Net Investments in Properties

Real Estate

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



	December 31,
	2016			2015
Land	$	1,128,933		$	1,160,567
Buildings	4,053,334			4,147,644
Real estate under construction	21,859			1,714
Less: Accumulated depreciation	(472,294		)	(372,735		)
	$	4,731,832		$	4,937,190

During 2016, the U.S. dollar strengthened against the British pound sterling, as the end-of-period rate for the U.S. dollar in relation to the British pound sterling at December 31, 2016 decreased by 17.0% to $1.2312 from $1.4833 at December 31, 2015. Additionally, during the same period the U.S. dollar strengthened against the euro, as the end-of-period rate for the U.S. dollar in relation to the euro decreased by 3.2% to $1.0541 from $1.0887. As a result of these fluctuations in foreign exchange rates, the carrying value of our real estate decreased by $89.8 million from December 31, 2015 to December 31, 2016.

Depreciation expense, including the effect of foreign currency translation, on our real estate was $142.7 million, $137.3 million, and $113.0 million for the years ended December 31, 2016, 2015, and 2014, respectively.

Acquisitions of Real Estate During 2016 – We entered into the following investments, which were deemed to be real estate asset acquisitions because we acquired the sellers’ properties and simultaneously entered into new leases in connection with the acquisitions, at a total cost of $530.3 million, including land of $140.2 million, buildings of $259.8 million, and net lease intangibles of $130.3 million (Note 8) (including acquisition-related costs of $4.0 million in the aggregate, which were capitalized to land, building, and intangibles):


•	an investment of $167.7 million for three private school campuses in Coconut Creek, Florida on April 1, 2016 and in Windermere, Florida and Houston, Texas on May 31, 2016. We also committed to fund an additional $128.1 million of build-to-suit financing over the next four years in order to fund expansions of the existing facilities;

•

an investment of $218.2 million for 43 manufacturing facilities in various locations in the United States and six manufacturing facilities in various locations in Canada on April 5 and 14, 2016; on October 4, 2016, we acquired a manufacturing facility in San Antonio, Texas from the tenant for $3.8 million (which we consider to be part of the original investment) and simultaneously disposed of a manufacturing facility in Mascouche, Canada, which was acquired as part of the original investment, for the same amount (Note 17); and

•

an investment of $140.7 million for 13 manufacturing facilities and one office facility in various locations in Canada, Mexico, and the United States on November 8, 2016 and December 1, 2016. In addition, we recorded an estimated deferred tax liability of $29.4 million, with a corresponding increase to the asset value, since we assumed the tax basis of the acquired entities as part of the acquisition of the shares of these entities.

In addition, we entered into the following investments, which were deemed to be real estate asset acquisitions, at a total cost of $1.9 million:


•	an investment of $1.1 million for a parcel of land adjacent to a property owned by us in McCalla, Alabama on October 20, 2016. We also committed to fund $21.5 million of build-to-suit financing for the construction of an industrial facility on the land. Construction commenced during 2016 and is expected to be completed during 2017; and


•	an investment of $0.8 million for a parcel of land adjacent to a property owned by us in Rio Rancho, New Mexico on December 9, 2016. We will reimburse the tenant in the property for the costs of constructing a parking lot up to $0.7 million.

We reclassified 31 properties with an aggregate carrying value of $9.7 million from Net investments in direct financing leases to Real estate, at cost during the year ended December 31, 2016, in connection with the extensions of the underlying leases (Note 6).

Dollar amounts are based on the exchange rates of the foreign currencies on the dates of activity, as applicable.

Acquisitions of Real Estate During 2015 – We entered into the following investments, which were deemed to be business combinations because we assumed the existing leases on the properties, for which the sellers were not the lessees, at a total cost of $561.6 million, including land of $89.5 million, buildings of $382.6 million, and net lease intangibles of $89.5 million:


•	an investment of $345.9 million for 73 auto dealership properties in various locations in the United Kingdom on January 28, 2015;


•	an investment of $42.4 million for a logistics facility in Rotterdam, the Netherlands on February 11, 2015;


•	an investment of $23.2 million for a retail facility in Bad Fischau, Austria on April 10, 2015;


•	an investment of $26.3 million for a logistics facility in Oskarshamn, Sweden on June 17, 2015;


•	an investment of $41.2 million for three truck and bus service facilities in Gersthofen and Senden, Germany on August 12, 2015 and Leopoldsdorf, Austria on August 24, 2015;


•	an investment of $51.7 million for six hotel properties in Iowa, Louisiana, Missouri, New Jersey, North Carolina, and Texas on October 15, 2015; and


•	an investment of $30.9 million for an office building in Irvine, California on December 22, 2015.

