foreign currency exchange rates.
2021 - For the three months ended March 31, 2021, net other losses were $1.0 million, which were primarily comprised of net realized and unrealized losses of $1.2 million related to changes in foreign currency exchange rates.
(Provision for) Benefit from Income Taxes
Our (provision for) benefit from income taxes is primarily related to our international properties.
For the three months ended March 31, 2022, we recognized a provision for income taxes of $1.3 million, compared to a benefit from income taxes of $1.1 million for the same period in 2021, primarily due to higher current tax expense related to reviews of tax positions on certain international properties.
Net Income Attributable to Noncontrolling Interests
For the three months ended March 31, 2022 as compared to the same period in 2021, net income attributable to noncontrolling interests increased by $0.1 million, primarily due to a noncontrolling interest's $3.8 million share of a gain on sale of real estate related to a tenant's exercise of a purchase option recognized during the current year period (Note 5) and a $1.0 million increase in the Available Cash Distribution, partially offset by a noncontrolling interest's $4.6 million share of an impairment charge recognized on one of our international properties during the current year period (Note 7).
Liquidity and Capital Resources
Sources and Uses of Cash During the Period
We use the cash flow generated from our investments primarily to meet our operating expenses, fund construction projects, service debt, and fund distributions to stockholders. Our cash flows will fluctuate periodically due to a number of factors, which may include, among other things: the timing of funding for our build-to-suit and development projects; the timing of the receipt of proceeds from, and the repayment of, non-recourse secured debt and the WPC line of credit, and the receipt of lease revenues; whether our Advisor receives fees in shares of our common stock or (as it does currently in light of the Proposed Merger) cash, which our board of directors elects after consultation with our Advisor; the timing of payments of the Available Cash Distributions to our Advisor; and changes in foreign currency exchange rates. Despite these fluctuations, we believe our investments will generate sufficient cash from operations to meet our normal recurring short-term and long-term liquidity needs, as well as the measures noted above. We may also use existing cash resources, the proceeds of non-recourse secured debt, sales of assets, and distributions reinvested in our common stock through our DRIP (which is currently suspended in light of the Proposed Merger) 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 $13.4 million during the three months ended March 31, 2022 as compared to the same period in 2021, primarily due to the positive impact of our student housing properties placed into service during 2021 and higher revenues from self-storage operating properties (driven by an increase in occupancy and unit rates).
Investing Activities - Our investing activities are generally comprised of funding of development projects and capitalized property-related costs. In addition, during the three months ended March 31, 2022, we sold two properties, as described in Note 12.
CPA:18 - Global 3/31/2022 10-Q - 38
Financing Activities - Our financing activities are generally comprised of borrowings, repayments and prepayments of our non-recourse secured debt and line of credit with WPC (Note 3), and activity relating to our common stock, which includes (i) payments of distributions to stockholders, (ii) distributions that are reinvested by stockholders in shares of our common stock through our DRIP, and (iii) repurchases of shares of our common stock pursuant to our redemption program as described below. In addition, cash paid and received in accordance with our individual agreements with our joint-venture partners are considered financing cash flow activities.
Distributions
Our objectives are to generate sufficient cash flow over time to provide stockholders with distributions. For the three months ended March 31, 2022, we declared cash distributions to stockholders of $9.4 million. From inception through March 31, 2022, we have declared distributions to stockholders totaling $608.3 million, which were comprised of cash distributions of $319.8 million and $288.5 million reinvested by stockholders in shares of our common stock pursuant to our DRIP.
We believe that FFO, a non-GAAP measure, is an appropriate metric to evaluate our ability to fund distributions to stockholders. For a discussion of FFO, see Supplemental Financial Measuresbelow. Since inception, the regular quarterly cash distributions that we pay have principally been covered by FFO or cash flow from operations. However, we funded a portion of our cash distributions to date using net proceeds from our initial public offering and there can be no assurance that our FFO or cash flow from operations will be sufficient to cover our future distributions. Our distribution coverage using both FFO and net cash provided by operating activities fully covered our distributions declared for the three months ended March 31, 2022.
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. In light of the Proposed Merger, effective February 27, 2022, our board of directors suspended our quarterly redemption program (except for special circumstance redemptions) (Note 1).
During the three months ended March 31, 2022, we received 61 and 19 requests to redeem 228,508 and 72,755 shares of Class A and Class C common stock, respectively, all of which were fulfilled in the current period at an average price of $8.80 and $8.71 per share for Class A and Class C common stock, respectively.
