| Equity Investments in Real Estate |
Equity Investments in Real Estate
We own equity interests in net-leased properties that are generally leased to companies through noncontrolling interests (i) in partnerships and limited liability companies that we do not control but over which we exercise significant influence or (ii) as tenants-in-common subject to common control. Generally, the underlying investments are jointly owned with affiliates. We account for these investments under the equity method of accounting. Earnings for each investment are recognized in accordance with each respective investment agreement and, where applicable, based upon an allocation of the investment’s net assets at book value as if the investment were hypothetically liquidated at the end of each reporting period.
As required by current authoritative accounting guidance, we periodically compare an investment’s carrying value to its estimated fair value and recognize an impairment charge to the extent that the carrying value exceeds fair value and such decline is determined to be other than temporary. Additionally, we provide funding to developers for the ADC Arrangements. Under ADC Arrangements, we have provided loans to third-party developers of real estate projects, which we account for as equity investments as the characteristics of the arrangement with the third-party developers are more similar to a jointly owned investment or partnership rather than a loan.
The following table presents Equity in earnings in equity method investments in real estate, which represents our proportionate share of the income or losses of these investments, as well as certain adjustments related to other-than-temporary impairment charges and amortization of basis differences related to purchase accounting adjustments (in thousands): | | | | | | | | | | | | | | Years Ended December 31, | | 2016 | | 2015 | | 2014 | Equity Earnings from Equity Investments: | | | | | | Net Lease (a) | $ | 15,271 |
| | $ | 21,692 |
| | $ | 12,571 |
| Self Storage | (394 | ) | | (1,703 | ) | | (1,878 | ) | All Other (b) | (5,010 | ) | | (1,762 | ) | | 17,655 |
| | 9,867 |
| | 18,227 |
| | 28,348 |
| Amortization of Basis Differences on Equity Investments: | | | | | | Net Lease | (3,077 | ) | | (2,263 | ) | | (3,381 | ) | Self Storage | (39 | ) | | (155 | ) | | (155 | ) | All Other | (3,489 | ) | | (1,142 | ) | | (739 | ) | | (6,605 | ) | | (3,560 | ) | | (4,275 | ) | Equity in earnings of equity method investments in real estate | $ | 3,262 |
| | $ | 14,667 |
| | $ | 24,073 |
|
__________ | | (a) | For the years ended December 31, 2016 and December 31, 2014, amounts include impairment charges of $1.9 million and $0.8 million, respectively, related to certain of our equity investments (Note 8). |
| | (b) | As of December 31, 2016, the carrying value of one of our investments was reduced to reflect a $22.8 million impairment of goodwill at the investee level to its fair value (Note 8). In addition, we recorded $10.6 million of income recognized in conjunction with the termination of a management agreement and a $10.6 million gain representing the portion of losses guaranteed by the previous management company under the terms of the management agreement. |
The following table sets forth our ownership interests in our equity investments in real estate and their respective carrying values, along with those ADC Arrangements that are recorded as equity investments (dollars in thousands): | | | | | | | | | | | | | | | | | | Ownership Interest at | | Carrying Value at December 31, | Lessee/Equity Investee | | Co-owner | | December 31, 2016 | | 2016 | | 2015 | Net Lease: | | | | | | | | | C1000 Logistiek Vastgoed B.V. (a) (b) | | WPC | | 85% | | $ | 54,621 |
| | $ | 59,629 |
| U-Haul Moving Partners, Inc. and Mercury Partners, LP (c) | | WPC | | 12% | | 37,601 |
| | 39,309 |
| BPS Nevada, LLC (c) (d) | | Third Party | | 15% | | 23,036 |
| | 22,007 |
| Bank Pekao S.A. (a) (c) | | CPA®:18 – Global | | 50% | | 23,025 |
| | 25,785 |
| State Farm (c) | | CPA®:18 – Global | | 50% | | 17,603 |
| | 18,587 |
| Berry Plastics Corporation (c) | | WPC | | 50% | | 14,974 |
| | 16,094 |
| Apply Sørco AS (a) | | CPA®:18 – Global | | 49% | | 12,528 |
| | 15,170 |
| Tesco plc (a) (c) (e) | | WPC | | 49% | | 10,807 |
| | 11,849 |
| Hellweg Die Profi-Baumärkte GmbH & Co. KG (referred to as Hellweg 2) (a) (c) (f) | | WPC | | 37% | | 10,125 |
| | 12,212 |
| Agrokor d.d. (referred to as Agrokor 5) (a) (c) | | CPA®:18 – Global | | 20% | | 7,079 |
| | 7,858 |
| Eroski Sociedad Cooperativa – Mallorca (a) | | WPC | | 30% | | 6,576 |
| | 6,790 |
| Dick’s Sporting Goods, Inc. (c) | | WPC | | 45% | | 4,367 |
| | 5,055 |
| | | | | | | 222,342 |
| | 240,345 |
| Self-Storage: | | | | | | | | | Madison Storage NYC, LLC and Veritas Group IX-NYC, LLC (g) | | Third Party | | N/A | | — |
| | 16,060 |
| | | | | | | — |
| | 16,060 |
| All Other: | | | | | | | | | Shelborne Property Associates, LLC (referred to as Shelborne) (c) (d) (h) (i) | | Third Party | | 33% | | 127,424 |
| | 148,121 |
| IDL Wheel Tenant, LLC (c) (d) (h) | | Third Party | | N/A | | 37,124 |
| | 44,387 |
| BG LLH, LLC (c) (d) | | Third Party | | 7% | | 36,756 |
| | 37,720 |
| BPS Nevada, LLC - Preferred Equity (c) (j) | | Third Party | | N/A | | 27,459 |
| | 27,514 |
| | | | | | | 228,763 |
| | 257,742 |
| | | | | | | $ | 451,105 |
| | $ | 514,147 |
|
