Real Estate

The Company's real estate assets were comprised of the following ($ in thousands):



	Net Lease⁽¹⁾			Operating Properties			Total
As of December 31, 2017
Land, at cost	$	219,092		$	203,278		$	422,370
Buildings and improvements, at cost	888,959			318,107			1,207,066
Less: accumulated depreciation	(292,268		)	(55,137		)	(347,405		)
Real estate, net	815,783			466,248			1,282,031
Real estate available and held for sale ⁽²⁾	—			68,588			68,588
Total real estate	$	815,783		$	534,836		$	1,350,619
As of December 31, 2016
Land, at cost	$	231,506		$	211,054		$	442,560
Buildings and improvements, at cost	987,050			311,283			1,298,333
Less: accumulated depreciation	(307,444		)	(46,175		)	(353,619		)
Real estate, net	911,112			476,162			1,387,274
Real estate available and held for sale ⁽²⁾	155,051			82,480			237,531
Total real estate	$	1,066,163		$	558,642		$	1,624,805

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(1)

In 2014, the Company partnered with a sovereign wealth fund to form a venture to acquire and develop net lease assets (the "Net Lease Venture") and gave a right of first refusal to the Net Lease Venture on all new net lease investments (refer to Note 7 for more information on the Net Lease Venture). The Company is responsible for sourcing new opportunities and managing the Net Lease Venture and its assets in exchange for a promote and management fee.

(2)

As of December 31, 2017 and 2016 the Company had $48.5 million and $82.5 million, respectively, of residential properties available for sale in its operating properties portfolio. As of December 31, 2016, net lease includes the Company's ground lease ("Ground Lease") assets that were reclassified to "Real estate available and held for sale" (refer to "Disposition of Ground Lease Business" below). As of December 31, 2016, the carrying value of the Company's Ground Lease assets were previously classified as $104.5 million in "Real estate, net," $37.5 million in "Deferred expenses and other assets, net," $8.2 million in "Deferred operating lease income receivable, net" and $3.5 million in "Accrued interest and operating lease income receivable, net" on the Company's consolidated balance sheet.

Real Estate Available and Held for Sale—The following table presents the carrying value of properties transferred to held for sale, by segment ($ in millions)⁽¹⁾:



	Year Ended December 31,
Property Type	2017		2016		2015
Operating Properties⁽²⁾	$	20.1	$	16.1	$	2.9
Net Lease	0.9		1.8		8.2
Total	$	21.0	$	17.9	$	11.1

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(1)	Properties were transferred to held for sale due to executed contracts with third parties or changes in business strategy.


(2)	During the year ended December 31, 2015, the Company transferred a commercial operating property with a carrying value of $2.9 million to held for investment due to a change in business strategy.

During the year ended December 31, 2016, the Company also acquired two residential condominium units for $1.8 million that were held for sale and were sold as of December 31, 2017.

Acquisitions—During the year ended December 31, 2017, the Company acquired one net lease asset for $6.6 million. In addition, in the third quarter 2017, in conjunction with the modification of two master leases, the Company exchanged real property with the tenant. The fair value of the property exchanged exceeded the Company's cost basis by approximately $1.5 million which will be deferred and amortized to "Operating lease income" in the Company's consolidated statements of operations over the remaining master lease terms.

During the year ended December 31, 2016, the Company acquired one net lease asset for $32.7 million. During the same period, the Company also acquired land for $3.9 million and simultaneously entered into a 99 year Ground Lease with the seller. This asset was one of the 12 properties comprising the Company's Ground Lease business that was disposed of in April 2017 (see "Disposition of Ground Lease Business" below).

During the year ended December 31, 2015, the Company acquired, via deed-in-lieu, title to a residential operating property, which had a total fair value of $13.4 million and previously served as collateral for loans receivable held by the Company. No gain or loss was recorded in connection with this transaction.

Disposition of Ground Lease Business—In April 2017, institutional investors acquired a controlling interest in the Company's Ground Lease business through the merger of a Company subsidiary and related transactions (the "Acquisition Transactions"). The Company's Ground Lease business was a component of the Company's net lease segment and consisted of 12 properties subject to long term net leases including seven Ground Leases and one master lease (covering five properties). The acquiring entity was a newly formed unconsolidated entity named Safety, Income & Growth Inc. ("SAFE"). The carrying value of the Company's Ground Lease assets was approximately $161.1 million. Shortly before the Acquisition Transactions, the Company completed the $227.0 million 2017 Secured Financing on its Ground Lease assets (refer to Note 10). The Company received all of the proceeds of the 2017 Secured Financing. The Company received an additional $113.0 million of proceeds in the Acquisition Transactions, including $55.5 million that the Company contributed to SAFE in its initial capitalization. As a result of the Acquisition Transactions, the Company deconsolidated the 12 properties and the associated 2017 Secured Financing. The Company accounts for its investment in SAFE as an equity method investment (refer to Note 7). The Company accounted for this transaction as an in substance sale of real estate and recognized a gain of $123.4 million, reflecting the aggregate gain less the fair value of the Company's retained interest in SAFE (refer to Note 2 - Summary of Significant Accounting Policies). The carrying value of the 12 properties is classified in "Real estate available and held for sale" on the Company's consolidated balance sheet as of December 31, 2016 and the gain was recorded in "Gain from discontinued operations" in the Company's consolidated statements of operations.

