Finance Receivables

Assets representing rights to receive money on demand or at fixed or determinable dates are referred to as finance receivables. Our finance receivables portfolio consists of our Net investments in direct financing leases, note receivable, and deferred acquisition fees. Operating leases are not included in finance receivables as such amounts are not recognized as assets in the consolidated financial statements.

Net Investments in Direct Financing Leases

Net investments in direct financing leases is summarized as follows (in thousands):



	December 31,
	2017			2016
Minimum lease payments receivable	$	600,228		$	619,014
Unguaranteed residual value	676,321			639,002
	1,276,549			1,258,016
Less: unearned income	(554,942		)	(573,957		)
	$	721,607		$	684,059

2017 — Interest income from direct financing leases, which was included in Lease revenues in the consolidated financial statements, was $66.2 million for the year ended December 31, 2017. During the year ended December 31, 2017, the U.S. dollar weakened against the euro, resulting in a $44.2 million increase in the carrying value of Net investments in direct financing leases from December 31, 2016 to December 31, 2017. During the year ended December 31, 2017, we sold an international investment accounted for as a direct financing lease that had a net carrying value of $1.7 million. During the year ended December 31, 2017, we reclassified six properties with a carrying value of $1.6 million from Net investments in direct financing leases to Land, buildings and improvements in connection with changes in lease classifications due to extensions of the underlying leases (Note 4).

2016 — Interest income from direct financing leases, which was included in Lease revenues in the consolidated financial statements, was $71.2 million for the year ended December 31, 2016. In addition, we recognized an impairment charge of $7.0 million on a property accounted for as Net investments in direct financing leases, which was sold in January 2017, based on the fair value of the property less costs to sell of $26.2 million (Note 8).

2015 — Interest income from direct financing leases, which was included in Lease revenues in the consolidated financial statements, was $74.4 million for the year ended December 31, 2015. In addition, we recognized impairment charges totaling $3.3 million on five properties accounted for as Net investments in direct financing leases in connection with an other-than-temporary decline in the estimated fair values of the properties’ residual values (Note 8).

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 direct financing leases at December 31, 2017 are as follows (in thousands):



Years Ending December 31,	Total
2018	$	70,488
2019	68,744
2020	68,125
2021	64,793
2022	55,201
Thereafter	272,877
Total	$	600,228

Notes Receivable

Earnings from our notes receivable are included in Lease termination income and other in the consolidated financial statements.

At December 31, 2017 and 2016, we had a note receivable with an outstanding balance of $10.0 million and $10.4 million, respectively, representing the expected future payments under a sales type lease, which was included in Other assets, net in the consolidated financial statements.

In February 2015, a B-note outstanding to us was repaid in full for $10.0 million.

Deferred Acquisition Fees Receivable

As described in Note 3, we earn revenue in connection with structuring and negotiating investments and related mortgage financing for the CPA REITs. A portion of this revenue is due in equal annual installments over three years, provided the CPA REITs meet their respective performance criteria. Unpaid deferred installments, including accrued interest, from the CPA REITs were included in Due from affiliates in the consolidated financial statements.

Credit Quality of Finance Receivables

We generally seek investments in facilities that we believe are critical to a tenant’s business and that we believe have a low risk of tenant default. As of December 31, 2016, we had an allowance for credit losses of $13.3 million on a single direct financing lease investment, including the impact of foreign currency translation. This allowance was established in the fourth quarter of 2015. During the years ended December 31, 2016 and 2015, we increased the allowance by $7.1 million and $8.7 million, respectively, which was recorded in Property expenses, excluding reimbursable tenant costs in the consolidated financial statements, due to a decline in the estimated amount of future payments we would receive from the tenant. We sold this direct financing lease investment in August 2017, as described above. At both December 31, 2017 and 2016, none of the balances of our finance receivables were past due. Other than the lease extensions noted under Net Investment in Direct Financing Leases above, there were no modifications of finance receivables during the year ended December 31, 2017.

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 a range of inclusion on the watch list to risk of default. The credit quality evaluation of our finance receivables was last updated in the fourth quarter of 2017. We believe the credit quality of our deferred acquisition fees receivable falls under category one, as the CPA REITs are expected to have the available cash to make such payments.

A summary of our finance receivables by internal credit quality rating, excluding our deferred acquisition fees receivable, is as follows (dollars in thousands):



	Number of Tenants / Obligors at December 31,		Carrying Value at December 31,
Internal Credit Quality Indicator	2017	2016	2017		2016
1 – 3	24	27	$	608,101	$	621,955
4	8	5	123,477		70,811
5	—	1	—		1,644
			$	731,578	$	694,410