Except for redemptions sought in certain defined special circumstances, the redemption price of the shares listed above was 95% of our most recently published quarterly NAVs at the time of redemption was made or processed. For shares redeemed under such special circumstances, the redemption price was the greater of the price paid to acquire the shares from us or 95% of our most recently published quarterly NAVs at the time of redemption.
CPA:18 - Global 3/31/2022 10-Q - 39
Summary of Financing
The table below summarizes our non-recourse secured debt, net (dollars in thousands):
| March 31, 2022 | December 31, 2021 | |||
|
Carrying Value (a)
|
||||
| Fixed rate | $ | 828,272 | $ | 869,093 |
| Variable rate: | ||||
| Amount subject to floating interest rate | 178,185 | 202,520 | ||
| Amount subject to interest rate swaps and caps | 172,844 | 181,432 | ||
| 351,029 | 383,952 | |||
| $ | 1,179,301 | $ | 1,253,045 | |
| Percent of Total Debt | ||||
| Fixed rate | 70 | % | 69 | % |
| Variable rate | 30 | % | 31 | % |
| 100 | % | 100 | % | |
| Weighted-Average Interest Rate at End of Period | ||||
| Fixed rate | 3.9 | % | 3.9 | % |
|
Variable rate (b)
|
3.6 | % | 3.5 | % |
| Total debt | 3.8 | % | 3.8 | % |
___________
(a)Aggregate debt balance includes unamortized deferred financing costs totaling $5.9 million and $6.7 million as of March 31, 2022 and December 31, 2021, respectively, and unamortized premium, net of $5.1 million and $4.3 million as of March 31, 2022 and December 31, 2021, respectively (Note 9).
(b)The impact of our interest rate swaps and caps is reflected in the weighted-average interest rates.
Cash Resources
As of March 31, 2022, our cash resources consisted of the following:
•cash and cash equivalents totaling $37.6 million (Note 2). Of this amount, $20.1 million (at then-current exchange rates) was held in foreign subsidiaries, which may be subject to restrictions or significant costs should we decide to repatriate these funds;
•ability to borrow up to $50.0 million from the unsecured revolving line of credit with WPC (scheduled to mature on March 31, 2023), which had an outstanding balance of $11.0 million as of March 31, 2022 (Note 3). Subsequent to March 31, 2022 and through the date of this Report, we borrowed a net amount of $5.0 million under the line of credit (Note 14);
•ability to borrow up to $28.0 million and $1.3 million under our third-party and external joint-venture financing arrangements, respectively; and
•unleveraged properties that had an aggregate carrying value of $129.5 million as of March 31, 2022, although there can be no assurance that we would be able to obtain financing for these properties on acceptable terms.
Our cash resources may be used for funding construction costs, working capital needs, other commitments, and to make distributions to our stockholders.
CPA:18 - Global 3/31/2022 10-Q - 40
Cash Requirements and Liquidity
During the next 12 months following March 31, 2022 and thereafter, we expect that our significant cash requirements will include:
•paying distributions to our stockholders and to our affiliates that hold noncontrolling interests in entities we control;
•funding future capital commitments such as development projects (Note 4);
•making scheduled principal and balloon payments on our debt obligations (Note 9);
•making scheduled interest payments on our debt obligations (future interest payments total $111.6 million, with $43.7 million due during the next 12 months; interest on unhedged variable-rate debt obligations was calculated using the applicable annual variable interest rates); and
•costs related to the Proposed Merger (Note 1).
We use the cash flow generated from our investments primarily to meet our operating expenses, service debt, and fund distributions to stockholders. We may also use proceeds from asset sales to fund development projects, build-to-suit investments, and short-term cash requirements. We currently expect that, for the short-term, the aforementioned cash requirements will be funded through our cash resources (as noted above), and our cash flow from operations, including the cash received under net lease and operating lease agreements. During 2021, we placed into service four student housing properties (all of which executed net lease agreements). In addition, in order to preserve cash and maintain financial flexibility during the COVID-19 pandemic:
•we have reduced our distributions declared for both Class A and Class C common stock since the second quarter of 2020;
•we limited the amount of cash available for our redemption program to the amount reinvested by stockholders in our DRIP, since August 2020; and
•we have refinanced certain loans and have the ability to refinance loans coming due.