In connection with these transactions, we also expensed acquisition-related costs totaling $11.1 million, which are included in Merger, property acquisition, and other expenses in the consolidated financial statements.

We also entered into the following investments, which were deemed to be real estate asset acquisitions because we acquired the sellers’ properties and simultaneously entered into new leases in connection with the acquisitions, at a total cost of $116.0 million, including land of $8.6 million, buildings of $68.1 million (including acquisition-related costs of $3.9 million, which were capitalized), and net lease intangibles of $39.4 million:


•	an investment of $53.5 million for an office building in Sunderland, United Kingdom on August 6, 2015; and


•	an investment of $62.5 million for ten auto dealership properties in Almere, Amsterdam, Eindhoven, Houten, Nieuwegein, Utrecht, Veghel, and Zwaag, Netherlands on November 11, 2015.

Dollar amounts are based on the exchange rates of the foreign currencies on the dates of activity, as applicable.

Acquisitions of Real Estate During 2014 – We entered into the following investments, which were deemed to be business combinations because we assumed the existing leases on the properties, for which the sellers were not the lessees, at a total cost of $366.9 million, including land of $33.1 million, buildings of $278.1 million, and net lease intangibles of $55.7 million:


•	an investment of $41.9 million for an office building in Chandler, Arizona on March 26, 2014;


•	an investment of $47.2 million for a warehouse facility in University Park, Illinois on May 15, 2014;


•	an investment of $117.7 million for an office building in Stavanger, Norway on August 6, 2014. Because we acquired stock in a subsidiary of the seller to complete the acquisition, we assumed the tax basis of the entity that we purchased and recorded an estimated deferred tax liability of $14.7 million. In connection with this business combination, we recorded goodwill of $11.1 million (Note 8);


•	an investment of $46.0 million for an office building in Westborough, Massachusetts on August 22, 2014;


•	an investment of $56.0 million for an office building in Andover, Massachusetts on October 7, 2014;


•	an investment of $29.1 million for an office building in Newport, United Kingdom on October 13, 2014; and


•	an investment of $29.0 million for a light-industrial/distribution center in Opole, Poland on December 12, 2014.

In connection with these transactions, we also expensed acquisition-related costs totaling $3.3 million, which are included in Merger, property acquisition, and other expenses in the consolidated financial statements. Dollar amounts are based on the exchange rates of the foreign currencies on the dates of acquisition, as applicable.

We also entered into the following investments, which were deemed to be real estate asset acquisitions because we acquired the sellers’ properties and simultaneously entered into new leases in connection with the acquisitions, at a total cost of $536.7 million, including land of $83.9 million, buildings of $366.6 million (including acquisition-related costs of $17.8 million, which were capitalized), net lease intangibles of $82.9 million, and a property classified as a net investment in direct financing lease of $3.3 million (Note 6):


•	an investment of $138.3 million for 10 industrial and 21 agricultural properties in various locations in Australia on October 28, 2014. We also committed to fund a tenant expansion allowance of $14.8 million;


•	an investment of $19.8 million for a manufacturing facility in Lewisburg, Ohio on November 4, 2014; and


•	an investment of $378.5 million for 70 office buildings in various locations in Spain on December 19, 2014.

Dollar amounts are based on the exchange rates of the foreign currencies on the dates of activity, as applicable.

As discussed in Note 3, we acquired 225 properties subject to existing operating leases in the CPA^®:16 Merger, which increased the carrying value of our real estate by $2.0 billion during the year ended December 31, 2014. We reclassified properties with an aggregate carrying value of $13.7 million from Net investments in direct financing leases to Real estate, at cost during the year ended December 31, 2014, in connection with the extensions of the underlying leases (Note 6).