Discontinued Operations—The transactions described above involving the Company's Ground Lease business qualified for discontinued operations and the following table summarizes income from discontinued operations for the years ended December 31, 2017, 2016 and 2015 ($ in thousands)⁽¹⁾:



	Year Ended December 31,
	2017			2016			2015
Revenues	$	6,430		$	21,839		$	18,520
Expenses	(1,491		)	(3,569		)	(3,443		)
Income from discontinued operations	$	4,939		$	18,270		$	15,077

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(1)	Revenues primarily consisted of operating lease income and expenses primarily consisted of depreciation and amortization and real estate expense. For the year ended December 31, 2017, revenues also includes income from sales of real estate.

The following table presents cash flows provided by operating activities and cash flows used in investing activities from discontinued operations for the years ended December 31, 2017, 2016 and 2015 ($ in thousands).



	Year Ended December 31,
	2017			2016			2015
Cash flows provided by operating activities	$	5,702		$	16,662		$	14,446
Cash flows used in investing activities	(534		)	(7,972		)	—

Other Dispositions—The following table presents the proceeds and income recognized for properties sold, by property type ($ in millions)⁽¹⁾:



	Year Ended December 31,
	2017⁽¹⁾		2016		2015⁽²⁾
Operating Properties
Proceeds	$	41.3	$	326.9	$	294.9
Income from sales of real estate	4.5		75.4		53.7

Net Lease
Proceeds	$	175.4	$	117.2	$	100.8
Income from sales of real estate	87.5		21.1		40.1

Total
Proceeds	$	216.7	$	444.1	$	395.7
Income from sales of real estate	92.0		96.5		93.8

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(1)	During the year ended December 31, 2017, the Company sold a net lease property and recognized a gain on sale of $62.5 million. Prior to the sale, the Company acquired the noncontrolling interest with a carrying value of $3.5 million for $12.0 million.

(2)

During the year ended December 31, 2015, the Company sold a commercial operating property for $68.5 million to a newly formed unconsolidated entity in which the Company owns a 50.0% equity interest (refer to Note 7). The Company recognized a gain on sale of $13.6 million, reflecting the Company's share of the interest sold to a third party, which was recorded as "Income from sales of real estate" in the Company's consolidated statements of operations. During the year ended December 31, 2015, the Company, through a consolidated entity, sold a leasehold interest in a commercial operating property with a carrying value of $126.3 million for net proceeds of $93.5 million and simultaneously entered into a ground lease with the buyer with an initial term of 99 years. The Company sold the leasehold interest at below fair value to incentivize the buyer to enter into an above market ground lease. As a result, the Company recorded no gain or loss on the sale and recorded a lease incentive asset of $32.8 million, which is included in "Real estate available and held for sale" on the Company's consolidated balance sheets. In December 2015, the Company acquired the noncontrolling interest in the entity for $6.4 million.

Impairments—During the years ended December 31, 2017, 2016 and 2015, the Company recorded impairments on real estate assets totaling $11.9 million, $10.7 million and $5.9 million, respectively. The impairments recorded in 2017 were primarily the result of shifting demand in the local condominium markets, changes in our exit strategy on other real estate assets and an impairment recorded in connection with the sale of an outparcel located at a commercial operating property. The impairments recorded in 2016 resulted from unfavorable local market conditions on residential operating properties and impairments upon the execution of sales contracts on net lease assets. The impairments recorded in 2015 resulted from a change in business strategy for two commercial operating properties and unfavorable local market conditions for one residential property.

Tenant Reimbursements—The Company receives reimbursements from tenants for certain facility operating expenses including common area costs, insurance, utilities and real estate taxes. Tenant expense reimbursements were $21.9 million, $23.6 million and $26.6 million for the years ended December 31, 2017, 2016 and 2015, respectively. These amounts are included in "Operating lease income" in the Company's consolidated statements of operations.

Allowance for Doubtful Accounts—As of December 31, 2017 and 2016, the allowance for doubtful accounts related to real estate tenant receivables was $1.3 million and the allowance for doubtful accounts related to deferred operating lease income was $1.3 million. These amounts are included in "Accrued interest and operating lease income receivable, net" and "Deferred operating lease income receivable, net," respectively, on the Company's consolidated balance sheets.

Future Minimum Operating Lease Payments—Future minimum operating lease payments to be collected under non-cancelable leases, excluding customer reimbursements of expenses, in effect as of December 31, 2017, are as follows ($ in thousands):



Year	Net Lease Assets		Operating Properties
2018	$	101,135	$	37,009
2019	101,448		33,748
2020	100,894		31,952
2021	101,288		30,075
2022	100,040		20,187