Our liquidity could be adversely affected by unanticipated costs, greater-than-anticipated operating expenses, and the continuing adverse impact of the COVID-19 pandemic, such as tenants not paying rental obligations. The extent to which the COVID-19 pandemic impacts our liquidity and debt covenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence.
Certain amounts disclosed above are based on the exchange rate of the local currencies as of March 31, 2022, which consisted primarily of the euro and Norwegian krone and, to a lesser extent, the British pound sterling.
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
Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts, Inc. ("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.
CPA:18 - Global 3/31/2022 10-Q - 41
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 restated in December 2018. 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. We believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment, and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate-related depreciation and amortization, as well as impairment charges of real estate-related assets, provides a more complete understanding of our performance to investors and to management; and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. In particular, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions, which can change over time.
MFFO
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 Institute for Portfolio Alternatives (the "IPA"), an industry trade group, has standardized a measure known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered non-traded REITs and which we believe to be another appropriate non-GAAP measure to reflect our operations. MFFO is not equivalent to our net income or loss as determined under GAAP and 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). Since MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO, we believe that it provides an indication of the sustainability of our operating performance after our initial property-acquisition phase. We believe that MFFO allows investors and analysts to better assess the sustainability of our operating performance now that our initial public offering is complete and the proceeds are invested. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-traded REIT industry.
We define MFFO, a non-GAAP measure, consistent with the IPA's Practice Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Traded REITs: Modified Funds from Operations (the "Practice Guideline"), issued 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 straight-line rents and amortization of above- and below-market leases and liabilities (which are adjusted in order to reflect such payments from a GAAP basis to a cash accrual 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, foreign exchange, derivatives, or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, and after adjustments for consolidated and unconsolidated partnerships and jointly owned investments, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, unrealized gains and losses on hedges, foreign exchange, 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.
CPA:18 - Global 3/31/2022 10-Q - 42
Our MFFO calculation complies with the IPA's Practice Guideline described above and is adjusted for certain items, such as accretion of discounts and amortizations of premiums on borrowings (as such adjustments are comparable to the permitted adjustments for debt investments), allowance for credit losses, non-cash accretion of environmental liabilities and amortization of ROU assets, which management believes is helpful in assessing our operating performance.
Our management uses MFFO in order to evaluate our performance against other non-traded REITs, which also have limited lives with defined acquisition periods and targeted exit strategies. 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. For example, 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.
Adjusted MFFO
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.
FFO, MFFO, and Adjusted MFFO
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:18 - Global 3/31/2022 10-Q - 43
FFO, MFFO, and Adjusted MFFO were as follows (in thousands):
| Three Months Ended March 31, | ||||
| 2022 | 2021 | |||
| Net income attributable to CPA:18 - Global | $ | 68,968 | $ | 511 |
| Adjustments: | ||||
|
Gain on sale of real estate, net
|
(77,271) | - | ||
|
Depreciation and amortization of real property
|
16,016 | 16,996 | ||
| Impairment charges | 9,221 | - | ||
| Proportionate share of adjustments for noncontrolling interests | (2,390) | (1,684) | ||
|
Total adjustments
|
(54,424) | 15,312 | ||
|
FFO (as defined by NAREIT) attributable to CPA:18 - Global
|
14,544 | 15,823 | ||
| Adjustments: | ||||
|
Merger and other expenses (a)
|
2,015 | - | ||
|
Other (gains) and losses(b)
|
918 | 1,009 | ||
|
Amortization of premiums and discounts
|
431 | 513 | ||
|
Above- and below-market rent intangible lease amortization, net (c)
|
(190) | (180) | ||
|
Other amortization and non-cash items
|
133 | 154 | ||
| Proportionate share of adjustments for noncontrolling interests | (105) | (179) | ||
| Straight-line and other rent adjustments | (4) | (1,118) | ||
|
Total adjustments
|
3,198 | 199 | ||
| MFFO attributable to CPA:18 - Global | 17,742 | 16,022 | ||
| Adjustments: | ||||
| Hedging gains | 196 | 46 | ||
| Tax benefit (expense), deferred | 49 | (1,806) | ||
| Total adjustments | 245 | (1,760) | ||
| Adjusted MFFO attributable to CPA:18 - Global | $ | 17,987 | $ | 14,262 |
__________
(a)Amount for the three months ended March 31, 2022 is comprised of costs incurred in connection with the Proposed Merger (Note 1).