Real Estate Under Construction

During 2016, we capitalized real estate under construction totaling $58.7 million, including accrual activity of $2.1 million, primarily related to construction projects on our properties. Of this total, $16.9 million related to an expansion of one of the three private school campuses that we acquired during 2016, as described above. As of December 31, 2016, we had three construction projects in progress. As of December 31, 2015, we had an outstanding commitment related to a tenant expansion allowance, for which construction had not yet commenced, and no other open construction projects. Aggregate unfunded commitments totaled approximately $135.2 million and $12.2 million as of December 31, 2016 and 2015, respectively.

In December 2015, we entered into a build-to-suit transaction for the redevelopment of a property in Doraville, Georgia. We demolished the property (Note 9) and commenced construction of an industrial facility, which was completed in October 2016. The building was placed into service at a cost totaling $13.8 million and we have no further funding commitment as of December 31, 2016. In addition, we placed into service amounts totaling $24.7 million related to partially-completed build-to-suit projects or other expansion projects during the year ended December 31, 2016.

On December 4, 2013, we entered into a build-to-suit transaction for the construction of an office building in Mönchengladbach, Germany for a total projected cost of up to $65.0 million, including acquisition expenses, which was based on the exchange rate of the euro on that date. During the years ended December 31, 2015 and 2014, we funded approximately $28.0 million and $20.6 million, respectively. The building was placed in service in September 2015 at a cost totaling $53.2 million and we have no further funding commitment as of December 31, 2016.

Dispositions of Real Estate

During 2016, we sold 28 properties and a parcel of vacant land, excluding the disposition of two properties that were classified as held for sale as of December 31, 2015, transferred ownership of another property to the related mortgage lender, and disposed of another property through foreclosure (Note 17). As a result, the carrying value of our real estate decreased by $411.2 million from December 31, 2015 to December 31, 2016.

Future Dispositions of Real Estate

During 2016, two tenants each exercised an option to repurchase the properties they are leasing in accordance with their lease agreements during 2017 for an aggregate of $21.6 million. At December 31, 2016, the properties had an aggregate asset carrying value of $16.3 million. There is no accounting impact during 2016 related to the exercise of these options.

Scheduled Future Minimum Rents

Scheduled future minimum rents, exclusive of renewals, expenses paid by tenants, percentage of sales rents, and future CPI-based adjustments, under non-cancelable operating leases at December 31, 2016 are as follows (in thousands):



Years Ending December 31,	Total
2017	$	585,799
2018	575,925
2019	565,614
2020	533,916
2021	506,875
Thereafter	3,401,847
Total	$	6,169,976

Operating Real Estate

At December 31, 2016, Operating real estate consisted of our investments in two hotels. At December 31, 2015, Operating real estate consisted of our investments in two hotels and one self-storage property. During the year ended December 31, 2016, we sold our remaining self-storage property, and as a result, the carrying value of our Operating real estate decreased by $2.3 million from December 31, 2015 to December 31, 2016 (Note 17). Below is a summary of our Operating real estate (in thousands):



	December 31,
	2016			2015
Land	$	6,041		$	6,578
Buildings	75,670			76,171
Less: Accumulated depreciation	(12,143		)	(8,794		)
	$	69,568		$	73,955

Depreciation expense on our operating real estate was $4.2 million, $4.2 million, and $3.8 million for the years ended December 31, 2016, 2015, and 2014, respectively.

We capitalized or reclassified from real estate under construction $2.2 million of building improvements related to our operating properties during the year ended December 31, 2016.

Assets Held for Sale

Below is a summary of our properties held for sale (in thousands):



	December 31,
	2016		2015
Net investments in direct financing leases	$	26,247	$	—
Real estate, net	—		59,046
Assets held for sale	$	26,247	$	59,046

At December 31, 2016, we had one property classified as Assets held for sale with a carrying value of $26.2 million. In addition, there was a deferred tax liability of $2.5 million related to this property as of December 31, 2016, which is included in Deferred income taxes in the consolidated balance sheets. The property was disposed of subsequent to December 31, 2016 (Note 20). At December 31, 2015, we had two properties classified as Assets held for sale, both of which were sold during the year ended December 31, 2016 (Note 17).