__________ | | (a) | The carrying value of this investment is affected by the impact of fluctuations in the exchange rate of the applicable foreign currency. |
| | (b) | This investment represents a tenancy-in-common interest, whereby the property is encumbered by debt for which we are jointly and severally liable. The co-obligor is WPC and the amount due under the arrangement was approximately $68.4 million at December 31, 2016. Of this amount, $58.1 million represents the amount we agreed to pay and is included within the carrying value of this investment at December 31, 2016. |
| | (c) | This investment is a VIE. |
| | (d) | This investment is reported using the hypothetical liquidation at book value model. |
| | (e) | On July 29, 2016, this investment refinanced a non-recourse mortgage loan that had an outstanding balance of $33.8 million with new financing of $34.6 million, of which our proportionate share was $17.0 million. The previous loan had an interest rate of 5.9% and a maturity date of July 31, 2016, while the new loan has an interest rate of Euro Interbank Offered Rate plus a margin of 3.3% and a term of five years. |
| | (f) | In January 2017, our jointly owned Hellweg 2 equity investment repaid non-recourse mortgage loans with an aggregate principal balance of approximately $243.8 million, of which our interest was $89.0 million (Note 17). During the fourth quarter of 2015, the German tax authority revoked its previous position on the application of a ruling in an unrelated matter by a Federal German tax court. Based on this change in position, the obligation for German real estate transfer taxes recorded in connection with our acquisition of the Partner’s remaining 5% equity interest in PropCo was no longer deemed probable of occurring. As a result, Hellweg 2 recorded a reversal of previously recognized gain on real estate transfer tax, of which our share was approximately $6.2 million and was recorded within Equity in earnings of equity method investments in real estate in our consolidated financial statements for the year ended December 31, 2015. |
| | (g) | At December 31, 2015, the carrying value of this investment included our 45% equity interest as well as a 40% indirect economic interest. On April 11, 2016, we acquired the remaining 15% controlling interest in these entities and, as a result, now have 100% of the economic interest and consolidate this investment as of December 31, 2016. In addition, on October 26, 2016 we exercised our option to purchase the 40% indirect economic interest in Madison Storage NYC, LLC and therefore this investment is considered a voting interest entity as of December 31, 2016. Veritas Group IX-NYC, LLC was considered a VIE at December 31, 2016 (Note 4). |
| | (h) | Represents a domestic ADC Arrangement. There was no unfunded balance on the loan related to this investment at December 31, 2016. This investment was placed into service during 2015. |
| | (i) | The carrying value as of December 31, 2016 includes a $22.8 million impairment charge to reduce goodwill at the investee level to its fair value, partially offset by $10.6 million of income recognized in conjunction with the termination of a management agreement and a $10.6 million gain representing the portion of losses guaranteed by the previous management company under the terms of the management agreement. |
| | (j) | This investment represents a preferred equity interest, with a preferred rate of return between 8%-12% during 2015 and 12% during 2016 and thereafter until November 19, 2019, the date on which the preferred equity interest is redeemable. |
The following tables present combined summarized investee financial information of our equity method investment properties. Amounts provided are the total amounts attributable to the investment properties and do not represent our proportionate share (in thousands): | | | | | | | | | | December 31 or September 30 (as applicable), (a) | | 2016 | | 2015 | Real estate assets | $ | 3,293,234 |
| | $ | 3,378,044 |
| Other assets | 773,576 |
| | 728,439 |
| Total assets | 4,066,810 |
| | 4,106,483 |
| Debt | 2,619,153 |
| | 2,530,826 |
| Accounts payable, accrued expenses and other liabilities | 447,944 |
| | 325,315 |
| Total liabilities | 3,067,097 |
| | 2,856,141 |
| Partners’/members’ equity | $ | 999,713 |
| | $ | 1,250,342 |
|
| | | | | | | | | | | | | | Twelve Months Ended December 31 or September 30 (as applicable), (a) | | 2016 | | 2015 | | 2014 | Revenues | $ | 815,161 |
| | $ | 779,875 |
| | $ | 595,228 |
| Expenses | 865,706 |
| | 791,224 |
| | 546,170 |
| (Loss) income from continuing operations | $ | (50,545 | ) | | $ | (11,349 | ) | | $ | 49,058 |
|
__________ | | (a) | We record our investments in BPS Nevada, LLC, BG LLH, LLC, IDL Wheel Tenant, LLC, and Shelborne Property Associates, LLC on a one quarter lag. Therefore, amounts in our financial statements for the years ended December 31, 2016, 2015, and 2014 are based on balances and results of operations from BPS Nevada, LLC, BG LLH, LLC, IDL Wheel Tenant, LLC, and Shelborne Property Associates, LLC as of and for the 12 months ended September 30, 2016, 2015, and 2014, respectively. |
Aggregate distributions from our interests in other unconsolidated real estate investments were $57.8 million, $52.1 million, and $28.7 million for the years ended December 31, 2016, 2015, and 2014, respectively. At December 31, 2016 and 2015, the unamortized basis differences on our equity investments were $19.1 million and $26.5 million, respectively. |