(b)Primarily comprised of gains and losses on (i) foreign currency movements, (ii) derivatives, and (iii) extinguishment of debt.
(c)Under GAAP, certain intangibles are accounted for at cost and reviewed at least annually for impairment, and certain intangibles are assumed to diminish predictably in value over time and amortized, similar to depreciation and amortization of other real estate related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, management believes that by excluding charges relating to amortization of these intangibles, MFFO and Adjusted MFFO provide useful supplemental information on the performance of the real estate.
CPA:18 - Global 3/31/2022 10-Q - 44
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market and Credit Risk
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, and equity prices. We are exposed to interest rate risk and foreign currency exchange risk, however, we generally do not use derivative instruments to hedge credit/market risks or for speculative purposes. From time to time, we may enter into foreign currency forward contracts and collars to hedge our foreign currency cash flow exposures.
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 (such as the COVID-19 pandemic) 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.
Interest Rate Risk
The values of our real estate, related fixed-rate debt obligations, and notes receivable investment 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 (including the ongoing impact of the COVID-19 pandemic) 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 our 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 secured debt 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 secured debt, and, as a result, we have entered into, and may continue to enter into, interest rate swap agreements or interest rate cap agreements with counterparties. See Note 8for additional information on our interest rate swaps and caps.
As of March 31, 2022, a significant portion (approximately 84.9%) of our outstanding debt either bore interest at fixed rates, or was swapped or capped to a fixed rate. Our debt obligations are more fully described in Note 9and Liquidity and Capital Resources - Summary of Financingin Item 2 above. The following table presents principal cash outflows for the remainder of 2022, each of the next four calendar years following December 31, 2022, and thereafter, based upon expected maturity dates of our debt obligations outstanding as of March 31, 2022 (in thousands):
| 2022 (remainder) | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | Fair Value | |||||||||
|
Fixed-rate debt (a)
|
$ | 117,082 | $ | 153,485 | $ | 172,754 | $ | 298,055 | $ | 79,551 | $ | 11,062 | $ | 831,989 | $ | 816,187 |
|
Variable rate debt (a)
|
$ | 53,289 | $ | 217,292 | $ | 22,446 | $ | 43,835 | $ | 11,289 | $ | - | $ | 348,151 | $ | 355,018 |
__________
(a)Amounts are based on the exchange rate as of March 31, 2022, as applicable.
The estimated fair value of our fixed-rate debt and variable-rate debt (which have effectively been converted to a fixed rate through the use of interest rate swaps) is marginally affected by changes in interest rates. A decrease or increase in interest rates of 1% would change the estimated fair value of this debt as of March 31, 2022 by an aggregate increase of $21.1 million or an aggregate decrease of $25.0 million, respectively. Annual interest expense on our unhedged variable-rate debt as of March 31, 2022 would increase or decrease by $1.8 million for each respective 1% change in annual interest rates.
As more fully described under Liquidity and Capital Resources - Summary of Financingin Item 2 above, a portion of our variable-rate debt in the table above bore interest at fixed rates as of March 31, 2022, 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.
CPA:18 - Global 3/31/2022 10-Q - 45
Foreign Currency Exchange Rate Risk
We own international investments, primarily in Europe and, as a result, are subject to risk from the effects of exchange rate movements in various foreign currencies, primarily the euro, the Norwegian krone, and, to a lesser extent, the British pound sterling, which may affect future costs and cash flows. We have obtained, and may in the future obtain, non-recourse mortgage financing in the local currency. Volatile market conditions arising from the COVID-19 global pandemic may result in significant fluctuations in foreign currency exchange rates. To the extent that currency fluctuations increase or decrease rental revenues, as translated to U.S. dollars, the change in debt service (comprised of principal and interest, excluding balloon payments), 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. We estimate that, for a 1% increase or decrease in the exchange rate between the euro, Norwegian krone, or British pound sterling, and the U.S. dollar, there would be a corresponding change in the annual projected estimated cash flow (scheduled future rental revenues, net of scheduled future debt service payments for the next 12 months) for our consolidated foreign operations at March 31, 2022 of $0.4 million for the euro and less than $0.1 million for both the Norwegian krone and British pound sterling, excluding the impact of our derivative instruments.
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 enter into foreign currency collars to hedge certain of our foreign currency cash flow exposures. See Note 8for additional information on our foreign currency collars.
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 well-diversified, it does contain concentrations in certain areas. There have been no material changes in our concentration of credit risk from what was disclosed in the 2021 Annual Report.
CPA:18 - Global 3/31/2022 10-Q - 46
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 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 March 31, 2022, have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective as of March 31, 2022 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:18 - Global 3/31/2022 10-Q - 47
PART II - OTHER INFORMATION
Item 1A. Risk Factors
We are including the following additional risk factors, which should be read in conjunction with our description of risk factors provided in Part I, Item 1A. Risk Factors in our 2021 Annual Report and provided under the heading "Risk Factors" in our definitive proxy statement/prospectus filed on April 27, 2022.
The pendency of the Proposed Merger could adversely affect our business and operations.
While we are undertaking the transaction described in the Merger Agreement, our tenants may delay or defer certain business decisions, such as whether or not to renew a lease, which could negatively impact our revenues, earnings, cash flows, and expenses, regardless of whether or not the Proposed Merger is completed. In addition, due to operating covenants in the Merger Agreement, we may restricted in our ability to pursue certain strategic transactions, undertake certain significant capital projects or financing transactions and otherwise pursue actions that outside of the ordinary course of business, even if such actions would prove beneficial.
Failure to complete the Proposed Merger could negatively affect us.
It is possible that the Proposed Merger may not be completed. The parties' respective obligations to complete the Proposed Merger are subject to the satisfaction or waiver of specified conditions, some of which are beyond the control of WPC and us. If the Proposed Merger is not completed, we may be subject to a number of material risks, including the following:
•our stockholders would not have had the opportunity to achieve the liquidity event provided by the Proposed Merger and our board of directors would have to review other alternatives for liquidity, which may not occur in the near future or on terms as favorable as the Proposed Merger;
•we have incurred and expect to incur substantial costs and expenses related to the Proposed Merger, such as legal, accounting, and financial advisor fees, which will be payable by us even if the Proposed Merger is not completed, and are only subject to reimbursement under certain limited circumstances;
•we may be required to pay a termination fee to WPC in the amount of either $15.7 million or $47.0 million if the Merger Agreement is terminated under certain circumstances; and
•we may be required to pay WPC's out-of-pocket expenses incurred in connection with the Proposed Merger if the Merger Agreement is terminated under certain circumstances.
If our request for an extension of time under Treasury Regulation Section 301.9100-3 to timely make certain entity classification elections with respect to seven of our subsidiaries is not granted, we would either fail to qualify as a REIT or, assuming certain relief provisions applied, would be required to pay a significant penalty tax. In addition, the closing of the Proposed Merger could be delayed.
By default, certain non-U.S. entities are treated as corporations for U.S. federal income tax purposes, but can elect to be treated as partnerships or entities disregarded from their owner for U.S. federal income tax purposes, which we refer to as flow-through entities. We intended to elect to treat seven non-U.S. subsidiaries that hold certain properties located outside the United States as flow-through entities for U.S. federal income tax purposes at the time that the entities were acquired but inadvertently failed to make such elections. We have requested an extension of time from the Internal Revenue Service ("IRS"), pursuant to Treasury Regulation Section 301.9100-3, to timely elect to treat these entities as flow-through entities effective shortly after our acquisition of the entities. We believe that we meet the requirements to be granted such extensions and that therefore we will be able to treat these subsidiaries as flow through entities in prior years. Notwithstanding the foregoing, the IRS may disagree with our position and decide not to grant the extension. As a result, no assurance can be given that we will in fact be able to make such elections. In addition, there can be no assurance as to when the IRS may decide to grant the extension, and while WPC has agreed with us that the decision of the IRS (and the timing of that decision) will not be a basis for termination of the Merger Agreement, the closing of the Proposed Merger may be delayed until the extension is received.
If the IRS does not grant the extension of time to file these elections, then these subsidiaries would be treated as non-U.S. corporations during certain prior periods. Because interests in non-U.S. corporations are not qualifying assets for purposes of the REIT asset tests, our ownership of such subsidiaries would cause us to fail to satisfy certain of the asset tests applicable to REITs during such prior periods. In that event, we would either fail to qualify as a REIT beginning with such prior periods, in which case we would be liable for substantial corporate income taxes for such prior periods, or if we were able to establish that
CPA:18 - Global 3/31/2022 10-Q - 48
we acted with reasonable cause and not willful neglect, we could maintain our REIT qualification but would be required to pay a penalty tax with respect to such failures, which could be material in amount. Prior to the Proposed Merger, any such taxes would be liabilities for us. Moreover, to the extent that we are liable for such penalty taxes, or if we fail to qualify as a REIT, following the Proposed Merger, the liability for any such penalty taxes or any corporate income taxes owed by us as a result of our failure to qualify as a REIT would generally become liabilities of WPC.
Item 2. Unregistered Sales of Equity Securities.
Unregistered Sales of Equity Securities
During the three months ended March 31, 2022, we issued 230,000 shares of our Class A common stock to our Advisor as consideration for asset management fees, which were issued at our most recently published NAV at the time of issuance. All shares issued during the three months ended March 31, 2022 were based on a NAV of $9.07 (which was the NAV as September 30, 2021). 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. 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, the shares issued were deemed to be exempt from registration.
All other 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.
In light of the Proposed Merger, effective February 27, 2022, our board of directors suspended our DRIP, as well as repurchases of shares of our common stock from our stockholders under our quarterly redemption program (except for special circumstance redemptions) (Note 1).
Issuer Purchases of Equity Securities
The following table provides information with respect to repurchases of our common stock pursuant to our redemption plan during the three months ended March 31, 2022:
| Class A | Class C | |||||||
| 2022 Period |
Total number of Class A
shares purchased (a) |
Average price paid per share |
Total number of Class C
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) |
||
| January 1-31 | - | $ | - | - | $ | - | N/A | N/A |
| February 1-28 | - | - | - | - | N/A | N/A | ||
| March 1-31 | 228,508 | 8.80 | 72,755 | 8.71 | N/A | N/A | ||
| Total | 228,508 | 72,755 |
___________
(a)Represents shares of our Class A and Class C 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 March 31, 2022, we received 61 and 19 redemption requests for Class A and Class C common stock, respectively. All redemption requests have been fulfilled as of March 31, 2022. We generally receive fees in connection with share redemptions. The average price paid per share will vary depending on the number of redemption requests that were made during the period, the number of redemption requests that qualify for special circumstances, and our most recently published quarterly NAVs. For shares redeemed under such special circumstances, the redemption price was the greater of the price paid to acquire the shares from us or 95% of our most recently published quarterly NAVs.
CPA:18 - Global 3/31/2022 10-Q - 49
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 |
| 2.1 | Agreement and Plan of Merger dated as of February 27, 2022, by and between Corporate Property Associates 18 - Global Incorporated, W. P. Carey Inc., CPA18 Merger Sub LLC, and, for the limited purposes set forth therein, Carey Asset Management Corp., W. P. Carey & Co. B.V., WPC-CPA:18 Holdings, LLC, and CPA: 18 Limited Partnership |
Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed February 28, 2022
|
| 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.INS | XBRL Instance Document | Filed herewith |
| 101.SCH | XBRL Taxonomy Extension Schema Document | Filed herewith |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | Filed herewith |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | Filed herewith |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | Filed herewith |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | Filed herewith |
CPA:18 - Global 3/31/2022 10-Q - 50
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 18 - Global Incorporated | |
| Date: | May 9, 2022 |
| By: | /s/ ToniAnn Sanzone |
| ToniAnn Sanzone | |
| Chief Financial Officer | |
| (Principal Financial Officer) | |
| Date: | May 9, 2022 |
| By: | /s/ Arjun Mahalingam |
| Arjun Mahalingam | |
| Chief Accounting Officer | |
| (Principal Accounting Officer) |
CPA:18 - Global 3/31/2022 10-Q - 51
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 |
| 2.1 | Agreement and Plan of Merger dated as of February 27, 2022, by and between Corporate Property Associates 18 - Global Incorporated, W. P. Carey Inc., CPA18 Merger Sub LLC, and, for the limited purposes set forth therein, Carey Asset Management Corp., W. P. Carey & Co. B.V., WPC-CPA:18 Holdings, LLC, and CPA: 18 Limited Partnership | |
| 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.INS | XBRL Instance Document | Filed herewith |
| 101.SCH | XBRL Taxonomy Extension Schema Document | Filed herewith |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | Filed herewith |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | Filed herewith |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | Filed herewith |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | Filed herewith |